The Effects of Exogenous Shocks on A Production Frontier and Technical Efficiency in Korea

This study investigates the effects of exogenous shocks from the HCI (Heavy Machinery and Chemical Industries) Drive Policies and the 1997 Asian financial crisis on a production frontier and technical efficiency level of the Non-HCI, HCI, and IT manufacturing in Korea from 1978 to 2001. The HCI Promotion Policy represents a strong market intervention under the GM (Governed Market) in the pre-1980 period, and the Asian financial crisis triggered another exogenous market intervention under the SM (Simulated Free Market) in the post-1980 period in Korea. Through a Full Frontier Production Function (FFPF) with a Gamma Distribution using maximum likelihood estimation method, it can be concluded that there have been significant reverberating effects of the HCI Drive Policy and the Asian financial crisis of 1997 with respect to the production frontier and level of technical efficiency of the rapidly growing core industries in the last few decades. Moreover, the technical efficiency level of the rapidly growing core industries targeted by the government at each economic developmental stage of Korea was higher than that of the industries not targeted, which proved that the winners of the government industrial policy gained static efficiency as well as dynamic efficiency in the last three decades. In conclusion, the targeted industries led economic growth for each economic developmental stage of Korea, and efficient industry proved it to be highly competitive in the world market.