Sectoral systems of innovation and productivity catch-up: determinants of the productivity gap between Korean and Japanese firms

This article attempts to identify the determinants of total factor productivity (TFP) catch-up by Korean firms compared with that of Japanese firms. The degree of catch-up is measured in terms of the TFP gap between each Korean firm and the industry average of the Japanese firms in each sector. Regressions are then employed to establish the determinants of the TFP gap or catch-up. These determinants are classified into two groups: sectoral- and firm-level variables. Sectoral-level variables, drawn from the sectoral innovation system literature, test the hypothesis that catch-up is more likely to occur in certain sectors than in others. It is found that TFP catch-up by Korean firms is more likely to occur in sectors where technologies are more explicit and easily embodied in imported equipment. This discovery helps explain why the TFP of Korean firms is now close to, or even higher than those of Japanese firms in the electronics sector, and why TFP gaps still remain after some catch-up in the automobile sectors associated with more tacit knowledge regimes. Second, the degree of the sectors' top firm dominance is positively related to the TFP catch-up, implying that catch-up is more likely to occur in sectors with more monopolistic market structures. It is also shown that firms in a monopolistic market structure should be subjected to the world market discipline to attain better performance in the productivity catch-up. Third, sector-level variables only affect international TFP catch-up, whereas firm-level variables determine intranational catch-up. Important results remain consistent in some robustness tests using different proxies for sectoral variables and catch-up as measured in labor productivity, as well as in the results obtained from using period average variables rather than yearly variables.