Exports of SMEs against Risk? Theory and Evidence from Foreign Exchange Risk Insurance Schemes in Korea

Purpose – This paper examines the effectiveness of the foreign exchange risk insurance system in the promotion of SME exports in Korea. The purpose of this study is to analyze the short-term and longterm responses of SME exports to foreign exchange risk insurance support policies. Based on these empirical studies, we would like to present some operational improvements to the operation of the foreign exchange risk insurance system. Design/methodology – In order to analyze the effect of exchange risk insurance on the exports of SMEs, a VAR model consisting of foreign exchange risk insurance underwriting values, export relative price, and domestic demand pressure, including export volume, was established. The study began with tests of the stationarity of time series data. The unit root tests showed that all concerned variables were non-stationary. Accordingly, the results of the cointegration test showed that the tested variables are not cointegrated. Finally, an impulse response function and variance decomposition analysis were conducted to analyze the impulse of foreign exchange risk insurance on exports of SMEs. Findings – As a result of estimating the VAR (1) model, foreign exchange risk insurance was found to be significant at a 1% significance level for SME' export promotion. In the impulse response analysis, SMEs' export response to the impulse of foreign exchange risk insurance showed that exports gradually increased until the third quarter, and then slowed down. However, the impulse did not disappear, and appeared continuously. Originality/value – This study analyzed the effect of foreign exchange insurance on exports of SMEs by applying the VAR model. In particular, this study is the first to analyze the short-term and longterm effects of foreign exchange risk insurance on exports of SMEs. The empirical evidence in the current study have a policy implication for the policy authority to support and promote the foreign exchange risk insurance in the effect of exchange rate volatility on Korea' export SMEs