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Working Paper

Protection and Market Imperfection : An Empirical Study of Korean Manufacturing

페이스북
커버이미지
  • 저자 민병승(閔丙承)
  • 발행일 1995/03/01
  • 시리즈 번호 9501
원문보기
요약 The book has shown that there is a high degree of
concentration in most Korean manufacturing industries. Three
important findings emerge from the examination of trends in
industry concentration in the 1970s and 1980s and from our
calculations of trade-adjusted, three-firm concentration ratios for
1974-1986.

First, Korean manufacturing is dominated by big business
groups, of chaebol. The share (by shipments) of the 30 largest
chaebol was 34.1 per cent in 1977, 40.7 per cent in 1982 and 37.3
per cent per cent in 1987. Considering the high level of
concentration of economic power in chaebol, industry
concentration as measured by the traditional concentration index
would seem to be biased downward. Market concentration ratios
do not show linkages between firms.

Second, Korean manufacturing was characterized by
oligopoly in the 1970s and 1980s. In particular, the strategic
industry policy, known as the heavy and chemical
industrialization policy, accelerated industry concentration 1970s.
Between 1970 and 1987, the average share of the oligopolistic
manufacturing market was around 43.6 per cent (by shipment
value) and 40 per cent (by number of commodities). The share
increased dramatically between 1977 and 1982 and, despite a
slight decline, remained high in the 1980s. Chaebol and industry
concentration followed a similar trend during this period.

Third, using four-digit levels of KSIC industry
classifications, the average level of concentration by
trade-adjusted three-firm concentration ratio (ACR3) was smaller
than concentration according to the traditional three-firm
concentration ratio (CR3), both in 1986 and 1974. Total industry
average by CR3 was 57.7 per cent in 1986 and 58.5 per cent in
1974. By ACR2 it was around 45.3 per cent in 1986 and about
50.4 per cent in 1974. This suggests that the traditional measure
of producer concentration is upwardly biased and needs to be
adjusted. But the trade-adjusted concentration ration in Korean
manufacturing was still higher than in the UK and in Belgium.
Another implication of the difference in the two measures in that
when formulating industry policy, small open economies like
Korea should explicitly take into account the impact on the
economy of competition from international trade.

The book also examined the links between international
trade and domestic industrial organization to see how imports
affected domestic firms' market power and how protection
nurtured an imperfectly competitive market structure in Korean
manufacturing in 1974 and 1986. Profitability and concentration
equations were estimated using multiple regression. The results
were estimated using both OLS and 2SLS methods.

The main finding is that, in both 1974 and 1986, imports
restricted domestic firms' market power and considerably
restrained industrial concentration. An important policy
implication is that financial subsidies for selected industries and
firms accelerated concentration of market structure in Korea;
market concentration, coupled with protection, distorted efficiency
in resource allocation.

IN 1986, both OLS and 2SLS results indicate that import
intensity significantly constrained the price-cost margin. The
OLS result for 1974 confirmed the disciplining effect of imports.
The hypothesis of import discipline was therefore found to be
applicable to Korean manufacturing. Estimation results for the
concentration equation demonstrate that import intensity
significantly affected domestic industrial concentration in both
1974 and 1986. Imports seem to have provided an avenue for
enforcing more competitive market behaviour and increasing the
allocative efficiency of Korean manufacturing.

Export intensity was found to positively affect the price-
cost margin in both 1974 and 1986. In 1974, both OLS and 2SLS
results showed that exporting was profitable, possibly because of
the government's export subsidy policy. This variable was not
significant in 1986, however. The effect of export intensity on
level of concentration was negative in both 1974 and 1986. The
role of the world market in providing room for domestic firms,
including new and small firms, seems to have been stronger in
1974: possibly, the strengthened economies of scale associated
with exporting proved to be a barrier to entry in 1986.

in addition, the results show that the barrier to new entry
caused by government intervention in the financial sector in the
mid 1970s was an important factor in market concentration in
Korean manufacturing. The allocation of capital by the
government significantly and positively influenced market
concentration in the 1970s. The coefficient of the variable was
not significant in the 1980s, when the government reduced its
intervention. The results suggest that the government policy of
intervention increased market concentration and distorted
resource allocation.

In contrast to the structuralist argument, the concentration
variable was not significant in the profitability equation in either
1974 or 1986. It would seem that while in 1974 only import
intensity directly affected domestic firms' profitability, in 1986
both the direct influence of import intensity and the indirect
influence of the interactive variable (import intensity multiplied
by concentration ratio) restricted market poser. The results thus
imply that market concentration, associated with protection, can
distort allocative efficiency. In addition, in line with modern
oligopoly Theory, a high degree of tacit collusion is possible in a
market characterized by oligopoly, like Korean manufacturing.

The estimation results demonstrated that economies of scale
and product differentiation were important factors in market
concentration in both 1974 and 1986. As expected, the
significance of this technical factor and product differentiation
differed according th the year. The coefficients for economies of
scale and product differentiation in total industry were more
significant in 1986 than in 1974.

There are some qualifications to these results. The model
did not explicitly reflect the concentration of economic power,
mainly due to the difficulty of obtaining data. Although
Cournot-type competition is frequently used to explain a positive
link between concentration and profits, this relationship is not
clear if imperfectly competitive firms compete in Bertrand-type
competition or Shumpeterian competition. Further study,
incorporating the effects of other international linkages (foreign
direct investment and international technology agreements, for
example) is needed. Due to the difficulty of obtaining data, the
analysis also did not include the effects of mergers on the
competitive behaviour of firms and performance in the market.
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