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The Microeconomics of North--South Korean Cross-border Integration

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  • Stephan Haggard
  • Marcus Noland

Abstract

Economic integration between North and South Korea occurs through three modalities: traditional arm's-length trade and investment, processing on commission (POC) trade, and operations within the Kaesong Industrial Complex (KIC). In order, these three modalities are characterized by decreasing exposure of South Korean firms to North Korean policy and infrastructure. Through a survey of 200 South Korean firms operating in North Korea we find that these modalities of exchange matter greatly in terms of implied risk. For example, firms operating in the KIC are able to transact on significantly looser financial terms than those outside it. We find that direct and indirect South Korean public policy interventions influence these different modalities of exchange and thus impact entry, profitability, and sustainability of South Korean business activities in the North. In effect, the South Korean government has substituted relatively strong South Korean institutions for the relatively weak Northern ones in the KIC, thus socializing risk. As a result, the level and type of cross-border integration observed in the survey is very much a product of South Korean public policy.

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File URL: http://hdl.handle.net/10.1080/10168737.2012.707872
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal International Economic Journal.

Volume (Year): 26 (2012)
Issue (Month): 3 (September)
Pages: 407-430

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Handle: RePEc:taf:intecj:v:26:y:2012:i:3:p:407-430

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  1. Simon Johnson & John McMillan & Christopher Woodruff, 1999. "Contract Enforcement in Transition," CESifo Working Paper Series 211, CESifo Group Munich.
  2. Moenius, Johannes & Berkowitz, Daniel, 2011. "Law, trade, and development," Journal of Development Economics, Elsevier, vol. 96(2), pages 451-460, November.
  3. Simon Johnson & John McMillan & Christopher Woodruff, 2001. "Courts and Relational Contracts," NBER Working Papers 8572, National Bureau of Economic Research, Inc.
  4. Marcus Noland & Stephan Haggard & Jennifer Lee, 2011. "Integration in the Absence of Institutions: China-North Korea Cross-Border Exchange," Working Paper Series WP11-13, Peterson Institute for International Economics.
  5. Marcus Noland & Stephan Haggard, 2012. "Networks, Trust, and Trade: The Microeconomics of China–North Korea Integration," Working Paper Series WP12-8, Peterson Institute for International Economics.
  6. James E. Anderson & Douglas Marcouiller, 2002. "Insecurity And The Pattern Of Trade: An Empirical Investigation," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 342-352, May.
  7. McMillan, John & Woodruff, Christopher, 1999. "Dispute Prevention without Courts in Vietnam," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(3), pages 637-58, October.
  8. John McMillan & Christopher Woodruff, 1998. "Interfirm Relationships and Informal Credit in Vietnam," William Davidson Institute Working Papers Series 132, William Davidson Institute at the University of Michigan.
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