The economic role of industrial equipment sector in the Korean national economy

After Japan began to regulate the exportation of core semiconductor materials in July 2019, the Korean government initiated a policy to strengthen the competitiveness of the local industry value chain (LIVC), encompassing the materials, components, and equipment sectors. Specifically, the government began to nurture the equipment sector in earnest. Based on Korea’s three most recent benchmark input-output tables, we define the equipment sector, including nine subsectors. Then, we consider them exogenous and estimate their economic spillover effects on the Korean economy from the LIVC perspective. We find that the equipment sector is characterized by high production-inducing (dominated by the backward-linkage effect) and low supply-shortage effects. However, we observe a decrease in its production-inducing and supply-shortage effects on the economy in terms of low localization in intermediate goods and a reduction in the cost of supply shortages. At the same time, we find heterogeneity in the economic spillover effects across different subsectors. Lastly, we observe the dispute and policy effect from the time-series analysis of domestic production, import reliance on Japan, and total trade balance. They indicate that policy makers should support the sector in terms of LIVC development and global competitiveness, with subsector-specific policies that incorporate its economic spillover effects.