Knowledge spillovers have been recognized as an important source of innovation and economic growth in both industry and firm-level data. A firm may reap benefits by locating near other firms in the same geographical region. In this paper, we examine how physical proximity influences a firm's future productivity and its survival possibility. Our results indicate that a firm located in a region with a higher median total factor productivity (TFP) gains higher productivity from other firms in the same region. One possible explanation is that such a firm has more opportunity to access superior external knowledge and to produce more new ideas. Our results also indicate these productivity-enhancing characteristics do not seem to be industry-specific. Finally, we find that high productivity firms are the only significant sources of knowledge spillovers, suggesting that firms benefit most from combining their internal knowledge with the external knowledge of neighboring firms with high TFP on average.

This paper investigates the bilateral trade pattern between South Korea and the United States and examines the economic impact of a Korea–United States (KORUS) free trade agreement (FTA). Three related general equilibrium approaches were used to investigate the effects of a KORUS FTA. The static general equilibrium model estimates the efficiency gains from resource allocation. The capital accumulation general equilibrium model includes the growth bonus from the increased incentives for savings and investment created by the static efficiency gains. The productivity enhancement general equilibrium model augments the capital accumulation model by taking into consideration the dynamic efficiency improvements from competitive effects in the economies over time. The last welfare gain turns out to be the biggest gain from the KORUS FTA, dwarfing the static efficiency gains. The results indicate that Korea could gain an estimated 0.32 to 5.97 percent in GDP from a KORUS FTA. Much of the gains that would accrue to Korea from the FTA with the United States would be productivity gains from increased competition between U.S. producers and domestic Korean producers. Another important area of gain for Korea would be increased efficiency from lower non-tariff barriers. This provides a strong argument for ensuring that an FTA between Korea and the United States is comprehensive and facilitates regulatory cooperation and the reduction of non-tariff barriers.