Industry Openness, Firm Capacity, and Performance of Korean SMEs

The question on how market openness affects firm performance has largely been discussed by academics as well as professionals, yet they have not yielded consistent results on this issue. The distinction between small-and-medium-size firms (SMEs) and large-size firms or an analysis of both firm and industry level data was even more difficult to find. This paper attempts to answer these two questions simultaneously by introducing a multilevel model that identifies both firm level micro variables and industry level macro variables by using a cross-sectional data set. Our analysis finds a strong positive relationship between openness and firm performance measured by revenue at both industry and firm levels. Among the firm level variables, the size of a firm measured by the number of workers and the quality of human resources measured by the number of employees with postgraduate educations show significantly positive effects on firm revenue whereas the R&D intensity of a firm displays a negative relationship with firm performance because of the possible time lag between investment and its outcome of revenue. The interaction between openness and the quality of human resources has a negative effect on revenue, but the interaction between openness and R&D intensity has a positive effect on firm performance. Additionally we provided an analysis comparing the manufacturing industry with the service industry to check any different effects of openness on firm revenue. The analysis shows that firm performance measured by revenue responds more elastically to the quality of human resources and R&D intensity in the service industry than the manufacturing industry.