Creative Destruction Mechanism of Korean Industry from the Perspective of Industrial Dynamics

Abstract

Schumpeter's study on economic growth and technological progress in the capitalist system as a process of creative destruction has influenced many studies on industry dynamics. In addition to Schumpeterianism, evolutionary economics and organizational ecology also attempted to grasp the sources of industrial dynamics. Although each perspective is slightly different, they all perceived competition in the market as a major source of industrial dynamics. In particular, Schumpeterianism emphasized Schumpeterian competition that firms are competing their competitive advantage originated from innovation as a main source of industry dynamics. In this perspective, this study attempted to analyze the creative destruction mechanism of Korean industry. In particular, we tried to describe the selection criteria exists in the Korean industry through empirical analysis of exit firms. First, we reviewed theoretical background and the empirical analysis on the survival of firms and derived stylized facts on firm survival. The stylized facts were classified into individual level, firm level, industry level, and macroeconomic level. At the individual level, it was possible to derive a stylized fact that the higher the level of education and experience of the organization members, the better the survival of the firm. At the firm level, the firm size, age, R&D investment, and exporting and were identified as significant determinants on the firm survival. At the industrial level, it was reported that the firm entry rate, industrial growth rate, which determine the degree of competition of the industry, and technology intensity as determinants on the survival of the firm. At the macroeconomic level, we were able to derive a stylized fact that firms' survival rate is procyclic to upturns and downturns of the economy. Second, survival analysis was implemented to describe the selection criteria of Korean industry through firm level micro data. The results showed that the stylized facts on the survival such a as firm size, age, and R&D investment is also found in Korean industry. In addition, we found the changes in the firm selection criteria as a result of restructuring of the financial sector and the industry sector in the process of overcoming the Asian financial crisis. More specifically, it was found that there was a change in firm financial management behavior before and overall incentive in terms of firm survival for the firm's investment activity was reduced after the Asian financial crisis. Third, we focused on the cleansing effect hypothesis in economic recessions. This study investigated two recessions in Korea, the Asian financial crisis and the global financial crisis. We measured total factor productivity using micro level manufacturing plant data from 1993 to 2013 and decomposed the source of the changes in total factor productivity to measure the cleansing effect in two large recessions. During the Asian financial crisis, there was no evidence to support a cleansing effect hypothesis. In contrast, during the global financial crisis, we found the evidence of a cleansing effect. Additionally, we found differences in market selection criteria in the two recessions

by the global financial crisis, the market selection criteria had changed to enable a more conducive environment for the creative destruction process. Fourth, the problem of zombie companies was investigated from a different perspective. Previous studies have recognized zombie companies as a factor that hinders the creative destruction process and recognized that they should be exited through restructuring. However, this study focuses on the fact that the problem of zombie firm may be different according to the financial system of the country. Specifically, we analyzed the characteristics of recovering firms and exiting firms in the credit based financial system such as Korea. Based on the firm level micro data, it was found that the firms with high amount of accumulated knowledge showed higher probability of recovering to the normal firms. Also, it is confirmed that the financial sector was not able to identify and support selectively firms between recovering firms and exiting firms.