Analysis on the Determinants of Currency Invoicing in Korean Trade (in Korean)

This study investigates the determinants of currency invoicing in Korean trade by using import and export transactions data between Korea and its 30 major trading partners for the period from 2000 to 2013. Unlike developed countries, where the invoicing currency is largely determined by the bargaining power of exporters and importers, we cannot find a strong substitution effect between the Korean won (KRW) and the trading partner's currency due to the lack of internationalization of the KRW. Also, in case of Korea, a higher market share for the Korean goods in a destination country does not increase the use of the KRW. This owes to a coalescing effect, with Korean firms invoicing in the US dollar in line with their competitors to limit the movement of their relative prices. On the other hand, the higher the level of industry product differentiation, the weaker the coalescing motive. As a result, traders prefer to invoice in either their own currency or their trading partner's currency instead of the US dollar. In addition, the share of invoicing in the currency of Korea's trading partner tends to be higher when trading with a country which has (i) a larger trade volume, (ii) higher level of financial development, (iii) lower inflation and lower price volatility, and (iv) its own currency with lower transaction costs. Taken together, it is necessary to establish a foothold for the expanded use of the KRW in international transactions in order to increase its share as an invoicing currency in trade. To do this, we should maintain macroeconomic stability and improve financial and foreign exchange market infrastructure while enhancing the non-price competitiveness of Korean export goods.