Imports, exports and total factor productivity in Korea

Abstract

This study investigates the relationship between trade and economic growth in Korea during 1980–2003. We find Granger causality from imports to Total Factor Productivity (TFP) growth, and the absence of any causal relation between exports and TFP. We then, empirically examine the impact of various trade variables on TFP growth. Our results indicate that imports have a significant positive effect on TFP growth, but exports do not. Furthermore, our results suggest that the positive impact of imports stems not only from competitive pressures arising from the imports of consumer goods but also from technological transfers embodied in imports of capital goods and imports from developed countries. Most of our empirical results still hold when we replace TFP growth with Gross Domestic Profit (GDP) growth as the dependent variable.

Notes

¹ See, for example, Hwang (1998).

² For surveys of the debates on TFP growth and trade in East Asia, see Edwards (1993) and Chen (1997), respectively.

³ See, for example, Bonelli (1992), Haddad et al. (1996), Weinhold and Rauch (1997), Yean (1997), Sjoeholm (1999) and Baldwin (2003).

⁴ Please refer to Balassa (1978), Krueger (1980) and Nishimizu and Robinson (1982).

⁵ See Grossman and Helpman (1991).

⁶ See Helpman and Krugman (1985).

⁷ See McKinnon (1964).

⁸ For a literature survey, see Greenaway and Sapsford (1994).

⁹ Haddad et al. (1996) is an example of the former while Pavcnik (2000) is an example of the latter.

¹⁰ Shan and Sun (1998), for example, fail to find unidirectional causality from exports to output and thus reject the export-led growth hypothesis for China.

¹¹ These include Hsiao (1987), Kunst and Marin (1989) and Jin and Yu (1996).

¹² Jung and Marshall (1985), Xu (1996) and Choi (2002) support the export-led growth hypothesis. Darrat (1986), Hsiao (1987), Dodaro (1993) and Dutt and Ghosh (1996) fail to find causality from growth to exports. Finally, Hsiao (1987), Chow (1987), Bahmani-Oskooee and Shabsigh (1991), Bahmani-Oskooe and Alse (1993) and Jin (1995) find bidirectional causality.

¹³ See Haddad et al. (1996) for a more comprehensive discussion. Hicks argued that severe market competition awakens firms from the laziness and comfort of a monopoly market and provides incentives for innovation.

¹⁴ See Tybout (2000) for an extended discussion. Schumpeter, however, suggested that a certain level of monopoly in the market provides firms with excess profits with which to make R&D investments, thus promoting productivity.

¹⁵ See Grossman and Helpman (1991), Sjoeholm (1999) and Tybout (2000).

¹⁶ Productivity growth triggers economic growth and increases income, which in turn, stimulates imports. On the other hand, increased productivity in an import-substituting industry crowds out imports from the domestic market and thus has a negative impact.

¹⁷ Additional studies on imports and productivity include Gokcekus (1997), who finds that protectionism reduces technical progress.

¹⁸ For capital, we used the perpetual inventory method to expand the capital estimated by Pyo (2003).

¹⁹ See Hall (1989) and Mankiw (1989), for more comprehensive discussions.

²⁰ Labour productivity not being affected by the capital utilization rate is a well-established result in real business-cycle theory. Other proxies for business cycles such as military spending, oil shocks and political dummies have been suggested. However, a complete treatment is beyond the scope of our article.

²¹ While the business cycle can affect productivity, productivity can also affect business cycles. To eliminate this endogeneity problem, we only include lagged values of the capital utilization rate as explanatory variables in the regression.

²² The purpose of adjusting TFP is to eliminate any error that may exist in the Solow residual as a productivity measure–to identify the part of the Solow residual that represents pure productivity. While the cyclical movement of the adjusted TFP is still smaller than the residual, the adjustment is not intended to completely eliminate the correlation between TFP and business cycles. The causality from TFP to business cycles is well established in real business-cycle theory, while the reverse effect from business cycles to productivity should be eliminated to prevent a spurious relationship. Therefore, it is quite natural that we have a high correlation after adjustment.

²³ See Osterwald-Lenum (1992) for critical values.

²⁴ See Sims (1980) for a complete discussion.

²⁵ The coefficient estimates are not reported here, but available from the authors upon request.

²⁶ See Okada (2005) for an overview of the theoretical literature.

²⁷ See, for example, Nalebuff and Stiglitz (1983).

²⁸ See, for example, Willig (1987).

²⁹ See Okada (2005), Nickel (1996) and Nickel et al. (1997), among others.

³⁰ Such studies include Coe and Helpman (1995), Keller (2000), Grunfeld (2002) and Chuang and Hsu (2004).

³¹ In a recent contribution to this journal, Thangavelu and Rajaguru (2004) find that imports have a significant positive effect on labour productivity in a number of Asian economies.