What do the Performances of the Korean Pharmaceutical Industrial Sector Suggest for the Korea-U.S. FTA?

This paper applies a stochastic frontier production model to the Korean pharmaceutical industrial sector based on the micro-level establishment data from 1991-2005 in order to capture the contributors and hindrances of its growth. The sources of total factor productivity (TFP) growth are decomposed into technical progress, technical efficiency improvement, allocative efficiency promotion, and scale effects. The empirical results indicated that the persistent technical progress pulled up the productivity growth of the Korean pharmaceutical industrial sector while poor technical efficiency retarded the productivity growth of the Korean pharmaceutical industrial sector. Astonishingly low technical efficiency level, but strong increasing-return-to-scale is another gravitating empirical result. The Korea-U.S. FTA suggests that the technical progress should be reinforced for the development of high value-added new drugs and the low technical efficiency level ought to be improved. Standardization of the GMP (Good Manufacturing Practices) and GLP (Good Laboratory Practices) ought to be adopted to increase exports for scale effects, and a joint marketing system and a transparent distribution system are required to promote allocative efficiency.