Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 29, No. 1, pp.43-68
ISSN: 1225-0279 (Print)
Print publication date 29 Feb 2016
Received 29 Oct 2015 Revised 28 Jan 2016 Accepted 29 Jan 2016

International Competitiveness: A Comparison of the Manufacturing Sector in Korea and Japan

Kyoji Fukao ; Kenta Ikeuchi ; YoungGak Kim ; Hyeog Ug Kwon ; Tatsuji Makino
Corresponding author, Professor, Institute of Economic Research, Hitotsubashi University, Naka 2-1, Kunitachi, Tokyo 186-8603, Japan, Tel: +81-42-580-8359, Fax: +81-42-580-8333
Research Fellow, First Theory-Oriented Research Group, National Institute of Science and Technology Policy, Tel: +81-3-3581-2396, Fax: +81-3-3503-3996;
Associate Professor, School of Economics, Senshu University, Tel: +81-44-900-7979, Fax: +81-44-900-7849
Professor, College of Economics, Nihon University, Tel: +81-3-3219-3471, Fax: +81-3-3219-3471
Researcher, Institute of Economic Research, Hitotsubashi University, Tel: +81-42-580-8350, Fax: +81-42-580-8333

JEL Classification: D24, O47, O57


Using firm-level data covering most firms in the manufacturing sectors of Korea and Japan, we compiled a new dataset of TFP and factor costs by firm size and industry. Employing this dataset, we quantitatively examine changes in the two countries’ relative competitiveness. Following Dekle, and Fukao’s (2011) approach based on production cost functions, we decompose intertemporal changes in the relative competitiveness of Korean firms vis-à-vis Japanese firms into four factors: (1) differences in TFP growth (catching up of Korean firms); (2) changes in relative factor prices; (3) changes in relative intermediate input prices; and (4) changes in real exchange rates. Using our new dataset, we also compare changes in the two countries’ competitiveness by different firm-size groups. We find that during the period of 1994-2010, the real wage rate of Korean workers doubled in most industries. Nevertheless, the competitiveness of Korean firms relative to their Japanese counterparts did not deteriorate. The main factors canceling out the impact of real wage increases were Korea’s higher TFP growth in many industries such as motor vehicles and the sharp decline in Korean intermediate input prices in some industries such as electrical and electronic machinery. We also find that in many industries the competitiveness of Korean small and medium-sized firms vis-à-vis their Japanese counterparts increased by more than that of large firms. Two important developments can be observed which likely contributed to the improved competitiveness of small and medium-sized firms in Korea vis-à-vis their rivals in Japan. First, in Korea, small and medium-sized firms registered higher TFP growth rates than large firms during 1994-2010. And second, wage gaps across firm-size groups narrowed in Japan, while they widened in Korea.


Competitiveness, Average production costs, TFP


This study is the result of a joint research project of the National Institute of Science and Technology Policy (NISTEP) and the Research Institute of Economy, Trade and Industry (RIETI). We would like to thank the editors of this journal, Prof. Jung-Wook Kim (Seoul National University) and Prof. Kyoo-Ho Park (Hanshin University), who were the discussants of an earlier version of this paper, and other participants of the 23rd SJE International Symposium “Firms and Innovation in Asia,” October 30, 2015 for their helpful comments. Kim is grateful for financial support from the Grant-in-Aid for Scientific Research (Grant No. 24530318) from Japan Society for the Promotion of Science.


  • Choi, N. “The Effect of International Outsourcing on Job Growth in the Republic of Korea.” In Choi B.-I. and C. Rhee (eds.), Future of Factory Asia, Asian Development Bank and Korea Economic Research Institute, 2014.
  • Dekle, R., and Fukao, K., with the assistance of Ungor, M. “The Japan-US Exchange Rate, Productivity, and the Competitiveness of Japanese Industries.” In K. Hamada, A. K. Kashyap, and D. E. Weinstein (eds.), Japan’s Bubble, Deflation, and Long-term Stagnation. U.K.: The MIT Press, pp. 105-28, 2011. []
  • Demian, C.-V., and di Mauro, F. “The Exchange Rate, Asymmetric Shocks and Asymmetric Distributions.” Working Paper Series No. 1801, European Central Bank, 2015.
  • Diewert, W. E., and Nakamura, A. O. “Bias Due to Input Source Substitutions: Can It Be Measured?” Survey of Current Business 91 (No. 2 2011).
  • Fukao, K., and Arai, S. “Biases to Manufacturing Statistics from Offshoring: Evidence from Japan.” In S. Houseman and M. Mandel (eds.), Measuring Globalization: Better Trade Statistics for Better Policy, Chapter 7, Vol. 1, Michigan: W. E. Upjohn Institute for Employment Research, pp. 219-50, 2015. []
  • Fukao, K., and Kwon, H.U. “Why Did Japan’s TFP Growth Slow Down in the Lost Decade? An Empirical Analysis Based on Firm-Level Data of Manufacturing Firms.” Japanese Economic Review 57 (No. 2 2006): 195-228. []
  • Houseman, S., Kurz, C., Lengerman, P., and Mandel, B. “Offshoring Bias in U.S. Manufacturing.” Journal of Economic Perspectives 25 (No. 2 2011): 111-32. []
  • Ito, K., and Lechevalier, S. “The Evolution of the Productivity Dispersion of Firms: A Reevaluation of its Determinants in the Case of Japan.” Review of World Economics 145 (No. 3 2009): 405-29. []
  • Jorgenson, D. W., Nomura, K., and Samuels, J. D. “A Half Century of Trans-Pacific Competition: Price Level Indices and Productivity Gaps for Japanese and U.S. Industries, 1955-2012.” In D. W. Jorgenson, K. Fukao and M. P. Timmer (eds.), Growth and Stagnation in the World Economy, Cambridge: Cambridge University Press, 2015.
  • Jung, M., Lee, K., and Fukao, K. “Total Factor Productivity of the Korean Firms and Catching up with the Japanese Firms.” Seoul Journal of Economics 21 (No. 1 2008): 93-137.
  • Kim, Y. G., Fukao, K., and Makino, T. “The Structural Causes of Japan’s ‘Two Lost Decades.’” Economic Review 61 (No. 3 2010): 237-60 (in Japanese).
  • Lim, H. “Political Economy of the Polarization of LEs-SMEs Industrial Structure in Korea.” Korean Social Science Review 3 (No. 1 2013): 223-54.
  • OECD, The Future of Productivity, Paris: OECD, 2015.
  • Okazaki, T., and Okuno-Fujiwara, M. (eds.) The Japanese Economic System and Its Historical Origins (Japan Business & Economics), Oxford: Oxford University Press, 1999.
  • Pyun, J. H., and Choi, B-Y. “Does Real Exchange Rate Depreciation Increase Firm Productivity? Analysis Using Korean Firm-Level Data.” Korea Institute for International Economic Policy, Sejong, 2015, Unpublished.
  • Syverson, C. “Product Substitutability and Productivity Dispersion.” Review of Economics and Statistics 86 (No. 2 2004): 534-50. []