This study analyzes how idiosyncratic shocks to a small number of large firms in Korea affect its aggregate volatility. Korea's unique large firm-oriented economic structure, on the one hand, has been one of the biggest drivers of the nation's economic growth so far, but on the other hand, raises concern that adverse shocks to large firms can escalate into a crisis for the entire nation. This concern has intensified as a large-scale recall of the smartphone (Galaxy Note 7) released by Samsung Electronics in 2016. This study attempts to clarify whether such idiosyncratic shocks to a few large companies affect the volatility of the Korean economy as a whole, and if so, how much.

The analysis finds some interesting facts. First, the idiosyncratic shocks Korean firms received by themselves have a significant impact on the aggregate volatility (direct effect), but the impact has been found to further amplify the volatility of the economy by transmitting shocks through other firms in the input-output relationship or firms in the same business group (linkage effect). These results are somewhat predictable considering the country's multi-layer supply chain subcontracting structure, but this study is the first to establish such a fact through data. Quantitatively, it is estimated that the magnitude of the linkage effect is about twice that of the direct effect.

The role of large firms is shown to be huge here as well. For example, the volatility driven by the idiosyncratic shocks to the three major Korean firms (based on sales) accounts for about 59 percent of the total direct effect, and that number rises up to 84 percent when expanded to the 30 largest companies. Although it was not possible to obtain an accurate estimate, much of the linkage effect seems to be originated from the shocks to those few large firms, given the transmission mechanism (i.e., the transmission of the shocks to another company in relation to input-output relationships or internal transactions within a business group).

The findings in this study indicate that the concentration of economic power to a small number of large firms or their business groups can certainly increase the system risk across the country. Therefore, systematic management of the concentration of economic power is required. Of course, it should not come to the simple conclusion of restricting production activities of large firms through, e.g., regulations. Above all, it is the most fundamental and desirable way to prevent the concentration of economic power by creating an environment in which good companies are constantly emerging and growing so that any market dominance is weakened and a competitive landscape is formed.

Preface
Executive Summary

Chapter 1 Introduction

Chapter 2 Firm Distribution and Macroeconomy: Theoretical Background and Korea’s Current Status
　Section 1 Macroeconomic Implications of Firm Distribution
　Section 2 Firm Distribution in Korea and Trends in Macroeconomic Volatility

Chapter 3 Idiosyncratic Firm Shocks and Macroeconomic Volatility: Empirical Analysis
　Section 1 Model Design
　Section 2 Empirical Analysis

Chapter 4 Macroeconomic Spillover Effects of Large Firm Shocks
　Section 1 Direct Effects of Large Firm Shocks
　Section 2 Spillover Effects of Large Firm Shocks

Chapter 5 Conclusion and Policy Implications

References
Appendix
ABSTRACT