Does Firm Size Matter in Explaining Firm Performance?: The Case of Korean SMEs in Open Economy

We examine the effects of firm size on performance in an open economy. In particular, we attempt to estimate those effects for SMEs (small and medium sized enterprises) in Korea. In doing so, we adopt a longitudinal analysis(random effects estimators) as well as the OLS estimator. We have found relatively strong evidence related to the performance effect of SMEs in Korea. Both the OLS estimates and the random effects estimates indicate that SMEs in Korea, compared to larger firms, have lower performance in both productivity and profits per worker, and the negative effects are more apparent in the random effects estimates. The results for the effects of trade openness on firm performance also convey a relatively robust message. Both the OLS estimates and the random effects estimates indicate that trade openness or foreign competition measured by tariff rate has a positive effect on the productivity of the Korean firms but not on their profitability. This result is consistent with the evidence obtained in the international economics literature that trade liberalization enhances the productivity of an economy. However, the positive productivity effect is found to be inversely related to firm size so that SMEs in Korea do not enjoy much benefit from trade openness.