Entry, Exit, and Aggregate Productivity Growth: Micro Evidence on Korean Manufacturing

Using plant-level panel data on the Korean manufacturing sector during the 1990-98 period, this study tries to assess the role of entry and exit in enhancing aggregate productivity, both qualitatively and quantitatively. The main findings of this study are summarized as follows. First, plant entry and exit rates in Korean manufacturing appear to be quite high - they are higher than in the U.S. and several developing countries for which comparable studies exist. Second, in line with existing studies on other countries, plant turnovers reflect the underlying productivity differential in Korean manufacturing, with the "shadow of death" effect as well as selection and learning effects all present. Third, plant entry and exit account for as much as 45 and 65 percent of manufacturing productivity growth during cyclical upturn and downturn, respectively. The findings of this study show that the entry and exit of plants has been an important source of productivity growth in the Korean manufacturing sector. Plant birth and death are mainly a process of resource reallocation from plants with relatively low and declining productivity to a group of heterogeneous plants, some of which have the potential to become highly efficient in the future. The most obvious lesson from this study is that it is important to establish a policy or institutional environment where efficient businesses can succeed and inefficient businesses fail.