Intra-industry innovation, spillovers, and industry evolution: Evidence from the Korean ICT industry

Companies innovate themselves to survive competition, and successful innovations are transferred to the industry as a whole through imitation. In this paper, the technical efficiency (TE) of the Korean information and communication technology (ICT) industry is estimated through stochastic frontier analysis, and the efficiencies from 2000 to 2013 are compared through meta-frontier analysis. In addition, by analyzing the effect of innovations that move the production function up on the TE and the meta-frontier efficiency through the two-stage least square model, this paper investigates the effects of innovation on other companies in the industry in the short- and long-term and how the industry evolves accordingly. As a result, sudden inflation of the meta-technology ratio caused by a few innovative firms automatically lowers the average TE. However, the innovation spills over intra-industry by the efforts of other firms trying to reach around the innovation (i.e., imitation). This recovers other firms' TE and increases meta-frontier efficiency. In addition, this paper provides theoretical and practical implications of the results.