R&D Investment and Productivity: A comparative study of Japanese and Korean firms

In this paper, using a large-scale dataset covering both Japanese and Korean firms, we examine the differences in performance and research and development (R&D) activities between them. We find that Japanese firms tend to be more productive in terms of total factor productivity (TFP), and that the productivity gap has not been narrowing in most industries. However, Korean firms are superior in terms of labor productivity and profitability. On the other hand, in recent years, Korean firms on average have tended to have a higher R&D intensity. In particular, smaller Korean firms have been actively increasing their R&D expenditures. We also find that the rate of return on R&D for large/productive firms is much higher in Korea, while that for small/less productive firms does not significantly differ. The relatively low rate of return for small/less productive firms may explain why Korea's average TFP level is not catching up with that of Japan. On the other hand, the rate of return on R&D for large firms is low in Japan, warranting further investigation on the factors underlying this.