Business groups and product variety in trade: evidence from South Korea, Taiwan and Japan

Abstract We analyze the impact of market structure on the trade performance of South Korea, Taiwan and Japan. South Korea has many large, vertically-integrated business groups known as `chaebol', whereas business groups in Taiwan are smaller and more specialized in the production of intermediate inputs. We test the hypotheses that a greater presence of business groups leads to less product variety but higher product quality, using data on exports from these countries to the United States. We find that Taiwan tends to export a greater variety of products to the US than Korea, and this holds particularly for final goods. In addition, Taiwan exports higher-quality intermediate inputs, whereas Korea exports higher-quality final goods. A comparison with Japan is also presented, which has greater product variety in its sales to the US than either Taiwan or Korea, due to its larger size.

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