International Competitiveness: A Comparison of the Manufacturing Sectors in Korea and Japan

Abstract

Using firm-level data covering most firms in the manufacturing sectors of Korea and Japan, we compiled a new dataset of TFP and factor costs by firm size and industry. Employing this dataset, we quantitatively examine changes in the two countries relative competitiveness. Following Dekle, and Fukaos (2011) approach based on production cost functions, we decompose intertemporal changes in the relative competitiveness of Korean firms vis-à-vis Japanese firms into four factors: (1) differences in TFP growth (catching up of Korean firms); (2) changes in relative factor prices; (3) changes in relative intermediate input prices; and (4) changes in real exchange rates. Using our new dataset, we also compare changes in the two countries competitiveness by different firm-size groups. We find that during the period of 1994-2010, the real wage rate of Korean workers doubled in most industries. Nevertheless, the competitiveness of Korean firms relative to their Japanese counterparts did not deteriorate. The main factors canceling out the impact of real wage increases were Koreas higher TFP growth in many industries such as motor vehicles and the sharp decline in Korean intermediate input prices in some industries such as electrical and electronic machinery. We also find that in many industries the competitiveness of Korean small and medium-sized firms vis-à-vis their Japanese counterparts increased by more than that of large firms. Two important developments can be observed which likely contributed to the improved competitiveness of small and medium-sized firms in Korea vis-à-vis their rivals in Japan. First, in Korea, small and medium-sized firms registered higher TFP growth rates than large firms during 1994-2010. And second, wage gaps across firm-size groups narrowed in Japan, while they widened in Korea.