Business Groups and Trade in East Asia: Part 2, Product Variety

We analyze the impact of market structure on the trade performance of South Korea, Taiwan and Japan. 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 hypothesis that the greater vertical integration in Korea results in less product variety than for Taiwan, by constructing indexes of product variety and `product mix' in their exports to the United States. It is found that Taiwan tends to export a greater variety of products to the U.S. than Korea, and this holds across all industries. In addition, Taiwan exports relatively more high-priced intermediate inputs, whereas Korea exports relatively more high-priced final goods. A comparison with Japan is also presented, and we find that Japan has greater product variety in its sales to the U.S. than either Taiwan or Korea.