Academic journal article Seoul Journal of Economics

Productivity Analysis on the Service Sector in Korea: Evidence from Industry-Level and Firm-Level Data

Academic journal article Seoul Journal of Economics

Productivity Analysis on the Service Sector in Korea: Evidence from Industry-Level and Firm-Level Data

Article excerpt

I.Introduction

One of the most dramatic characterizations of late industrialization is the speed and scope of structural transformation from manufacturingbased to service-based economy. In recent years, the structural transformation has been affected by two trends in the world economy. One is the fast speed of ICT revolution, and the other is repeated financial crisis. Both of these trends have made firms substitute labor with ICT and intangible capital and substitute long-term with short-term capital. These trends have also affected the productivity performance of firms as reviewed in Pyo (2018b).

This study aims to analyze this transformation in the Korean economy in terms of productivity performance in its service sector over the period of 1995-2013 in which the economy experienced a rapid adoption of ICT in ICT-producing and ICT-using industries and two financial crises in the years 1997 and 2007. The major finding is that, while the growth rate of gross output in the service sector has decelerated more rapidly than that in the manufacturing sector, the growth rate of total factor productivity (TFP) has improved from near 0% during 1996-2010 to 1.41% during 2011-2013. Particularly, the improvement in TFP in distribution and producer services has been impressive, which indicates that the Korean economy is transforming itself toward a service-oriented growth and that two financial crises have helped such transformation. When we conducted KLEMS (capital, labor, energy, material, and service) type growth accounting to gross output growth in manufacturing for the period of 1996-2004 and 2005-2012, we affirmed the relative contribution of service (S) as 13.2% and 16.8%, respectively (Appendix Table 1). From another point of view, the relative contribution of material (M) input to gross output growth in manufacturing was higher than that of service with 58.3% and 55.3%, respectively. This result corroborates that the activities of outsourcing and off-shoring as the service inputs into manufacturing have become important in terms of the value chain in the manufacturing process after the two financial crises than before they happened. This finding is consistent with Whitefoot and Valdivia (2015) who verified that, in the US manufacturing sector, a significant employment change has occurred after the global financial crisis in 2008 and that the different levels of employment changes at different value chain stages emerged. The authors affirmed a significant employment increase in the upstream stage of value chain, such as market analysis (26%), R&D (13%), and design and technical services (23%) and that a 25% reduction in employment occurred at the actual manufacturing and downstream stages, such as wholesale (-7%), retail (-4%), and after-market service (-5%). However, the relative level of TFP in the service sector in Korea remains to be far behind than that of the US and Japan.

While the late industrialization of the Korean economy had been a predominantly input-led and manufacturing-based catch-up process as documented by Van Ark et al. (1999) and Pyo (2001), the economic stagnation after the financial crisis of 1997 with the sharp decrease in the fertility rate has turned the Korean economy into an ICT-led productivity- and service-based economy. According to the growth accounting result of Fukao et al. (2012), the relative contribution of TFP growth (0.2%) in the total value-added growth (9.5%) of the market economy of Korea was only 2.1% during the period of 1980-1995 but increased to the level of 23% during the period of 1995-2007 with the growth rate of value-added (4.8%) and TFP (1.1%). During this transition, the growth in ICT capital services has played an important role. Fukao et al. (2012) validated that the growth in ICT capital services in Korea has grown at the annual rate of 0.4% during the period of 2000-2007, occupying 16% of the total capital input growth (2.5%) and 8.7% of the total value-added growth (4. …

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