The productivity spillover between SMEs and large firms in Korea

Abstract

This article investigates the inter-firm spillover effect of productivities among two different-sized firms in Korea—large enterprises and small and medium enterprises (SMEs)—considering industrial relationships. After estimating total factor productivity in Korea by industry and firm size, we set and estimate two models using the cointegrating relationship of the Panel Error Correction Model—Model 1 for inter-industrial spillover effect and Model 2 for spillover effect between large firms and SMEs. Our study provides three major findings. First, a productivity gap exists between large enterprises and SMEs in Korea. Second, this productivity gap between large firms and SMEs has been expanding. Third, the R&D efficiency in large enterprises is greater than that in SMEs. Finally, the spillover effects in both firm groups in Korea are asymmetric. That is, even if the productivity spillover effect is significant in enterprises of both sizes, a large enterprise is more likely than an SME to benefit from the spillover effects.