The IUP Journal of Applied Economics
Industry Rates of Return in Korea and Alternative Theories of Competition: Equalizing Convergence Versus Tendential Equalization

Article Details
Pub. Date : Jan, 2019
Product Name : The IUP Journal of Applied Economics
Product Type : Article
Product Code : IJAE11901
Author Name : Ivan D Trofimov
Availability : YES
Subject/Domain : Economics
Download Format : PDF Format
No. of Pages : 44

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Abstract

This paper considers convergence and equalization in industry profit rates in the Republic of Korea during the period 1970-2015, from the perspective of alternative paradigms of competition—classical and neoclassical. Two measures of profitability— average rate of profit based on the total capital stock in the economy, and Incremental Rate of Profit (IROP) based on the concept of regulating capital—are estimated. It is shown that little convergence in industry rates of profit occurs when the former measure is used, while almost complete equalization of IROP is achieved. The classical-type equalization takes place in particular capital accumulation and competitive settings in Korea, characterized by the prominent role of diversified conglomerate firms, the capital flows within conglomerates, investment coordination by the state, and the fast pace of capital accumulation and renewal.


Description

The dynamics of the profit rates at industry level is a salient topic in economics for a variety of reasons: the rate of profit serves as an indicator of the overall health and vitality of individual industries. It highlights the pace of technological progress and industrial change, and it is a key regulator of competition, of the speed and direction of capital investment across the firms and sectors, and of the degree of capital mobility.

The possibility of a reduction of profit rate differentials between industries is discussed in the neoclassical economic theory, while the tendency of the equalization of profit rates between industries is observed in classical economics. In both instances, the process is likely to be driven by the movement of capital to more profitable activities and uses. D’Orlando (2007) and Tescari and Vaona (2014) thus define two alternative paths along which industry profit rates may evolve: ‘convergence towards long period positions’, when the initial difference in the level of profit rates between individual industries is reduced over time, as capital flows to the industries with higher rates, and ‘the random oscillation of actual magnitudes around their long-period counterparts’, or oscillation of profit rates around some stable level. Convergence of profit rates is thus related to the gravitation of profit rates, albeit the latter concept is more restrictive, as far as the dynamics of profit rates are concerned.

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