Trade, market structure, and performance in a small developing economy: Some empirical evidence for the Korean manufacturing industries

Abstract

This empirical study investigates relationships among trade, market structure, and performance in a small newly industrializing country (NIC), Korea. The focus of this study is on: (i) The effects of international linkages on the pricing and profitability of manufacturing industries. (ii) The determinants of a NIC's trade pattern. (iii) The influences of international linkages on domestic concentration.

To elucidate these relationships, an econometric model is constructed by integrating recent theory and research in a simultaneous context. Empirical results of this study include some NIC-specific findings in contrast to their industrial country counterparts. Noteworthy findings are as follows: (1) Exposure to imports does not seem to set a limit on domestic profitability. Tariff protection and rents paid for quality-differentiated imports seem to provide a higher focal point for domestic pricing. The profitability of highly export-oriented industries is low compared with that of moderately exporting industries. (2) Domestic market power and standard domestic structural variables are important determinants of industry profitability. MNEs' subsidiaries operate in more profitable industries. (3) Labor-intensiveness constitutes an important source of comparative advantage in a small NIC. In addition, a NIC reveals its comparative advantage in homogeneous products. (4) A NIC's trade pattern is characterized by stage-of-processing trade. The "going offshore" policy of MNEs seems to correlate with this trade pattern. (5) Export opportunities permit a large number of domestic competitors, thereby reducing concentration. Imports may provoke defensive concentration and the rationalization of domestic producers.

In conclusion, the procompetitive role of trade functions, at best, only for exports. Trade liberalization is likely to facilitate open import competition. A NIC should move more quickly to skilled sectors. Deconcentration policy should be pursued in order to minimize distortions of resource allocation.