The Microeconomics of North-South Korean Cross-Border Integration
AbstractEconomic 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, the authors 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. The authors 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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Bibliographic InfoPaper provided by Peterson Institute for International Economics in its series Working Paper Series with number WP12-9.
Date of creation: May 2012
Date of revision:
economic integration; transition; institutions; socialization of risk; South Korea; North Korea;
Other versions of this item:
- Stephan Haggard & Marcus Noland, 2012. "The Microeconomics of North--South Korean Cross-border Integration," International Economic Journal, Korean International Economic Association, vol. 26(3), pages 407-430, September.
- P3 - Economic Systems - - Socialist Institutions and Their Transitions
- F15 - International Economics - - Trade - - - Economic Integration
- P33 - Economic Systems - - Socialist Institutions and Their Transitions - - - International Trade, Finance, Investment, Business, and Aid
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-06-13 (All new papers)
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