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Business groups and declining allocative efficiency in Korea

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Business groups and declining allocative efficiency in Korea04



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Title Business groups and declining allocative efficiency in Korea
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Material Type Videos
Author(English)

Korea Development Institute

Publisher

[Sejong] : Korea Development Institute

Date 2018-04
Subject Country South Korea(Asia and Pacific)
Language English
File Type Link
Subject Economy < General
Industry and Technology < Entrepreneurship
Holding Korea Development Institute
License

Abstract

The sharp downward trajectory in productivity since 2011 has prompted many to voice their concerns over the slowdown in Korea’s economic growth. So, why is the productivity growth rate declining? To find out, an analysis was conducted on the growth in the aggregate productivity of Korean firms from 2006 to 2016 based on the increase in average productivity, allocative efficiency, and the entry and exit effect. The results revealed that from 2011, allocative efficiency has rapidly fallen, which has, in turn, diminished overall productivity. A decline in allocative efficiency implies that resources are being excessively allocated to low-productivity firms while being inadequately allocated to high-productivity firms. Then, who has primarily contributed to the decline in allocative efficiency? The changes in allocative efficiency were decomposed into the contribution of stand-alone firms and that of the affiliates of large business groups designated by the Korea Fair trade Commission for limitations on cross-shareholding. A visible downturn was discovered in the allocative efficiency of large business-group firms from 2011, which has consequently curtailed the firms’ overall growth in aggregate productivity. On the other hand, no notable trends were found for stand-alone firms. Why is the decline mainly found in business-group firms? Compared to stand-alone firms, the increased output of business-group firms on an additional one unit of capital is lower.