This study investigates how Korean SMEs’ direct/indirect exports have been changing and how they have been affected by FTAs and financial support policies, with the aim of providing implications for SME internationalization policies. In our study we define direct export as the act of selling products directly to foreign buyers, while indirect export refers to the act of selling products to other domestic individuals or firms that engage in direct export. Direct/indirect forms of export, in general, are easier for SMEs to conduct due to the smaller cost involved when compared against other internationalization modes such as foreign direct investment (FDI). Thus, a major share of all internationalization activities by SMEs is accounted for by direct/indirect exports. Despite this importance, few studies have chosen to examine the direct and indirect exports of SMEs together, mainly because the SMEs’ indirect exports are hard to measure due to data limitation. This study aims to fill the research gap by utilizing newly-developed estimation methodologies and firm-level survey.
   More specifically, this study performs the following detailed research tasks. First, we compare the direct and indirect exports of SMEs across Korean manufacturing industries during the period 2002-2017 and explore the differential characteristics of SMEs according to their main export modes. We find that the share of SMEs in total indirect exports is much larger than that in total direct exports (73.0% vs. 18.8% in 2017) and document differential direct/ indirect export structures across the manufacturing industries. We further highlight that the firm characteristics are heterogeneous depending on whether their main export mode is direct or indirect.
   Second, we analyze the impacts of FTA policies on direct and indirect exports of SMEs by detailed manufacturing industries. We also examine how Korean SMEs have been utilizing FTAs for their exports. The FTA policies have been one of Korea’s main trade policies since 2000s. The main results of our analysis show that FTAs have significantly increased Korean SMEs’ direct exports during the period 2005-2017, albeit by only half the magnitude of the effect realized by FTAs in the direct exports of large enterprises during the same period. The gap in FTA direct export effects between large and small/medium firms tends to be larger in industries which show larger polarization in the distribution of firm sizes. Compared to the FTA direct export effects, however, the effect of FTAs on indirect export are seen to benefit SMEs in a broader set of industries. When considering the direct and indirect export effects of FTAs together, we find that the gap in FTA export effects between large and small/medium firms becomes narrower.
   Third, this study investigates the effect of financial support policies, one of the representative SME support policies in Korea, on direct and indirect exports of SMEs. The main finding is that the financial supports for SMEs by the Korean government significantly increased the SMEs’ direct exports. The magnitude of the direct export effects tends to be larger for firms with larger financial support, lower credit score, less years of operation, etc. We also find that the government financial supports positively affected the SMEs’ indirect effects, although the effects were differential depending on the indirect export type.
   Lastly, we conclude with some policy implications based on the main findings. We make suggestions on what policy goals should be set to better assist SMEs’ entry to direct exports, how to facilitate SMEs that indirectly export to engage in direct exports, and how to improve the existing FTA and financial support policies to more effectively facilitate SMEs’ internationalization.