Vertical Integration, Firms’ Entry, Exit, Strategic Shifts, Age, and The Productivity Growth in Korea's Core Growth‐Leading Industries

This study attempts to measure the impact of firms’ entry, exit, strategic shifts, and age on the productivity growth of Korea's three core growth‐leading industries and their vertical integration with capital share (VI) firms and non‐VI (NVI) firms in view of the 2008 global financial crisis and the institutional push by the Korean Government. A stochastic frontier production model was applied to firm‐level panel data from 2006 to 2011 for Korea's automobile, electronics and general machinery industries. The results show that exogenous shocks to the market triggered large‐scale resource reallocations from firms with declining productivity to firms with less declining or rising productivity, and market share reallocation between VI firms and NVI firms. The Korean Government's institutional push led the productivity growth of NVI firms to reach their highest levels in 2010. In a VI structure, a structure comprising VI firms only, the agency problem dominated the synergies of secure supply chains and saving on transaction costs, while NVI firms endeavoured to raise their productivity to step into a VI structure to secure stable supply chains, only to find their R&D initiatives stagnated once they took on the VI structure. Therefore, efficient resource reallocation is hindered by the agency problem within the bounds of vertically integrated industrial structures.