Market Structure and International Trade: Business Groups in East Asia

In this paper we study the effect of market structure on the trade performance of South Korea, Taiwan, and Japan. We center our analysis on Korea and Taiwan, countries which have very different market structures: Korea has many large, vertically-integrated business groups known as chaebol, whereas business groups in Taiwan are smaller and horizontally-integrated in the production of intermediate inputs. The exports of these countries to the United States are compared using indexes of product variety and 'product mix', which are constructed at the 5-digit industry level. It is found that Taiwan tends to export a greater variety of products to the U.S. than Korea, and this holds across nearly all industries. In addition, Taiwan exports relatively more high-priced intermediate inputs, whereas Korea exports relatively more high-priced final goods. We argue that these results confirm the importance of market structure as a determinant of trade patterns.