The Quest to Resurrect Korea's Shipbuilding Industry

This study investigates the sources of productivity retrogression in Korea's shipbuilding industry and its vertical integration with capital-share (VI) and non-VI (NV) structure to examine the feasibility of resurrecting Korea's shipbuilding industry. Six notable findings emerge from this study. 1) VI firms with extensive business duration raised the productivity growth of their industry and the VI structure through secure supply chains and reduced transaction costs despite agency cost, overcoming agency dilemma, while NV counterparts marginally raised the productivity growth of their industry but dampened that of the NV structure. 2) New VI entrants in the industry and the VI structure during the 2008 economic recession and the 2011 economic recovery raised total factor productivity (TFP) growth; however, new NV entrants in the industry and the NV structure significantly dampened TFP growth during the economic downturns of 2008, 2011, 2016, and 2018. 3) Exiting VI firms contributed to the TFP growth of their VI structure one year prior to their actual exit in the 2009 and 2020 economic depressions and 2013 economic downturn, demonstrating their competitiveness. 4) Self-selecting firms shifting from a VI to an NV structure boosted the TFP growth of the NV structure they entered during the economic depressions of 2009 and 2020, and the sharp economic bounceback of 2010. 5) Self-selecting firms shifting from an NV to a VI structure were competitive, enhancing the productivity growth of the NV structure they exited one year prior to actual exit during the economic downturns of 2016-2017, and the 2020 economic depression. 6) Technical retrogression and TFP retrogression in the NV structure dominated the industry, while weakening of the technical efficiency of the VI structure led to overall deterioration of the industry's technical efficiency, and the impacts of firms' strategic shifts were significantly smaller in the VI structure compared with the NV structure. Ultimately, the deteriorating technical efficiency in the VI structure, along with technical retrogression, scale diseconomy, and the new NV entrants, significantly hindered the TFP growth of these structures. This bottleneck needs to be addressed by institutional efforts, implementing an incentive scheme that pursues cutting-edge technology to offset the global business cycle in the shipbuilding market, especially for the NV structure.