Changes in Competition of Small vs. Large Firms from International Trade

Changwoo Nam and Jiyoon Oh

Chapter 5 in Globalization and Performance of Small and Large Firms, pp V-1 - V-49 from Economic Research Institute for ASEAN and East Asia (ERIA)

Abstract: Using Korean plant level manufacturing data, this paper examines the effect of lowering trade barriers on changes in markups of small and large firms, exporter and non-exporters. We find that the large firms decide on higher markups in each sector as they have higher market powers in integrated markets, also exporters set higher markups through relatively higher observable productivity than non-exporters. Even after controlling productivity and other firm characteristics, markups are proportional to market share, which can be interpreted that market power purely influences firm price strategy. Interestingly, the markup distribution which is more closely related to the competition from globalization has been decreasing over time while the performance gap measured as sales has been stable over time. It cautions that even if performance gap measured in quantity may be widening, this does not imply that the level of competition between large and small firms is weakened.

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