The R&D and productivity relationship of Korean listed firms

This study analyzes the relationship between R&D investment and the productivity of Korean R&D‐engaged firms. An interdependent chain of equations including the propensity to invest, R&D investment and productivity are estimated in a multi‐step procedure accounting for selectivity and simultaneity biases. Using Korean firm level panel data of listed firms from 1986 to 2002, we find four main empirical results. First, there is a two‐way causal relationship between R&D investment and productivity for Korean listed firms. Second, Chaebol firms were associated with lower R&D growth as well as lower labor productivity growth in comparison to non‐Chaebol firms. Third, there was a substantial reduction in growth rates both in R&D investment and labor productivity in 1997‐1998, immediately following the Asian financial crisis. Fourth, considering the positive feedback effect from productivity growth to R&D growth, a decrease in R&D investment growth after the Asian financial crisis should have been harmful by further decreasing productivity growth.