Patterns of Vertical Intra-Industry Trade Considering Quality Difference : S.Korea Case

The simultaneous exports and imports within same industries is well known as the intra-industry trade (IIT). Since the pioneering empirical literatures of Balassa (1966)1) and Grubel and Lloyd (1975)2), bunch of empirical and theoretical papers studied this new paradigm of international trade challenging to the classical Heckscher - Ohlin paradigm. On the steps of IIT studies, the most essential progress was the division of IIT into Horizontal IIT (HIIT) and Vertical IIT (VIIT). This classification is based on the characteristics of product differentiation. HIIT is the trade of product which is close substitute but differ in characteristics, on the contrary VIIT differ in embodied quality level.In empirical literatures, the division between HIIT and VIIT is accomplished by unit price comparison. If unit price ratio defined as export product price over import product price of product which belong to same industry goes to specific range, this trade is on HIIT and if that ratio is out of that range this kind of trade go to VIIT. This simple methodology have been very common practical way for IIT research and generally the price ratio range for HIIT is 75~125% or 85~115%. In other words, if a product’s export price is higher than import price over 125% (or 115%) or lower than import price below 75% (or 85%), both cases are classified as VIIT. Another progress in IIT studies was the research on the determinants of HIIT/VIIT. Various countryand industry-specific determinants have been studied and differences in factor endowments and market size, physical and/or institutional barrier against trade and foreign direct investment (FDI) are the key elements determining IIT in country level. Though these determinants have been studied extensively during past decades, little is known of the impact of national technological capacity on IIT. Considering VIIT as occurring from product differentiation with quality difference, this is very surprising.In these perspectives, this paper investigates the determinants of Korea’s VIIT with special interest on national R&D stock. Classical analysis of VIIT will be followed by separated investigation of HQ-VIIT (Higher Quality VIIT) and LQ-VIIT (Lower Quality VIIT). This segregated analysis will give deepened understanding of VIIT determinants