Export Companies Facing Difficulties... 'Why They Chose Domestic Sales Over Export'

Bank of Korea Economic Research Institute 'Analysis of Factors Influencing Export Discontinuation of Domestic Manufacturing Firms from 2000 to 2018'
Employment Size and R&D Investment Determine Export Continuity
Small Firms Account for Up to 74% of Sudden Export Discontinuations

[Image source=Yonhap News]

[Asia Economy Reporter Eunbyeol Kim] What is the background behind South Korean manufacturing export companies, which have ceased their main export businesses and returned to domestic companies? It has been found that not only macroeconomic variables but also the productivity and financial soundness of the companies significantly affect whether they continue their export businesses.

According to the "Analysis of Factors Determining the Discontinuation of Exports by South Korean Manufacturing Companies," published on the 10th by Nam Yunmi and Choi Moonjung, associate researchers at the Bank of Korea Economic Research Institute, the key factors influencing the likelihood that export companies will stop exporting the following year include ▲ownership of intangible assets ▲capital intensity of the company ▲market interest rates ▲global demand, showing that both company characteristics and macroeconomic variables have a balanced impact.

The proportion of goods and services exports to South Korea's Gross Domestic Product (GDP) averaged 41% from 2000 to 2018. With 87% of total exports consisting of goods exports, the dependence on exports is high. However, looking at the status of companies, even after entering export markets, some completely return to the domestic market or suddenly stop exporting. It is reported that for small-scale companies, even if they are currently exporting, 74% suddenly stop exporting the following year.

Researcher Nam explained, "Among company characteristics, employment size, capital intensity, ownership of intangible assets, and foreign ownership were estimated to be important determinants in discontinuing export businesses."

First, it was found that the larger the company's employment size and the higher the capital intensity, the lower the likelihood of stopping exports. Also, companies owning intangible assets were less likely to stop exporting compared to those that do not. Companies investing in intangible assets such as research and development (R&D) have higher capabilities and absorptive capacity to incorporate external knowledge, resulting in higher survival rates. Companies owned by foreigners were also analyzed to have a lower possibility of export discontinuation than domestic companies.

By industry, it was found that the higher the employment replacement rate of new companies compared to existing companies, the more intense the competition within the industry, which increases the incentive to continue exporting and reduces the likelihood of export discontinuation.

Among macroeconomic variables, global demand, domestic demand, and market interest rates were estimated to have significant effects, whereas the impact of exchange rates was not significant. Although exchange rates can affect the volume or value of exports, it is interpreted that they do not greatly influence whether a company completely stops exporting.

Traditionally, a higher exchange rate (depreciation of the domestic currency) is perceived to have a positive effect on exports. However, recently, with increased participation in the Global Value Chain (GVC) and the rise of intermediate goods exports and imports, the cost effect and price effect are mixed, making the impact of exchange rates less clear.

Researcher Nam evaluated, "Since domestic and foreign demand greatly affect export companies, close attention should be paid to these factors, and improving the financial soundness of companies can play a positive role in sustaining exports." He also emphasized, "Because productivity has a significant impact on the likelihood of export discontinuation, continuous R&D and innovation to strengthen competitiveness in export items facing fierce competition in overseas markets are important."

Furthermore, he stressed, "It is necessary to support companies with a high likelihood of continuing exports to reduce resource waste, and rather than unconditionally promoting only the entry of companies into export markets, efficient policy support should be targeted at companies likely to maintain exports."

This content was produced with the assistance of AI translation services.