Horizontal and vertical intra-industry trade of Korea: A cross-country and industry analysis

Intra-industry trade (IIT) is the simultaneous export and import of products within the same industry. This dissertation investigates the levels and trends of IIT in Korea, and empirically tests models of IIT using Korea's bilateral trade in the manufacturing industry with twenty-three countries that account for three-fourths of Korea's total trade.; An important distinction between the theoretical models of IIT is the two different types of product differentiation: horizontal IIT where products are differentiated by attributes, and vertical IIT where products are differentiated by quality. This distinction is important because theory predicts that different forces may be at work.; The Grubel-Lloyd index is used to measure the IIT level and price data are used to distinguish between horizontal and vertical IIT. Two types of characteristics—country and industry characteristics—are tested. The model is estimated using Tobit analysis.; The data generally support the theoretical models of IIT however, the vertical IIT model is better able to explain the variations in the level of IIT in Korea. This may be due to the fact that most of Korea's IIT is vertical in nature. This study also found that the difference in factor endowment was not significant when total IIT is analyzed, but it became significant when horizontal and vertical IIT are analyzed separately.; This study generally follows the methodology of recent studies, including that of Greenaway, Hine and Milner (1994, 1995). However, this study is different in that it extended the empirical studies of IIT to a developing country and a country-specific fixed effect regression was run by including eight years of data. Unlike previous studies, supply-side variables were explicitly included in the model so as to distinguish from demand-side variables.; Given the importance of IIT in Korea's bilateral trade, Korea needs to adopt domestic policies that can actively promote IIT Special trade agreements are needed with countries that have high potential for IIT and further reduction of trade barriers in sectors with high IIT could offer greater benefits to the domestic economy. In addition, establishment of small and medium-sized firms should be encouraged to promote horizontal IIT since the social cost of adjustment is lower than that associated with vertical IIT.