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Assessment of the Korean-Chinese Exports Competition in Sophisticated Markets *

Authors:
  • Soongsil University & Ilia State University

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Purpose-This paper empirically investigates the competition effect of exports between Korea and China in their common-export markets considering market sophistication. Modern market sophistication includes an importing country's aggregate demand for products of high quality, design, novelty, eco-friendliness, and even IPR protection. Using an empirical analysis to identify the demand for product quality across countries, this paper estimates the effects of market sophistication on the competition between Korean exports and Chinese products. Design/Methodology-Our empirical model considers the relationship between an importing country's consumer sophistication and the export competition between Korea and China. This study employs the existing theoretical framework to identify the aggregate demand for product quality across countries. Using a quite direct measurement (the consumer sophistication index, our analysis investigates the differential effects of Korea's export market sophistication, particularly in markets where Korean exports are in competition with similar Chinese products. Findings-Our main findings can be summarized as follows: the negative effects of the export competition between Korea and China on Korea's exports are stronger in third markets where consumers are less sophisticated while the effects are not as pronounced in markets where consumers are more sophisticated. This result, however, best applies to differentiated goods which significantly vary in product quality. Originality/value-Existing studies focus on the supply side of production and make the assumption that the market preference for export quality is identical across countries. This paper attempts to evaluate the export competition between Korea and China from the demand-side perspective. This area of trade studies is underexplored both empirically and in theory, although the issue has long been important to Korean and world trade.
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1
JKT 23(2)
Assessment of the Korean-Chinese Exports
Competition in Sophisticated Markets
*
Jung Joo La
Pi-Touch Institute, South Korea
Wonkyu Shin
Department of Global Commerce at Soong-sil University
Center for International Development Coopeartion, Kyung Hee University, South Korea
Abstract
Purpose - This paper empirically investigates the competition effect of exports between Korea and
China in their common-export markets considering market sophistication. Modern market
sophistication includes an importing country’s aggregat e dema nd for products of hig h quality , desi gn,
novelty, eco-friendliness, and even IPR protection. Using an empirical analysis to identify the demand
for product quality across countries, this paper estimates the effects of market sophistication on the
competition between Korean exports and Chinese products.
Design/Methodology - Our empirical model considers the relationship between an importing
country’s consumer sophistication and the export competition between Korea and China. This study
employs the existing theoretical framework to identify the aggregate demand for product quality
across countries. Using a quite direct measurement (the consumer sophistication index, our analysis
investigates the differential effects of Korea’s export market sophistication, particularly in markets
where Korean exports are in competition with similar Chinese products.
Findings - Our main findings can be summarized as follows: the negative effects of the export
competition between Korea and China on Korea’s exports are stronger in third markets where
consumers are less sophisticated while the effects are not as pronounced in markets where consumers
are more sophisticated. This result, however, best applies to differentiated goods which significantly
vary in product quality.
Originality/value - Existing studies focus on the supply side of production and make the assumption
that the market preference for export quality is identical across countries. This paper attempts to
evaluate the export competition between Korea and China from the demand-side perspective. This
area of trade studies is underexplored both empirically and in theory, although the issue has long been
important to Korean and world trade.
Keywords: Export Competition Between Korea and China, Export Similarity Index, Korea’s
Bilateral Exports, Market Sophistication
JEL Classifications: D12, F14, O53
1.
Introduction
China is one of the most dynamic countries in regards to exports. The volume of China’s
exports has increased rapidly after its accession to the WTO. The rank of Chinese exports
in the world market has jumped from 8th in 1998 to 2nd in 2008. By comparison, Korea’s
export volume ranked 12th during the same period, with an average market share of about
2.6% (2.17% excluding exports to China). Since then, it seems that the gap between the
exports of Korea and China has widened. While Korean exports have slightly increased,
Chinese exports have continued to grow exponentially- even following the 2008 global
*This work was supported by the Ministry of Education of the Republic of Korea and the National
Research Foundation of Korea (NRF-2015S1A3A2046224).
Corresponding author: wonkyu12@gmail.com; wkshin@ssu.ac.kr
© 2019 Korea Trade Research Association. All right reserved.
Journal of Korea Trade
Vol. 23, No. 2, April 2019, 1-13
https://doi.org/10.35611/jkt.2019.23.2.1
ISSN 1229-828X
Journal of Korea Trade, Vol. 23, No. 2, April 2019, 1-12
2
financial crisis (See Fig. 1 in Section 2).
A common concern of China’s expanding exports was that they would likely undermine
the exports of other countries. When studying this risk, mixed results are often seen
because the precise effect of Chinese export expansion depends on whether a country’s
exports are complementary or in competition with Chinese products (Gereffi and
Frederick, 2010; Jenkins, Peters and Moreira, 2008; Rodrik, 2006). Many studies discuss the
beneficial effects of Chinese export growth on export competitors that form part of the
same global value chains (Dean, Fung and Wang Zhi, 2011; Shin Won-Kyu and Ahn Duk-
Geun, 2017; Xing Yuqing, 2014/2016). In this paper, we focus on the effects of direct
competition with rising China’s exports in the third-export markets.
Lall and Albaladejo (2004) argue that China’s rapid growth in the world export market
will strongly affect Asian countries with export baskets that are largely composed of low-
skilled or low-technology intensive products. Shafaeddin (2004) finds that China’s exports
have less of a rivalry with those of newly industrializing economies (NIEs) than with those
of South Asian countries, whose exports face severe competition in labor-intensive
products. However, Ianchovichina and Walmsley (2005) predict that the NIEs will soon
face a challenge in the global export markets due to China’s competitive edge shifting to
the production of high-end goods. Lall, Weiss and Hiroshi Oikawa (2005) support this
prediction with empirical evidence. They argue that countries with a similar export
structure to China are likely to lose exports in competing export markets. China’s exported
products look similar to and function as well as competing products but are more
affordable. This imposes price pressure on existing products and forces them out of the
markets. Eichengreen, Rhee Yeong-Seop and Tong Hui (2007), and Tong Hui (2007) also
show that China drives out existing goods in the textile and shoe industries by flooding the
markets with made-in-China products. Greenaway, Mahabir and Milner (2008) show that
high-income Asian countries feel a heavy burden due to competition with China in the
export of similar consumer products.
It is a great challenge for Korea to compete with China in third-export markets since the
two countries produce and export similar products.
1
Many argue that a successful strategy
for Korea could be to upgrade the quality of export products (Felipe et al., 2012; Xing,
2016). When presenting this strategy, the theoretical framework for calculating product
quality and explaining the direction of bilateral trade flows is used to identify possibly
adverse effects of China’s exports on Korea’s bilateral exports. According to the pioneering
studies of Flam and Helpman (1987) and Schott (2004) on export quality, each country
produces and exports differentiated-quality goods based on its level of productivity,
income, and factor endowment.
Here, a simple policy suggestion for improving Korea’s exports is to develop a more
competitive edge in the production of high-quality export products, considering that the
quality of China’s exports largely lags behind (Jenkins et al., 2008; Rodrik, 2006).
2
But what
characteristics of product quality are critical for upgrading export products? This policy
suggestion and previous studies focus on the supply side of production and make the
assumption that the market preference for export quality is identical across countries.
Hallak (2006), Hallak and Schott (2011) and Weder (1996), however, suggest that each
country has a different preference for its product demands. Weder (1996) specifically refers
to this preference as the sophistication of import market demand. Although Korean
1
In 2013, Korea had the 7
th
highest export similarities with China among 164 countries according to the
Export Similarity Index calculated by the author with 3-digit export data of SITC revision 3, which will
be introduced in section 2.
2
Schott (2008) argue that it will take some time for China to catch up with other OECD countries in the
quality of export products in the US market due to relative scarcity in skill and capital.
Assessment of the Korean-Chinese Exports Competition in Sophisticated Markets
3
exports are generally more competitive in export quality than those of China, they may not
fully take into account importers’ specific quality preferences.
This paper attempts to evaluate the export competition between Korea and China from
the demand-side perspective. This area of trade studies is underexplored both empirically
and in theory, although the issue has long been important to Korean and world trade. Our
empirical model considers the relationship between an importing country’s consumer
sophistication and the export competition between Korea and China. This study employs
the empirical framework of Hallak (2006) to identify the aggregate demand for product
quality across countries, weighted by per capita income. Using a quite direct measurement
(the consumer sophistication index developed by the Institute for Industrial Policy and
Studies in South Korea),
3
our analysis investigates the differential effects of Korea’s export
market sophistication, particularly in markets where Korean exports are in direct
competition with similar Chinese products.
The structure of this paper is as follows. The paper explains the empirical framework and
hypothesis in Section 2, before introducing the methodology and data in Section 3. In
Section 4, we provide empirical results. Section 5 concludes the paper with implications
and policy suggestions.
2.
Empirical Framework and Hypothesis
This paper largely builds upon two strands of literature. The first relates to empirical
studies on the rapid growth of Chinese exports and its consequences, particularly on export
competitors whose export portfolios look similar to those of China. The second is based on
the theoretical arguments and empirical findings of Hallak (2006) and Hallak and Schott
(2011) which found that rich countries tend to import relatively more from countries that
produce high-quality goods.
First, the market diversion effect caused by the growth of China’s exports takes place in
third markets (Lall et al., 2005). When the final export goods of Korea and China look alike
and compete in the third markets, Korean exports, including NIEs, face a decline or, at the
least, stagnation (Greenaway et al., 2008, Ianchovichina and Walmsley, 2005). Fig. 1
provides sweeping evidence of the relationship between China’s exports and the level of
export similarity (i.e. measuring competition between Korea and China) at the level of
consumer goods. While Chinese export market shares grow as the export similarity
between Korea and China increases, overall exports of Korea become stagnant in the world
market.
Second is the theoretical and empirical framework developed by Hallak (2006) and
Hallak and Schott (2011). Their studies established theoretical framework for empirically
testing the effect of product quality difference on trade flows and confirm that rich
countries tend to import relatively more from countries that produce high-quality goods.
The important assumption of this framework is that export quality and the intensity of
preference for quality vary across countries. In Hallak’s (2006) framework, for example, the
GDP per capita level represents the overall intensity of demand for quality (i.e. market
sophistication).
However, instead of using GDP per capita, this paper employs the
consumer sophistication index (CSI), enabling empirical measurements to explain overall
market sophistication.
3
The Institute for Industrial Policy and Studies is a business research institute established in 1993 under
the Ministry of Commerce, Industry & Energy of Republic of Korea.
Journal of Korea Trade, Vol. 23, No. 2, April 2019, 1-12
4
Fig. 1. The World Export Market Share of Korea & China; and the Level of Similarity in
their Export Baskets
(Unit: %, Export Similarity Index)
Note: The third export markets indicate export destinations that include all countries except for two
countries. The X axis is % of exports to the world while the Y axis is the ESI score measuring
the export similarity (competition) between two countries.
Source: Authors’ calculation using UN Comtrade data.
The concept of the consumer sophistication is not new. Sproles et al. (1978)
conceptualize consumer sophistication as an individual’s aggregated level of acquired
knowledge, experience in purchasing products, and decision-making skills. Barnes and
McTavish (1983) and Titus and Bradford (1996) develop further this concept to certain
consumer characteristics such as awareness of ethical issues, life-style, health, and eco-
friendliness.
Empirical studies supporting the concept and usefulness of the consumer sophistication
are found in various literatures. Townsend (1991) argues the U.S are generally sensitive to
design because consumers have a strong preference for product novelty. In addition,
environmental awareness and eco-friendless are important issues for modern consumer
sophistication. Bjørner et al. (2004) found that Danish people are willing to pay a premium
for eco-friendly products. Cherian and Jacob (2012) also argue that consumer attitudes
now favor an eco-friendly lifestyle and, in response to this change, producers have tried to
develop a competitive edge in the green market industry. More recently, the issues over
Intellectual Property Rights (IPRs) relating to trade flows become significant in the current
world trading system as the perception of IPRs level in importing countries affect the
patterns of bilateral trade (Shin Won-Kyu, Lee Keun and Park Walter G., 2016).
Bearing in mind above theoretical discussion and empirical findings, our empirical
analysis has the following three steps.
Firstly, the ‘Export Similarity Index (ESI)’ between Korea and China for a given sector
are calculated to measure the degree of export competition between them to the third
markets. The ESI is the index first used by Finger and Kreinin (1979) which measures the
level of competition between country k and country c in country i, and is computed as
below:
Assessment of the Korean-Chinese Exports Competition in Sophisticated Markets
5
ESI, 
Χ

   100 (1)
where X
z
(ki) is the share of product z in the exports of country k to country i, and X
z
(ci) is
the share of product z in the exports of country c to country i. According to Lall et al. (2005),
we can expect the market diversion effect taking place in the third-export markets as
China’s exports replace the previously prevailing Korean products. This effect continues to
accelerate when the export baskets of two countries become more alike. The higher the ESI
score is, the more competition there is between the export baskets.
Secondly, this paper relates the concept of a consumer’s sophistication in the analysis on
the effects of an importer’s demand for quality varying over the different export
competition between Korea and China to the third markets. Again, in Hallak’s (2006)
framework, the GDP per capita level represents the overall intensity of demand for quality.
Instead of using GDP per capita, this paper borrows the consumer sophistication index,
enabling empirical measurements to explain overall market sophistication. Assuming that
CSI has a positive relationship with the intensity of preference for quality, a consumer’s
demand for the quality is regarded as the sophistication of domestic demand (Hallak, 2006;
Hallak and Schott, 2011; Weder, 1996).
Thirdly, to identify the effects of the consumer sophistication in this empirical setup, this
paper utilizes an interaction term (the level of market sophistication in the third markets:
CSI
i
with respect to a variable measuring the export competition between Korea and China:
ESI
kc
). This interaction term is used to identify the variations in the level of competition
between Korea and China in the common export markets of the two countries, considering
each market’s sophistication level. This paper uses panel data of 61 common export
markets for Korea and China (markets which both countries are exporting to) during the
period of 2003 to 2010. To explain bilateral trade flows between Korea and its trading
partner countries considering trade barriers, cultural differences, and transaction costs, our
empirical specification
4
is defined as:
(2)
where is country k’s (i.e. Korea’s) exports to country i at time t; is the export
similarity index between country k and country c (i.e. China) in importer i; is
country i’s consumer sophistication index (CSI); is the bilateral distance between
country k and i;
_    
is a dummy variable which indicates whether country k and
country i share a common language, is importer fixed effects; is time fixed effects;
and is an error term.
5
Following the studies of Flam and Helpman (1987), Hallak (2006), and Schott (2004),
which investigate the relationship between export quality and income, the country with the
higher income exports higher quality products. We may therefore assume that overall
Korea’s exports are of higher quality than those of China (Rodrik, 2006; Xu, 2007). Hallak
(2006) and Hallak and Schott (2011) demonstrate that a country with a high preference for
export quality imports more from higher-income countries rather than from lower-income
countries. Therefore, we should expect countries with a strong preference for export quality
4
This empirical specification is similar to gravity model since Hallak’s (2006) framework also
benchmarks the gravity model to estimate bilateral trade flows considering level consumer
sophistication as one of factors of trade costs.
5
Considering Korea is exporting country k, the dummy variables regarding a common border and a
colonial relationship are practically not applicable to the specification.
12 3
4
ln ln ln ln ln
_
kkckc k
it it it it i
kk
iitit
E
X ESI ESI CSI Dist
Com lang
 

  

k
it
E
Xkc
it
ESI
it
CSI
k
i
Dist
i
t
k
it
Journal of Korea Trade, Vol. 23, No. 2, April 2019, 1-12
6
to prefer Korean exports over those of China. On the other hand, countries with a
preference for cheap prices over product quality would be expected to favor Chinese
exports. We can conclude that the competition between Korean and Chinese exports in
third markets is affected by the importing country’s preference for export quality.
Therefore, we hypothesize that the adverse effects of China’s export expansion are likely
to be less pronounced in importing countries that have a strong preference for export
quality. The interaction term (
2
) in Equation (2) represents that the effects of export
competition can vary across countries according to market sophistication ( ). Then,
the coefficient of is expected to be negative while that of the interaction term
between the and is likely to be positive. To put this differently, the
negative effect of the export competition between Korea and China ( ) decreases
when the level of consumer sophistication ( ) goes higher.
However, this prediction is likely to hold true only for product groups where the
difference in quality between Korean and Chinese products is observable. If the product
groups are homogeneous and cannot be easily separated in terms of quality by consumers,
this argument is likely to be inaccurate. Regarding distinctions in the quality of export
products, Rauch (1999) classified export goods into three categories such as homogeneous,
referenced, and differentiated goods according to their price-setting mechanism.
6
Hallak
(2006) and Hallak and Schott (2011) show that homogeneous goods are insensitive to the
demand for quality and sophistication.
3.
Empirical Method and Data
This paper adopts various econometric methods such as the OLS, fixed effects, random
effects, and the Hausman-Taylor model for Equation (2). First, we must note that OLS
analysis may be biased due to unobserved individual factors. Fixed and random effects
models, however, are known to effectively control these country-specific factors in regards
to bilateral trade flows. In this case, however, the fixed effects model is more appropriate
for Equation (2), if the null hypothesis of the Hausman test is rejected. This means that any
unobserved individual factors must be correlated with other explanatory variables.
Fixed effects analysis, however, would be unable to offer estimations for time-invariant
variables. In this case, the Hausman-Taylor model can serve as a good alternative. This
method can provide the coefficients of time-invariant variables. Furthermore, the model
addresses endogeneity problem between explanatory variables and error terms by using
instrument variables. In our paper, lnESI and the interaction term between lnESI and lnCSI
are treated as time-varying endogenous variables in the Hausman-Taylor estimation
model. To ensure validity of the instruments we use the Hausman test of over-
identification. The null hypothesis of the Hausman test regarding the differences between
the fixed effect and Hausman-Taylor estimators should not be rejected.
We use export data from the United Nations Commodity Trade Statistics Database (UN
Comtrade). To consider the characteristics of exported products, this paper divides all
commodities into differentiated, reference-priced, and homogeneous goods. This classi-
6
Differentiated products do not have well-defined product standards and are not traded on specialized
exchanges. Differentiated products carry the largest potential for quality variation. Reference-priced
products are goods that have referable standards for corresponding prices that are available in
specialized publications; however, they are not traded on organized exchanges. Quality variation is
possible but to a lesser degree than for differentiated goods. Homogenous products are goods that have
clearly defined standards and/or are internationally traded on organized exchanges. Hence, they have
well-defined prices and the smallest potential variation in quality (Rauch, 1999).
ln it
CSI
ln kc
it
E
SI
ln kc
it
E
SI ln it
CSI
ln kc
it
E
SI
ln it
CSI
Assessment of the Korean-Chinese Exports Competition in Sophisticated Markets
7
fication of commodities follows the reasoning of Hallak (2006) and Rauch (1999). The
differentiated, reference-priced, homogeneous goods include 111, 48, 36 codes respectively
from the 3-digit SITC (Standard International Trade Classification) Revision 3 data; and
the ESI is also calculated using the 3-digit codes of SITC accordingly.
7
The Institute for Industrial Policy and Studies uses a unique measure for consumer
sophistication in its annual ‘National Competitiveness Report’. The Institute for Industrial
Policy and Studies publishes the report annually. The report is a Korean version of ‘Global
Competitiveness Report’ of the World Economic Forum.
The index is a survey result
conducted by its partner institution, the Korea Trade-Investment Promotion Agency
(KOTRA), which runs more than 100 offices abroad. It has several components as shown
in Table 1(a). Each component is ranged from 0 to 100 on the basis of the survey.
Subsequently, the CSI is derived from an average of each component.
Table 1. Components for Consumer Sophistication Index
(a) Breakdown of Consumer Sophistication Index
Components Survey Questions
Information How much does consumer know about product?
Quality How much is consumer sensitive to product’s quality?
Brand How much is consumer sensitive to company’s brand?
Design How much is consumer sensitive to product’s design?
New product How strong is consumer’s preference for new product?
Health & Environmental
Issue
How sensitive is consumer to health & environmental
issues?
Intellectual Property
Right
How much is consumer reluctant to accept illegally copied
products?
(b) Descriptive Statistics of the Index (2003~2010)
No. of country Mean Std. Dev. Min Max
61 52.390 15.824
19.954
(Kenya)
84.772
(Denmark)
Source: Authors’ based on the ‘National Competitiveness Report’ published by the Institute for
Industrial Policy and Studies.
The CSI is available for 61 countries during the analysis period of 2003 to 2010.
8
Table
7
Several codes are excluded for an adjustment to the product classification of Korea’s exports— SITC
codes of 628, 736, and 847 for the differentiated goods; 14, 233, and 341 for the reference-priced goods;
423 and 424 for homogeneous goods. Further disaggregation approach may help to reduce possible
aggregation bias for ESI. For example, calculating ESI based on the HS (Harmonized Commodity
Description and Coding System) 6-digit codes may be more favorable to control for the bias. However,
this paper follows the broad classification of commodities using empirical frameworks of Hallak (2006)
and Rauch (1999) that introduces for the quality variation of exports, the 3-digit codes of SITC is the
most disaggregated available.
8
Due to the consistency of data construction, our analysis covers 2003 to 2010. The components of CSI
index are reformed recently after year 2010; it has provided consistent data only by 2010. 61 countries
are major export destinations for Korea and make up 86% of Korea’s total exports (excluding exports
to China) in 2008; the same countries made up 91% of China’s total exports (excluding exports to
Journal of Korea Trade, Vol. 23, No. 2, April 2019, 1-12
8
1(b) shows the statistics for consumer sophistication index averages from 2003 to 2010.
Kenya has the lowest index value while Denmark has the highest.
Bilateral trade data such as bilateral distance and common language is drawn from the
gravity dataset of CEPII (Centre d'Etudes Prospectives et d'Informations Internationales-
Institute for Research on the International Economy). Distance is calculated by finding the
distance between each country’s most populous cities. Additionally, the common language
dummy variable indicates whether at least 9% of both countries’ populations speak the
same language.
Table 2 presents summary statistics for the data used in the estimation.
Table 2. Descriptive Statistics on Variables
Product
Classification Variable Obs. Mean S.D. Min Max
Differentiated
goods
488 20.840 1.396 16.959 24.449
488 3.610 0.367 1.864 4.314
488 14.091 2.097 0 18.442
61 8.961 0.524 7.053 9.875
Reference-priced
goods
488 19.050 1.703 15.012 23.133
488 2.882 1.493 0.115 4.275
488 11.378 6.100 0 18.459
488 8.961 0.524 7.053 9.875
Homogeneous
goods
488 17.423 2.452 7.879 22.478
488 2.525 1.445 0.011 4.598
488 9.928 5.788 0 19.130
488 8.961 0.524 7.053 9.875
Note: When the value of the consumer sophistication index is zero (e.g. Libya), this index is treated
by taking the form as such ln(CSI+1).
4.
Empirical Results
Tables 3-5 show regression results of different product groups based on Equation (2).
For differentiated and reference-priced goods, the coefficient of the lnESI is negatively
significant at the 1-10% level for all econometric models while that of the interaction term
between the lnESI and lnCSI is positively significant at the same level. More specifically, we
interpret the results of the interaction term using estimated coefficients of the Hausman-
Taylor models in Table 3-4.
For the explanation of these variables for differentiated goods, the negative impacts of
the lnESI with a slope of -0.242 become -0.242, -0.112, -0.104, -0.095, and -0.082 at the
Korea) in 2008. The list of countries is as follows: Argentina, Australia, Austria, Bangladesh, Belgium,
Brazil, Cambodia, Canada, Chile, Colombia, Croatia, Czech Rep., Denmark, Dominican Rep., Egypt,
Finland, France, Germany, Greece, Guatemala, Hong Kong, Hungary, India, Indonesia, Iran, Israel,
Italy, Japan, Jordan, Kenya, Kuwait, Malaysia, Mexico, Morocco, Netherlands, New Zealand, Nigeria,
Oman, Pakistan, Panama, Peru, Philippines, Poland, Romania, Russian Federation, Saudi Arabia,
Singapore, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Thailand, Turkey, United Arab
Emirates, Ukraine, United Kingdom, USA, Venezuela, Viet Nam, and Libya.
ln k
it
E
X
ln kc
it
E
SI
ln ln
kc
it it
E
SI CSI
ln k
i
D
ist
ln k
it
E
X
ln kc
it
E
SI
ln ln
kc
it it
E
SI CSI
ln k
i
D
ist
ln k
it
E
X
ln kc
it
E
SI
ln ln
kc
it it
E
SI CSI
ln k
i
D
ist
Assessment of the Korean-Chinese Exports Competition in Sophisticated Markets
9
minimum (0), 1st quartile (3.71), 2nd quartile (3.95), 3rd quartile (4.20), and 4th quartile
(4.57) of the lnCSI, respectively. This suggests that exports of Korea experienced about 3
times lower damages (-0.242 -0.082: 24% of negative effects due to export competition
from Chinese products falls to 8%) in the third export markets competing with China at
the 4th quartile. In the sample, countries with those types of CSI scores represent developed
countries. For instance, Denmark, Japan, Israel, Sweden, Switzerland, Austria, Finland, and
Netherland, Italy, Canada, and the United States. Notably, many European and Nordic
countries highly appreciate various aspects of product quality such as eco-friendliness,
novelty, and design. Therefore, this result lends support for our hypothesis and the overall
validity of our theoretical prediction.
Table 3. Regression Results for Differentiated Goods
DV: OLS FE RE HT
-0.585*** -0.242** -0.249** -0.242**
(-2.90) (-2.16) (-2.20) (-2.15)
0.363*** 0.035** 0.045*** 0.035**
(10.42) (2.05) (2.65) (2.05)
-0.446*** − -0.829 *** -0.843***
(-3.95) (-3.11) (-2.73)
0.198* 0.286 0.289
(1.68) (0.93) (0.81)
No. of Observation 488 488 488 488
R
-square 0.328 0.429 0.428
(11) − 320.86***
Hausman Test: (9) 18.44**
Hausman Over-identification
Test: (9)
0.00
Note: * significance at 10% level, ** significance at 5% level, and *** significance at 1% level. ( ) is
t-value or z-value. Coefficient estimates for year fixed effects and constant are not reported in
the tables although they are included in the analysis.
Analogously, with regard to the explanation for reference-priced goods, the slope of the
lnESI curve is -0.408, -0.293, -0.286, -0.278, and -0.266 at the minimum (0), 1st quartile
(3.71), 2nd quartile (3.95), 3rd quartile (4.20), and 4th quartile (4.57) of the lnCSI,
respectively. These results imply that the negative effects of lnESI are dampened when
consumption in the export destinations becomes sophisticated. Reference-priced goods
also have quality variation but less so than differentiated goods. These estimation results
confirm that the positive effects of market sophistication can be applied to products with
smaller variance in quality, although the effects are less pronounced.
However, the regression result for homogeneous goods turns out to be statistically
insignificant while the results for the OLS models are significant. As discussed in Section
2, this result is in line with Hallak (2006) and Hallak and Schott (2011). In other words, this
finding implies that, among the three categories, homogeneous goods cannot be applied
within the theoretical framework of this study.
ln k
it
E
X
ln kc
it
E
SI
ln ln
kc
it it
E
SI CSI
ln k
i
Dist
_l k
i
Com ang
2
2
2
Journal of Korea Trade, Vol. 23, No. 2, April 2019, 1-12
10
Table 4. Regression Results for Reference-priced Goods
DV: OLS FE RE HT
-0.530* -0.408*** -0.409*** -0.408***
(-1.65) (-3.96) (-3.98) (-3.95)
0.168*** 0.031* 0.033** 0.031*
(3.35) (1.84) (1.97) (1.84)
-1.327*** − -1.405*** -1.407***
(-10.35) − (-4.00) (-4.03)
0.734*** − 0.767* 0.767*
(5.02) − (1.87) (1.88)
No. of Observation 488 488 488 488
R
-square 0.304 0.586 0.586
(11) 610.68***
Hausman Test: (9) 3.65
Hausman Over-identification
Test: (9)
0.00
Note: * significance at 10% level, ** significance at 5% level, and *** significance at 1% level. ( ) is
t-value or z-value. Coefficient estimates for year fixed effects and constant are not reported in
the tables although they are included in the analysis.
Table 5. Regression Results for Homogeneous Goods
DV: OLS FE RE HT
-0.570* -0.336* -0.341* -0.336*
(-1.75) (-1.76) (-1.79) (-1.75)
0.285*** 0.030 0.041 0.030
(3.67) (0.68) (0.94) (0.68)
-1.533*** -1.721*** -1.731***
(-8.24) (-3.65) (-3.52)
1.148*** 1.327** 1.336**
(5.32) (2.41) (2.33)
No. of Observation 488 488 488 488
R
-square 0.284 0.296 0.296
(11) 194.06***
Hausman Test: (9) 33.56***
Hausman Over-identification
Test: (9) − − 0.00
Note: * significance at 10% level, ** significance at 5% level, and *** significance at 1% level. ( ) is
t-value or z-value. Coefficient estimates for year fixed effects and constant are not reported in
the tables although they are included in the analysis.
The coefficient of the distance variable is negatively significant, as expected, at the 1%
level for all the classifications. In regards to the common language variable, its coefficient
ln k
it
E
X
ln kc
it
E
SI
ln ln
kc
it it
E
SI CSI
ln k
i
Dist
_l k
i
Com ang
2
2
2
ln k
it
E
X
ln kc
it
E
SI
ln ln
kc
it it
E
SI CSI
ln k
i
Dist
_l k
i
Com ang
2
2
2
Assessment of the Korean-Chinese Exports Competition in Sophisticated Markets
11
is almost insignificant for differentiated goods but positively significant at the 1-10% level
for reference-priced and homogeneous goods. It is noted that the estimated results of these
two variables display some interesting features. The values of their coefficients increase as
product groups become more similar in quality. For example, the coefficient values of the
distance variable increase from the range of 0.446~0.843, for differentiated goods, to the
range of 1.327~1.407, for reference-priced goods, and to that of 1.533~1.731 for
homogeneous goods. The results indicate that the variables influencing trade costs (i.e.
distance and common language) become prevailing factors for the direction of trade when
products are similar in quality. In other words, the results support the direction of trade
patterns as emphasized in the inter-trade Heckscher-Ohlin framework, addressing the
traditional aspects of trade costs besides product quality. Again, our paper attempts to
account for aspects of product quality that affect global patterns of bilateral trade.
Since the null hypothesis for the Hausman test is rejected at the 1-5% level for
differentiated and homogeneous goods, the fixed effects model is more appropriate for
estimating Equation (2) than the random effect method. In addition, the null hypothesis
for the over-identification test of the Hausman-Taylor analysis is not rejected for all sectors.
Thus, the instrument variables for the Hausman-Taylor estimations are valid.
5.
Conclusion
There is much empirical evidence for the rise of Chinese exports and their market
expansion effect by price competitiveness stemming from abundant labor. Panel data
consisting of 61 common markets for Korea and China during the period of 2003 to 2010
captures the negative effects of the export competition with China on Korea’s exports to
the third-export markets. The empirical results show that China’s exports do negatively
affect Korean exports overall. However, this study provides a different angle, showing that
the negative effects diminish when a third market possesses a high demand for quality,
novelty, design, brand, eco-friendliness, and anti-privacy—the aspects of modern market
sophistication.
Our main findings can be summarized as follows: the negative effects of the export
competition between Korea and China on Korea’s exports are stronger in third markets
where consumers are less sophisticated while the effects are not as pronounced in markets
where consumers are more sophisticated. This result, however, applies to differentiated and
reference-priced goods which vary in product quality. For homogenous goods, the effects
of market sophistication are diminished.
We may draw some policy implications from our study of trade competition between
Korea and China, especially considering consumer demand for quality sophistication. As
the technological level of exports from China continues to rise, the gap in overall quality
between the two countries’ exports is likely to decrease (Felipe et al., 2012). Unless Korea
produces and exports substantially different product portfolios from China, it is almost
inevitable that the country will face steep price competition or even quality competition.
Generally, Korean firms are advised to seek a complementary strategy to Chinese trade
since a struggle for price-competitiveness would be a losing battle in the end. For instance,
direct investment of Korea in China is a typical case for setting up GVCs (Global Value
Chains) to favor Korean firms (Xing Yuqing, 2014). However, this type of approach only
avails Korean firms that are capable enough of investing or expanding their production
network in China. These firms probably are larger, more innovative and productive in the
first place. For small-medium sized firms that lack technological skills and the capital for
R&D, competition from China is a considerable challenge (Shin Won-Kyu and Ahn Duk-
Geun, 2017; Shin Won-Kyu et al., 2016).
Journal of Korea Trade, Vol. 23, No. 2, April 2019, 1-12
12
Our findings emphasize that, when exporting the same portfolios as China, it is
important for Korea to export differentiated products. There are some ways for exported
products to be differentiated. Conventional aspects of product quality are subject to
technical capabilities in production that can relatively easier to upgrade through
investment in R&D, technical innovations, and capacity building (Morrison, Pietrobelli,
and Rabellotti, 2008). However, quality is perhaps more shaped by the institutional and
socio-cultural conditions of the economy, which concern novelty, health, eco-friendliness,
and public perception of IPRs. An appreciation for these aspects is not developed overnight
and take time for a country to build. Therefore, a simple implication is that Korea’s
exporting firms need to consider the demands for product sophistication strategically and
strive to deliver the more implicit aspects of quality in their export goods in order to appeal
to higher sophisticated markets (Messerlin and Shin Won-Kyu, 2017; Xing Yuqing, 2014).
As long as China’s market expansion is a result of fair and free trade promoting resource
reallocation, export competition between Korea and China should be promoted for the
benefit of the world economy as a whole (Deardorff, 2008; Shin Won-Kyu and Ahn Duk-
Geun, 2019). Throughout the paper, we highlight quality dimensions and the strategic
gains from the interactive effect of competition and market sophistication, using the
exports of Korea as an applicable example. We hope to develop an analytical framework to
better evaluate the role of market sophistication and provide empirical evidence to identify
its effects on Korea’s export flows with trading competitors and partners.
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... with the recipient countries in the region (spatial spillover effects). Though Korean OFDI has outstandingly expanded into North America, the European Union, South East Asian countries and mainland China markets, it has lagged behind that of mainland China in terms of the market competition on the developing countries including the South Asian, South America countries and Africa continent according to our empirical findings and the analyses of (La & Shin, 2019). Is it necessary and is it better to diversity its OFDI to other regions from the longer-term OFDI perspective? ...
... (Shin et al., 2016;La and Shin, 2019). 그러므로 이에 대한 개발협력 수요가 크다고 볼 수 있다 (Athukorala and Jayasuriya, 2003;Finger, 2001;OECD and WTO, 2013;Shin et al., 2017b).앞에서 ...
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