International Vertical Integration and Economic Growth

Korea's trade patterns with U. S. in industrial products are remarkably different from those with Japan. Korea has been running deficits visa vie Japan every year since mid 1960s, whereas she has been running surpluses visa vie U. S. during the same period. These trade patterns can be a manifestation of an international vertical integration between Korea and Japan. with U. S. acting as a third country. Thus since 1960s Korea has been buying capital goods developed and produced in Japan to manufacture final goods. This arrangement allowed Korea to achieve economic growth as rapid as that of Japan. as she was able to tap into the advanced technology developed in Japan. Korea's faster growth then can be partly explained by the catch up effect. Here U. S. offered huge markets in which Korea was able to sell the final goods produced with Japanese technology. This paper explains these observed trade patterns with an endogenous growth model where an international vertical integration promotes more rapid economic growth not only for the advanced country, but also for the developing country.