External Finance and Productivity Growth in Korea: Firm Level Evidence Before and After the Financial Crisis.
KDI Journal of Economic Policy 2008, 30(2) 27-59
34 Pages Posted: 2 May 2016 Last revised: 21 May 2016
Date Written: December 31, 2008
This paper empirically investigates the finance-growth linkage in Korea by utilizing firm-level data of manufacturing industries before and after the 1997 financial crisis. We find that, first, an increase in external finance is associated with a faster subsequent capital accumulation of firms.
However, this capital accumulation channel became relatively attenuated after the crisis. Second, the total factor productivity growth effect of external finance has been considerably weak both before and after the crisis. Third, the information production and industry restructuring effects of external finance have also remained weak after the crisis. The limited role of external finance in post-crisis Korea partially reflects sluggish corporate investment and weakening dependence of good credit firms on external finance. The evidence suggests that, in order to effectively sustain economic growth, further reform efforts may be required to strengthen resource allocation and corporate restructuring roles of financial markets and institutions.
Keywords: External Finance, Firm Level Growth, Total Factor Productivity, Capital Accumulation
JEL Classification: G20, O40
Suggested Citation: Suggested Citation