Trade and competition in Korean manufacturing

Abstract

The primary objective of this thesis is to examine the efficiency and welfare effects on Korean manufacturing of an increase in competition from foreign firms. The Korean case is of interest because it represents an experience with liberalisation of a protected manufacturing sector in a small open economy. In the study, the imperfectly competitive nature of Korea's manufacturing sector is explicitly incorporated into the model. The analysis focuses first on the effects of an increase in foreign competition on domestic monopoly power, X-efficiency and national welfare. The market concentration of Korean manufacturing industry remained high throughout the 1970s and 1980s. The evidence suggests that financial subsidies to industry accelerated the level of market concentration, and that protection, especially through import quotas, was associated with high levels of X-inefficiency. The analysis also indicates that, in a small open economy, a rise in foreign competition has positive welfare effects, even when the economy is characterised by oligopoly and scale economies.