We examine the long-term trends in the regional agglomeration, specialization and mobility of Korean manufacturing. Korea began to cross-over to a capitalist system in the early 20th century, largely by adopting modern property rights while under the colonial rule of Japan. A rapid growth during this period   and market integration resulted in tremendous changes in the Korean economic landscape. By observing these economic changes and other developments, we explore the driving forces that produced the current geographic distribution of manufacturing facilities. We emphasize the role of transportation networks and transport costs in shaping the country's regional industrial agglomeration and specialization.

The regional distribution of manufacturing employment in Korea has been stable since the mid-1960, when the country had begun to recover from the severe destruction of the Korean War. While we observed a relatively slow growth in the Southwest region, the stability of the overall regional distribution of manufacturing employment was striking, considering the massive urban migration during this period. However, a regional agglomeration of manufacturing in Korea has fallen steadily during the last century ―except the recovering period after the Korean War― controlling urban migration of population. Our index shows that regional manufacturing employment has converged to the national average in most regions.

Localization rose until the early 1980's and has fallen continuously. The trends of localization in Korea are comparable to those in the U.S. manufacturing reported by Kim (1995). The panel data estimations show that the localization occurs in Korea to exploit the economies of scale. However, unlike the U.S. case, abundant resources are not a driving force of localization in Korea. An examination of the time series and cross-section of the localization indexes of high-tech industries show the absence of an economically meaningful external economy in Korean manufacturing.

The decomposition of a localization measure into mean reversion factor and dispersion factor following Dumais, Ellison and Glaeser (2002) shows that industry mobility in Korea is high and the historical events may not be so important in localization of industries. The analysis supports the argument that transport costs are a major source of change in localization in the long-run.

Our analysis provides the empirical ground to evaluate the “balanced regional growth plans" currently being aggressively pursued by the Korean government. The two major building block theories of the “balanced regional growth plans" are: (1) since the locations of industries are not balanced geographically, the government needs to intervene to relocate them; and (2) by forming industrial clusters under the government leadership, industries can generate innovation and, consequently, higher productivity. However, our time series analyses show that there is no remarkable market failure or a positive external economy that may justify government intervention in the location of manufacturing industries. If an excessive concentration of resources in Seoul and its vicinity exists, it is caused by the service industry, not by manufacturing. Thus, the solution is not found in relocating manufacturing industries.