Vertical Integration, Firm Strategies, Business Duration, and Productivity: Empirical Evidences of General Machinery Industry in Korea

This paper estimates the extent to which the effects of firm strategies on productivity growth vary according to changes in vertical integration and business duration in Korea’s general machinery industry. A fixed effect stochastic frontier production function (FE SFPF) model is applied to a firm level panel data set from 2006 to 2011. Empirical results show that the strategic partnerships Korean firms make with foreign companies produced the greatest effect on total factor productivity (TFP) growth for both vertically integrated firms (VI) and non-vertically integrated firms (NVI). For VI, engaging in entire strategic partnerships had the second largest effect and in strategic partnerships for technology produced the third largest effect on TFP growth, while for NVI, incentive schemes had the second largest effect on TFP growth, firms’ strategic partnerships for technology had little effect and patents and intellectual property rights had a negative effect on TFP growth. The results shed light on what could be effective policy guidelines for NVI to adopt in terms of strategic partnerships especially in the area of technology exchanges and patents and intellectual property rights to promote the positive outcomes of these strategies, and share the growth with VI through fair trade and efficient competition policy in a way that enhances technical progress, and thus, productivity growth, and ultimately global competitiveness for firms in Korea’s general machinery industry.