Efficiency and Its Determinants of Agricultural Corporations in South Korea

Abstract

Agricultural corporation was established in 1990 with the enactment of Act on the Special Measures for Development of Agricultural and Fishing Villages, as an attempt at bringing a revolutionary change in the agricultural industry of South Korea. Even though it is a relatively new concept in the industry, the number of participants has continuously increased and the agricultural corporation system has now became the fundamental components of the agricultural economy in South Korea. In fact, due to aging and decrease in number of agricultural population in rural areas, the rural economy has been getting worse lately. Even worse, opening of agri-food market fostered by Free Trade Agreement (FTA) have made the situation harder for rural villages and agricultural population to sustain and survive in the industry. In order to fight off such competition and to derive economically and socially sustainable agriculture, constructing a well-organized structure that allows the effective and specialized management within farm-households to expand their business is needed.

This study evaluates operational conditions of agricultural corporations in terms of efficiency and identifies determinants of the efficiency to derive managerial and policy implications on the current agricultural corporate system. For the analysis, three models of DEA (CCR, BCC and SBM) with bootstrapping and Tobit model are applied in two-stage processes. From the comparison made between the three models of DEA, BCC-bootstrapping model presented the most coherent and concrete outcome in efficiency measures, and therefore applied for further analysis on its determinants. Results were driven focusing two operational structures (farming association and agricultural business corporations) and three major business classifications (production, processing and distribution corporations). Major findings from this study is as follows.

Agricultural corporations at the frontier with estimated efficiency score of 1 appeared to be 5.1% in CCR model, 5.8% in BCC model, and 3.5% in SBM model, respectively. On the other hand, agricultural corporations with highest degree of inefficiency (presented by efficiency score below 0.5) appeared to be 26.1%in CCR model, 24.6% in BCC model and 33.2% in SBM model, indicating that considerable proportion of agricultural corporations in South Korea are in operation at the level of inefficiency. Agricultural corporations with IRS were shown to be 65.0% of the entire set, whereas 28.7% appeared to be CRS, and 6.3% appeared to be DRS. Thus, overall expansion of input resources was recommended, since IRS indicates bigger increase in output units compare to a unit increase in inputs.

Regarding operational structures, agricultural business corporations appeared to have higher overall efficiency measures indicating better-off conditions in operation. However, proportion of farming associations at the frontier appeared to be larger than of agricultural business corporations, demonstrating bi-polarized and biased condition in operation among farming associations with beneficiaries of intimate governmental network and support presenting extreme efficiency, whereas the majority of farming associations are at poor condition. Within the division of business classifications, agricultural production corporations appeared to be the most efficient, followed by the processing and distribution corporations. Agricultural processing and distribution corporations appeared to be particularly far behind production corporations in terms of efficiency, indicating necessities of improvement.

As a result of the analysis on determinants, efficiency tended to increase with larger amount of assets and number of employees. Positive influence appeared among agricultural production corporations with 9~13 and 14~18 years of operation, whereas newly established (period of operation under 4 years) and decrepit (period of operation at 19 or more years) corporations demonstrated negative influence on efficiency in general. Regional concentration in agriculture appeared to have positive influence upon the efficiency, as well as the provision of multi-business activities.

These outcomes reflect substantive inefficiency among agricultural corporations, even though the system was introduced as a solution for improvement in operational structure of agrarian economy. Consequently, this study implies necessities in political and strategic remedial measures in improvement of efficiency among agricultural corporations, accordingly to each condition of operational structure, business classification, located region and etc. This is expected to not only increase efficiency for the benefits of rural economy, but also to further lead agriculture into more socially and economically sustainable industry in South Korea.