Three essays on innovation: Firms' responses to trade shocks, government policies, and labor market dynamics in Korea

Abstract

Recent, prolonged low growth has made innovation-driven economic growth essential for many countries, especially in high-technology sectors such as semiconductors. Research and development (R&D) is the primary engine of this innovation, and firms in countries such as South korea (hereafter Korea) and the United States now contribute more than 80 percent of total national R&D.With this in mind, this study pursues three interrelated objectives. First, it examines how external shocks spur or hinder firm-level innovation. Second, it investigates how government policy can be designed to encourage private sector R&D. Third, it traces how the R&D-driven innovation affects employment, the central mechanism through which its effects reach the wider economy. This study is based on three empirical essays that use financial statement panel data for Korean listed firms. By connecting external shocks, policy design, and employment outcomes, this study aims to provide insights for policies that promote active firm innovation, and to clarify the labor market dynamics that accompany the pursuit of innovation. The first chapter examines the impact of the 2019 Korea-Japan trade dispute on Korean firms, focusing on their innovation responses. Affected firms are classified into two groups: user-side firms that rely on Japanese export-controlled chemicals for semiconductors, displays, and rechargeable batteries, and producer-side firms that can substitute those chemicals domestically. Both groups increased R&D expenditures in response to the shock, with some producer-side firms increasing patent applications. However, user-side firms faced higher costs, while producer-side firms benefited from productivity gains. This contrast suggests that supply chain diversification and domestic production substitution created opportunities for producer-side firms, while imposing higher costs on user-side firms due to production inefficiencies. The second chapter investigates the policy effects of a new R&D tax credit system implemented in korea since 2011. The system classifies eligible firms from two to three groups: Small Medium Enterprises (SMEs), non-SMEs, and newly medium-sized firms from previously non-SMEs, to align tax incentives with actual firm classifications. It raised the tax credit rate for medium-sized firms from 6 percent to 15 percent. Although, this study finds no clear evidence that the reform had a significant effect, firm heterogeneity does matter. Medium-sized firms with a higher intangible asset-to-capital ratio show a larger increase in R&D spending. Within the treatment group, the policy had clearly boosted R&D in high-tech firms and in firms with below average R&D intensity and poor financial conditions, suggesting that it eased financial constraints. The third chapter examines how firms' innovation activity, measured by R&D expenditures, is reshaping the Korean labor market. The key findings are as follows. First, R&D investment is generally associated with increased employment. This effect is especially strong in high-tech manufacturing, where longer R&D duration further amplifies it. Second, higher R&D investment tends to reduce the share of non-regular workers. In high-tech services, it is also associated with a decline in the share of female workers. Third, while the overall impact on average salaries is modest, there is a significant increase in high-tech conglomerates. These results highlight the skill-biased nature of R&D and labor force heterogeneity. As a result, the benefits tend to be disproportionately concentrated among regular employees. Thus, R&D-driven innovation may create high-quality jobs but also exacerbate labor market inequalities. Taken together, the essays demonstrate how external shocks or intentional government policy can trigger firms’ innovation activities, and how employment channels transmit both the benefits and the strains of firm-level R&D to the broader economy, thereby providing guidance for policies that seek sustainable and inclusive growth.