The Determinants of Exports in Korean Defense Industry

Purpose - Since the Ukraine war started, the South Korean defense industry has gained significant global interest. However, despite the critical role of exports for national security and economic growth, firm-level analysis has been scarce concerning the factors influencing South Korea’s defense exports due to data constraints related to confidential information. This study addresses this gap by empirically analyzing the determinants of South Korea’s defense exports using data from 120 defense firms spanning from 2007 to 2021. Design/Methodology - With an unbalanced panel of defense firms containing financial information, we investigate the factors that determine the export intensity of Korean defense firms using a Tobit estimation. Then, we compare the determinants of export intensity between companies with high and low defense specialization ratios (DSRs), measured by the proportion of defense sector revenue to total revenue. The defense environment in Korea has been centered on large enterprises (LEs). We use interaction terms with dummies to compare the determinants of exports in a group of LEs and small and medium-sized enterprises (SMEs). Findings - The export intensity of the defense firms is positively associated with operating profit margins, R&D investment, and defense capability improvement budgets. However, these outcomes diverge based on the DSR. Firms with a lower DSR are influenced by internal factors such as operating profit margins and R&D investments in shaping their exports. Conversely, firms with a higher DSR exhibit significant associations between exports and external factors such as defense capability improvement budget, global defense spending, and geopolitical risk. Furthermore, when compared with SMEs, LEs experience greater export intensity as their operating profit margins, R&D investment, and equipment investment rise. Our results also show that the determinants of export intensity vary depending on the characteristics of each sector. Originality/value - To the best of our knowledge, this study represents the first attempt to examine the determinants of defense exports using extensive firm-level data in South Korea. This approach contrasts with that of research, which predominantly relies on country-level data. Our analysis provides insights into formulating a trade policy that acknowledges the distinct environment and characteristics of the Korean defense industry, which differ from those of defense industries in other nations.