Intra-firm and Arm's Length Trade during the Global Financial Crisis: Evidence from Korean Manufacturing Firms

In this paper, we investigate and compare the different patterns of intra-firm trade and arm's length trade during the global financial crisis. Intra-firm trade refers to the cross-border flow of goods between related parties, and arm¡¯s length trade refers to the cross-border flow of goods between unrelated parties. Using firm-level data from the Korean manufacturing sector from 2006 to 2009, we employ two approaches that complement each other, accounting decomposition and fixed effects regression analyses. Our accounting decomposition result reveals that aggregate-level intra-firm trade is more responsive to shocks during the global financial crisis compared to arm¡¯s length trade, particularly in durable goods industries. The decline in intra-firm trade during the crisis is largely driven by extensive margins while the changes in arm¡¯s length and total trade are largely driven by intensive margins. The fixed effects panel regression results show that firms¡¯ involvement in the global value chain is the most significant determinant for the decline in a firm¡¯s trade growth during the crisis, where the negative effect is stronger for arm¡¯s length trade than for intra-firm trade, and is more pronounced in durable goods industries than in non-durable goods industries.