Firm's Choice between Export and R&D and its Effect on the Firm's Productivity and Survival

Abstract

This paper examines the nature and process of technology upgrade among firms in South Korea and the underlying productivity dynamics by using micro panel data. In this paper, we see important aspects of the firm's behaviour on improving its productivity through internal and external knowledge creation activities represented by research and development (R&D) and export, respectively. Our results indicate that the level of a firm's productivity plays an important role in determining its decision on R&D investment and export. In addition, a firm's experiences involved exporting and/or investment in R&D increase the probability of its current decision on export and/or R&D investment. Firms that either export or invest in R&D show significantly high productivity level than other firms that do not involve in any of two activities. Furthermore, firms that export and invest in R&D simultaneously are more likely to have higher productivity than firms that only participate in one of two activities. These findings are consistent with the hypothesis of compounding effects of two types of knowledge creations, R&D and export.

Key Words:

• R&D and export decision
• productivity growth
• firm survival

Jel Classification:

• L60
• O33

Notes

¹ Young (1995) well compares historical patterns of output growth and productivity growth in the newly industrializing countries; Hong Kong, Singapore, South Korea, and Taiwan.

² Rhee et al. (1984) describe the role of foreign buyers in the development of Korean manufacturing industries as “The relationship between Korea firms and the foreign buyers went far beyond the negotiation and fulfillment of contracts. Almost half of the firms said they had directly benefited from the technical information foreign buyers provided: through visits their plants by engineers or other staff of the foreign buyers, through … and through feedback on the design, quality and technical performance of their products”.

³ Nadri (1993) is an excellent review of this literature.

⁴ Many of researches emphasized the potential importance of export activity on firm's growth such as Clerides et al. (1998), and Bernard and Jenson (1999). Based on their findings, we will use a firm's export activity as explanatory variable in the regression equation.

⁵ There are some other possible explanations of knowledge spillovers. Research and development (R&D), foreign direct investment (FDI) and export experience are possible sources of knowledge spillovers.

⁶ A theoretical model developed by Ericson and Pakes (1995) supposes that the distribution of a firm's future productivity depends on both a firm's current productivity and a single continuous investment variable.

⁷ Unlike Aw et al. (2002), I do not suppose the upper threshold of productivity. They set the upper threshold level of productivity and a firm with higher productivity than this level will not invest in R&D because they consider the fact that investment increases the probability of moving to higher future productivity levels, so that the returns to additional investment will be low for high productivity firms.

⁸ As one referee pointed out, the government subsidy would have an effect on firm's behaviors on R&D activity and firm's productivity. It is necessary to check if this is happened in our data, but we unfortunately could not do it because of data limitation.

⁹ The effect of cyclical change should be considered since firm's activity can be affected by cyclical change as one of referees suggested. The best way we deliver this issue is to construct the TFP as explained in the Appendix even though it does not explain cyclical change perfectly. In future work, we would explicitly set up for empirical work with cyclical change and show the difference from current results.

¹⁰ The coefficients on the year dummies are not reported.

¹¹ We may need to check if the relationship between the increasing rate of workers' wages and the volume of imports from China. This may make us to be able to figure out why there is negative sign on production worker's wage in survival equation. That is, increase of wage drives firms to move their facilities to China. Those firms will be reported in failure in data.

¹² Since 1985, output and export of the Taiwan electronic industry have grown tremendously. For example, between 1985 and 1988, the rate of export was almost 37% at an average annual output growth. By 1987 electronics was Taiwan's largest industry and accounted for over 25% of total exports. This pattern is very similar to that of Korea in the 1960s and 1070s. The average annual export growth rate of Korean industries was 40% in the 1960s and 1970s, but fell to 25% in the 1980s and to 11.5% in the 1990s.

¹³ Korean industries actively started to invest in R&D by several supportive government policies, especially the Technology Development Promotion Law of 1981.