Since 2000, Korean firms’ R&D investment have recorded an annual increase of 12.7% and accounted for 78% of total R&D investment in Korea, which surpasses that of U.S., Japan, and China. On the other hand, Korean firms’ exports and outward foreign direct investment (OFDI) have steadily increased to record 562 billion and 24 billion dollars in 2013, respectively, which accounts for more than 50% of total GDP. Given the fact that the Korean economy heavily relies on firms’ R&D investment, exports and OFDI, our report provides in-depth analysis on the effects of R&D investment on exports and OFDI by using a rich set of Korean firm-level data. In particular, by considering the results from prior trade literatures that analyzed the effects of R&D investment on firm productivity and that examine the effects of firm productivity on exports and OFDI, we analyze the effects of R&D investment on exports and OFDI by incorporating firm productivity as a mediator.
In examining the effects of R&D investment on firm productivity, we first measure R&D investment as firms’ total expenditure on R&D activities, while measuring firm productivity using total factor productivity, capital productivity, and labor productivity. Using these measures, we find that R&D investment significantly increases firm productivity. In particular, to analyze how firm R&D investment affects its productivity-level over time, we use lagged R&D variables to estimate their effects on current productivity-level. As a result, we find that current and previous R&D investment have positive and significant effects on current productivity-level and that its magnitude becomes larger over time. In other words, firm productivity is significantly and largely associated with prior R&D investment. Alternatively, estimating the effects of R&D investment on firm exports using lagged variables, we find that R&D investment have positive and significant effects on current exports and that its magnitude becomes larger as R&D investment is made in prior. Evaluating the effects of R&D on OFDI through lagged R&D variables, our results show that R&D investment made in prior years significantly increases the current amount of OFDI and also raises the probability of firms’ engagement in OFDI in the current period.
To provide in-depth analysis on the effects of R&D investment on firm’s exports and OFDI, we use path analysis methodology to estimate the effects of R&D on exports and OFDI with and without incorporating firm productivity as a mediator variable. Our estimation results show that firm R&D has positive and significant direct and indirect effects on exports and OFDI through the increase in total factor productivity. Estimating the magnitude of direct and indirect effects, we find that firm R&D investment is more effective in increasing exports and OFDI directly than indirectly through firm productivity increase.
Given the fact that R&D intensiveness is different across industries, we perform the same estimations at the industry-level. Our estimation results show that firm R&D investment has significant positive direct and indirect effects through firm productivity on exports and OFDI among capital-intensive industries, namely, electronic components, auto-vehicle, and machinery equipment industry sectors; while it has insignificant direct and indirect effects within labor-intensive industries, such as textile and paper. Among capital-intensive industries, in particular, we find that firm R&D investment is more effective in directly increasing exports than OFDI in most sectors, while it is more effective in increasing OFDI than exports through firm productivity improvement in the auto-vehicle and machinery equipment sectors.
Our analysis provides significant policy implications on firm R&D investment. First, our estimation results that firm R&D significantly increases the productivity, exports and OFDI imply that R&D promotion policies towards the private sector are effective in improving firm performance and that more favourable policies towards firm R&D investment should be considered. Second, our findings that the magnitude of firm R&D effects becomes larger over time indicate that firms and governments should evaluate its effect from a long-term point of view. Third, policies that are designed to promote firms to invest in R&D activities would be more effective for capital-intensive industries than labor-intensive industries. Our results that direct and indirect effects of R&D on exports and OFDI are significant in capital-intensive industries imply that while promoting firm R&D investment in capital-intensive industries is effective, alternative measures should be considered to increase exports and OFDI in labor-intensive industries.