Misallocation and Manufacturing TFP in Korea

Oh, JiYoon

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This paper analyzes the effects of allocative efficiency on productivity

in the manufacturing sector of Korea following Hsieh and Klenow

(2009). The results of this research indicate that the overall allocative

efficiency declined from 1990 to 2012. Using the method of Oberfield

(2013), which allows inter-industry resource movement as well as

intra-industry reallocation, we confirm that intensified misallocation

generally results from intra-industry allocative inefficiency. The

potential loss from instances of worsening misallocation is estimated

to be approximately 0.6% points for each year, which is considerable

in terms of the overall TFP. In terms of the firm size distribution,

initially large establishments are more likely to expand if distortions

are removed in most countries. One notable feature in Korea is that

this pattern is pronounced. This implies that subsidies to unproductive

small-sized establishments are heavily implemented.

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