Trade Liberalization and Firm Productivity: Evidence from Korea

This paper empirically examines the impact of Korea’s FTAs on firm productivity at home. Among the various channels though which trade liberalization can affect firm-level productivity, we focus on the expansion of exports as the major channel. Using our unique firm-level data with 5,981 firms over the period 2001-2009, we first identify the major direction of causality from exports to firm productivity under Korea’s FTAs and find that 1) Korea’s FTAs have positive impacts on domestic firm’s TFP via the export channel, 2) mostly these effects happen after the effectuation of FTAs, 3) the positive ex post effects of FTAs on firm’s TFP are more prominent in the SMEs in the short-term but in large-sized firms in the long-term, and 4) in some parts there are positive ex ante effects (i.e., conscious self-selection) of FTAs on firm’s TFP in the group of large-sized firms in Korea. In sum, this paper presents the primary evidence for the positive role of FTAs in Korea’s economy, and our findings further suggest that differences in the impact of FTA depending on the firm size should be taken into account for strategic and effective use of FTAs.