Are there spillover effects of large firms’ growth in supply chain networks? Evidence from the Korean economy

ABSTRACT

Previous literature has found that inter-firm cooperation leads to higher growth rates for small and medium enterprises (SMEs). However, these studies have focused only on direct effects, such as subcontracting, rather than on spillover effects in supply chain networks (SCNs). Regarding the spillover effects, this article investigates whether a large firm’s growth leads to the growth of the directly and indirectly related SMEs in its SCN, using Korean firm-level data with the system  Generalized Method of Moments (GMM) approach. The estimation results show that increases in the sales of large firms significantly affect the growth rates of the related SMEs. These effects, however, diminish as the relationship with the large firm goes down from the first vendor to the second vendor and from the second vendor to the third vendor. In the case of Korea, when a large firm grows by 1%, the first vendor grows by 0.38–0.44%, but the growth rates of the second and third vendors are only 0.036–0.047% and 0.003–0.005%, respectively. Thus, while there are spillover effects, the effects are weak. We discuss what these findings mean for national economic growth.

KEYWORDS:

• Supply chain networks
• firm growth
• small and medium enterprises
• spillover effects

JEL CLASSIFICATION:

• L20
• L22

Acknowledgements

This work was supported by the National Research Foundation of Korea Grant funded by the Korean Government (NRF-2014S1A5B8060964).

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ In this article, inter-firm cooperation includes the relationships between a large firm and SMEs as well as relationships between SMEs in the SCNs.

² See Koo (2013) for a historical review of economic growth strategies in Korea.

³ For example, in the case of the automobile industry (Hyundai Motor), = 0.380, = 0.115 and = 0.072.

⁴ Dabla-Norris et al. (2015) analysed the impact of income inequality on economic growth and found that it is negative.

⁵ The Korea Fair Trade Commission (KFTC) (Korea Fiar Trade Commission 2014) has made efforts to promote the growth of SMEs and protect SMEs against abuse by large firms through various policies and regulations. For example, since 2011, the KFTC has enhanced the ‘Fair Transaction in Subcontracting Act’ by introducing punitive damages.

Additional information

Funding

This work was supported by the National Research Foundation of Korea Grant funded by the Korean Government [NRF-2014S1A5B8060964].