Productivity Growth of Newly Industrializing Economies in Heterogeneous Capital Goods Markets: The Case of the Korean Machinery and Equipment Industry

Abstract

Because market development and competition with incumbent firms is extremely challenging, latecomers to capital goods markets can rarely become equal to or overtake the incumbent firms. From this perspective, the remarkable growth and trade performance of the Korean machinery and equipment industry is exceptional. However, few studies have analyzed the sources of this notable performance of the Korean machinery and equipment industry. Therefore, we investigated the Total Factor Productivity Growth (TFPG) of the Korean machinery and equipment industry and its 12 sub-sectors from 1970 to 2012 using the stochastic frontier production approach. As a result, we found that the industry has achieved labor input-driven TFPG largely due to technical progress. This is contrary to the previous result that East Asia’s has expanded the production frontier by capital accumulation. In contrast, in some sub-sectors, scale effect and allocation efficiency have driven TFPG. We also found distinctive patterns of TFPG across different sub-sectors from the perspectives of the effect of input factors and the pattern of technical progress. These results imply that policy makers should consider industry-specific policy designs that incorporate the specific characteristics of individual sub-sectors.