Role of R&D in the productivity growth of Korean industries: Technology gap and business cycle

The gap between the productivity of the Korean economy and that of advanced economies has narrowed considerably in the manufacturing sector while remaining large in the service sector. Using a panel of Korean industries, this paper assesses the determinants of Korea's productivity growth. Our empirical analysis finds that (i) labor productivity has converged across industries, (ii) research and development (R&D) investment has played an important role in fostering productivity growth, and (iii) the productivity impact of R&D is stronger in more advanced industries (i.e., industries that are close to the technology frontier) and during economic downturns. The implication is that for more developed economies, such as Korea's, in which innovation plays a key role in productivity growth, R&D spending is best focused on more advanced industries and timed counter to the business cycle.