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Release of medium-to-long term outlook on respective agenda based
on the analysis of pending macroeconomic issues

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Journal of Economic Policy

KDI Journal of Economic Policy, February 2015

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  • Author Korea Development Institute
  • Date 2015/02/27
  • Series No. KDI Journal of Economic Policy Vol.37, No.1
  • Language English
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SUMMARY An Empirical Study of the Effect of the Internet on Fares in the U.S. Airline Industry / Hwa Ryung Lee

A reduction in search costs is generally believed to make markets more competitive. However, the effect may be mitigated or amplified if consumers must pay costs for switching products. This paper investigates how search costs affect prices in the presence of switching costs using U.S. domestic airfare data for 2000–2010. The airline industry experienced a dramatic decrease in search costs with increasing Internet use in the 2000s. At the same time, the industry is known for its frequent flyer programs (FFPs), which increase switching costs for consumers. We use the average network size of airlines in a market as a proxy for switching costs related to FFPs and Internet usage as a proxy for (the inverse of) search costs. The results show that increasing Internet usage lowers airfares but that the effect is smaller for markets with a larger average network size.

The Effect of the Global Financial Crisis on Corporate Investment in Korea: From the Perspective of Costly External Finance / Daehee Jeong

This paper examines the effect of the global financial crisis on corporate investment in Korea. Specifically, the crisis was considered to have possibly constrained firm-level investment as the negative shock to the credit supply dramatically unfolded. As Duchin et al. (2010) demonstrated, if a negative supply-side shock is evident during a crisis period, larger cash holdings before the crisis will lead to fewer constraints to corporate investment, or vice versa. In order to investigate the supply-side effect of the crisis, we use firm-level financial data, including firms listed on the Korean stock market as well as small and medium-sized enterprises. We find that corporate investment declined significantly after the crisis, even if we control for factors associated with the demand side, such as contemporaneous capital productivity and cash flow. More importantly, the decline is positively and significantly related to cash holdings before the crisis, implying the negative effect of a credit supply shock. Small and medium enterprises experienced relatively sharp investment declines compared to those of larger firms, and the relationship between pre-crisis cash amounts and the degree of investment decline is greater than that in large firms. Additionally, we examine whether the negative effect persists up to the present, finding evidence that the cash-investment relationship continues in small and medium-sized enterprises.

Innovation Height and Firm Performance: An Empirical Analysis from the Community Innovation Survey / Daiya Isogawa, Kohei Nishikawa, and Hiroshi Ohashi

This study evaluates the economic impact of product innovation by using firm-level data from the Community Innovation Survey conducted in Japan. It accounts for possible technological spillover from innovation activities and examines the extent to which new-to-market product innovations contribute to firm performance. Econometric analysis using a simultaneous equation model reveals that new-to-market product innovation is likely to increase a firm’s sales without cannibalizing those of existing products and generate more technological spillover to other firms. Moreover, such innovation is more likely to emerge from firms collaborating with academic institutions. The paper concludes by discussing policy implications of these findings as well as points to the importance of cross-country comparison between Korea and Japan.

R&D, Innovation and Productivity: The Role of Public Support / Amani Elnasri and Kevin J. Fox

Research and innovation are widely agreed to be major driving forces behind long-term productivity and economic growth. However, the relationships have proven to be difficult to quantify. We make reference to the international literature and draw on recent research for Australia to advance our understanding of these relationships. Particular focus is on assessing the impact of publically financed R&D on productivity. The conclusions have implications for government innovation policies, providing insight into possible productivity gains from funding reallocations. Specifically, the findings suggest that government research agencies and higher education are areas in which investment leads to more potential productivity gains.
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