(Determinants of Korea's Import and Its Effects on Firm's Distribution)

Korean Abstract: 본 연구에서는 한국의 수입구조에 대한 이해를 높이기 위하여 수입구조를 수출 및 해외투자와의 상호작용 속에서 파악하고, 수입이 기업의 퇴출과 구성요소별 생산성을 통해 기업의 분포구조에 미치는 영향을 분석하였다. 이를 토대로 수출 및 투자와 연동된 새로운 수입통계 시스템 도입, 무역조정 지원제도의 개선, 유형별 수입을 고려한 맞춤형 대책수립을 제안하였다. English Abstract: Recently, our trades have been declining for the second year in a row, due to the maturity of the global value chain and the delay in the recovery of the world economy. In particular, imports decline more than exports, but trade surplus is rather expanding. Policy makers and experts expressed concern about the decline in exports, but did not show interest in decreased imports. Behind these responses, there is dichotomy that the increase in exports is positive but the increase in imports is negative. More importantly, there is still a lack of clear understanding of Korea's import structure. In this paper, we analyze determinants of Korea's imports in the context of the interaction between exports and foreign investments, and investigate the effects of imports on firms' exit and productivity in order to understand Korea's import structure and distributional influences of imports. Since 1988, Korea's overall imports have increased substantially, except for the currency crisis and the period of the global financial crisis, but it has recorded a continuous declining trend due to recent sharp drop in imports of raw materials. Major importing countries have changed from developed countries in the past to resource-abundant countries and developing countries. By type, intermediate goods account for about 50% of imports, raw materials and capital goods account for 20% respectively, and consumption goods account for around 10%. In order to analyze determinants of imports by type, we constructed theoretical model and found two propositions. First, regardless of types, imports will increase as the economic sizes of importing countries become larger, and will decrease as the transaction cost with the importing partner increases. Second, while imports of consumption goods increase as the income level and market size of importing countries increases, imports of intermediate goods and raw materials used as production inputs increases as the outputs and exports of industries increase. The results of the empirical analysis based on the theoretical model are summarized as follows. First, as the export becomes more active, imports of intermediate goods and raw materials used as production input factors will increase, while imports of consumer goods will decrease. Second, imports of intermediate goods and raw materials are positively related with inward foreign direct investment (FDI), but imports of consumption goods are negatively affected by inward FDI. Third, the more industries spend R&D investments, the more the industries import intermediate goods and raw materials. Fourth, the effects of import liberalization are different for each type of import. The influence of the tariff rate was limited for raw materials and capital goods imports. According to the analysis of Korea's import structure, imports of consumption goods declined by 0.137%, and imports of intermediate materials and raw materials were analyzed to increase by 0.235% and 0.193%, respectively when exports increased by 1%. When inward FDI increased by 1%, imports of consumption goods and capital goods decreased by 0.02% and 0.017% respectively, but imports of raw materials were expected to increase by 0.071%. The main results of analyzing the effects of imports on probability of firms’ exit are as follows. First, the increase in total imports increase the probability of a firm's exit but the firm size, capital stocks, productivity decrease the probability. Second, imports of raw materials and intermediate goods decrease the probability. Third, whether firms are exporting or not does not significantly affect the relationship between import penetration and firms' exit. Fourth, the magnitude of the effects of imports on firms' exit varied from industry to industry. The results of effects of imports on productivity structure are summarized as follows. First, the total import penetration rates have an inverse U-shaped relationship with total factor productivity. Second, these nonlinear relationships between import penetration rate and total factor productivity are very different for each type of imports by industry. In order to investigate the effects of imports on the distribution of productivity within the industry, we decompose changes in the productivity into within firm effects, between firm effects, and exit and entry effects. Second, when imports increase, within firms effects are significant in food, iron, transportation industries and between firms effects are significant in oil and iron industries. Only in the transportation industry, exit and entry effects turn out significant. Third, the total import penetration rates have a positive impact on the growth rate of productivity by economies of scale, whereas the penetration rates of intermediate goods imports increase productivity through technological progress. Based on this, three policy proposals were derived. The first is the introduction of a new statistical system for imports linked with export and investment. Also, the new system should contain statistics for e-commerce imports in order to analyze the current situation of import of consumption goods. The second is improvement of the trade adjustment assistant (TAA) program. An increase in imports will increase the competitiveness of the domestic market and induce the exit of companies with low productivity, but these impacts were analyzed to be somewhat different depending on type and industry. In addition, a nonlinear relationship between imports and productivity was also considered. Third one is customized policies taking into account effects of imports by type. As the FTA tariff elimination schedule goes forward, the effects of imports are expected to continue to expand. To introduce customized policy for imports by type, it is necessary to raise the understanding of Korea’s import structure.