This paper investigates the effect of exchange rate fluctuations on the Korean manufacturing firm’s performance in the period of 1989~2006 using totally 6,801 firms, which include not only the listed firms, but the registered and audited firms. 

The empirical study shows the operation performances of manufacturing firms deteriorate according to the appreciation of Korean Won/US dollar exchange rates, but improve according to the appreciation of Japanese Yen/US dollar exchange rates. These results correspond with the theories and the experiences as well as with the results of existing empirical studies that manufacturing firms take advantage of the depreciation of Korean Won and the appreciation of Japanese Yen. 

The extent of influences of exchange rate fluctuations on the Korean manufacturing firm’s performance have weakened for not only Won/US dollar, but for Yen/US dollar since 2002, when Korean Won continued to appreciate thereafter. 

The effects of exchange rate fluctuations on the firm’s performance depend on the characteristics of firms as follows. First, the export oriented firms performances appear to be more sensitive to the exchange rate fluctuations than the domestic market oriented firms. Second, the exchange rate fluctuations have more influence on the small-medium firms than on the large firms. Therefore, it is necessary for the small-medium firms to strengthen the exchange rate management system, as well as to improve the quality of export goods with product differentiation. Third, the low productivity firms performances appear to be more sensitive to the exchange rate fluctuations than the high productivity firms.

Therefore, Korean firms are required to continue to reduce cost by means of restructuring and raising the efficiency of the management, as well as by stabilizing the labor-management relations. Finally, the exchange rate fluctuations have more effect on the high R&D ratio firms than on the low R&D ratio firms. This unexpected result implies that although the rise of R&D ratio may alleviate the exchange rate sensitivity, it means that Korean firms have not overcome the fragilities of responding sensitively to the exchange rate fluctuations yet, due to the technical gap with the U.S. and Japanese firms. Therefore it is necessary for Korean firms to enhance the quality competitiveness of export goods by producing high-technology goods.