KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

KDI FOCUS Path to National Champions: Transforming Support Policies for Small- and Medium-Sized Enterprises (SMEs)

South Korea’s ‘national champion policy,’ designed to foster global enterprises, has yet to deliver measurable outcomes in sales and productivity, suggesting inefficiencies in resource allocation linked to ‘the risk of picking winners.’ Accordingly, the incentive structure of growth policies for Small- and Medium-Sized Enterprises (SMEs) needs an operational shift, moving away from conventional subsidy assistance toward a bespoke model that integrates private investment, consulting, and networks to address their business challenges collaboratively. Furthermore, in order to enhance policy accountability and effectiveness, it is crucial to consolidate support details and performance outcomes while ensuring transparency through public disclosure.

- Amid intensifying competition for technological dominance, advanced countries are stepping up the reintroduction of targeted industrial policy to concentrate support in specific industries or firms.

- Korea provides substantial subsidies to firms through its national champion policy, but studies on its effectiveness remain limited.

- This study analyzes the effectiveness of Korea’s national champion policy and offers recommendations for improvement by comparing its operational approach with those of other countries.

- Korea’s flagship national champion policy program, World Class 300, provided targeted annual subsidies to 30~56 firms selected through a government-led process.

- The declining share of high-growth firms led to a large drop in the number of firms satisfying WC300’s sales growth criterion, making it harder to identify eligible firms.

- An analysis of WC300 outcomes reveals no significant impact on sales, value-added, or productivity, suggesting that resources may have been allocated to firms misaligned with the project’s objectives.

- Korea’s national champion policy aims to foster innovation and promote exports among SMEs to drive growth and job creation.

- However, concentrating resources on less competitive firms through selective support risks undermining economic efficiency and distorting market dynamics.

- Relational support is likely more effective than transactional support for high-potential firms.

- Effective business growth support requires tailored assistance that meets the diverse needs across the growth stages of individual firms rather than focusing on a single activity.

- The time has come for Korea to shift gears in its national champion

- To enhance the effectiveness of the national champion policy, its framework―including firm selection and support measures―should transition to a private-sector-led approach.

- Enhancing policy accountability and effectiveness requires centralized management of support details and performance data alongside transparent public disclosure.

- Given the low incentives for actively restructuring government support projects, institutionalizing independent evaluations is crucial for improving future outcomes.

- New policy initiatives should operate systematic pilot programs to enhance effectiveness.

Summary

Policy Study KOR Analysis of Unfair Trade Factors in Agency Deals

Enacted in 2015, the Fair Agency Transactions Act of South Korea mandates annual written fact-finding investigations of agency transactions. Per this mandate, the Korea Fair Trade Commission (KFTC) has conducted agency deal surveys since 2017 to identify unfair trade practices in agency transactions, with results disclosed through press releases. However, KFTC’s investigations do not deal with specific instances of unfair trade conditions. This study aims to determine factors contributing to unfair trade in agency transactions based on these survey results, focusing on the cosmetics sector as investigated in the 2021 fact-finding survey. Dissatisfaction with transactions serves as an indicator of the existence of unfair trade practices.

This study first investigates the factors influencing supplier dissatisfaction. Findings indicate that suppliers are more likely to be satisfied if they are market leaders with a significant market share and less dependent on the agency channel for transactions. This suggests that supplier satisfaction in agency deals decreases with lower market share or higher reliance on agents. These results are connected to the concept of bargaining power, implying that suppliers with greater negotiating power face fewer challenges when negotiating with agents. The study also examines the factors that influence agent dissatisfaction. Conditions frequently leading to unfair trade in agency transactions include the lack of a defined sales territory, diversification of supplier distribution channels (e.i., online), and shorter contract cycles.
However, this study finds the impact of contracts granting exclusive rights to suppliers and agents is inconclusive. While exclusive agents experience a greater variety of unfair trade, there is no higher likelihood of dissatisfaction with their transactions. This suggests that exclusive agency agreements foster a greater dependence on suppliers, which can lead to a higher likelihood of encountering unfair trade, but may also result in increased satisfaction due to more consistent transactions.

All these results have several implications. To enhance the effectiveness of KFTC’s surveys, it is essential to analyze unfair trade practices specific to each industry, which can improve KFTC’s monitoring functions. Additionally, including open-ended questions rather than solely relying on closed-ended ones is crucial, as agency transactions entail a myriad of scenarios that are difficult to capture accurately with quantitative queries alone. To reduce the burden on respondents and improve efficiency, KFTC should consider incorporating narrative questions into the survey design and streamlining the questionnaires through a thorough evaluation.

Summary

KDI FOCUS Protecting Customer Funds for Emerging Financial Products

Emerging financial products driven by innovation, such as virtual assets and simplified payment services, introduce both new conveniences and in-transaction risks to customer funds. Despite regulations on segregating customer funds already in place, full compliance by businesses with these rules is unlikely, especially with insolvency on their horizon. This paper proposes a new protection framework that bolsters the safety of new financial products and reduces funding pressures for the compensation scheme.

- New financial products emerging through innovation offer novel benefits but may also expose customers to risks in managing their funds.

- A protection system for emerging financial products can lay a strong foundation, serving as a key safety net to support reliable financial innovation.

- Customer funds for new financial products include prepaid balances, virtual asset deposits,

- P2P lending deposits, and funeral service prepayments.

- The current volume of customer funds associated with new financial products is substantial, at about 18 trillion won, and is expected to grow further, driven by advancements in digital finance and population aging.

- There have been numerous cases where businesses misappropriated customer funds for new financial products and later went bankrupt.

- Although fund segregation regulations for customer funds are in place, firms on the verge of bankruptcy are highly likely to violate them, and several other limitations persist.

- While fund segregation regulations serve a preventive function, the best of such precautions cannot eliminate all incidents, necessitating a post-incident protection system.

- In the direct protection scheme, firms pay insurance premiums in advance, and KDIC protects customers in the event of business insolvency.

- However, the direct scheme applies uniform insurance rates regardless of fund segregation in contrast to the fundamental insurance principle of premiums proportional to risk.

- In the indirect framework, firms do not pay insurance premiums, and KDIC safeguards only the funds segregated in banks in the event of bank failure.

- The indirect approach only protects segregated funds, leaving customers unprotected from violations of segregation rules, resulting in reduced protection effectiveness.

- The proposed hybrid scheme indirectly protects customer funds segregated in banks while directly safeguarding all other customer funds.

- This hybrid protection system ensures high effectiveness by safeguarding all customer funds and keeps

- insurance premium burdens low for firms and customers, as firms are incentivized to deposit most customer funds in banks.

- The hybrid protection system addresses risk transfer, in which a bank’s failure can trigger a firm’s insolvency.

- Early detection of firms facing liquidity risks is enabled by the hybrid proposal.

- KDIC’s burden under the hybrid option is not expected to be substantial.

- While the indirect protection system is easy to implement, the hybrid option requires substantial changes to the existing framework, making immediate implementation challenging.

- Recently, major developed countries have expanded the coverage of deposit insurance institutions beyond traditional deposits to include a wide range of financial and quasifinancial services, aiming to responsibly foster financial innovation.

- This study builds on such global trends to propose protection measures for customer funds in new financial products.

- The proposed protection system, with its inclusive nature, can serve as a comprehensive framework to protect and foster future innovation by capturing new financial products within its regulatory scope.

Summary

Research Monograph KOR Competition Policy in the Digital Platform Economy

Digital platforms have boosted consumer welfare and driven innovation and competition by integrating diverse technological advancements. These online platforms facilitate easier business transactions, instant information and content sharing, and the introduction of new products and services. However, as economic agents increasingly depend on them, concerns are growing about the excessive concentration of economic power in a limited number of platforms. As a result, in the past few years, competition policy related to digital platforms has gained more attention, prompting vigorous discussions for improvement.

Globally, competition authorities have conducted numerous investigations, and there have been several lawsuits regarding the abuse of market power by digital platforms, along with active merger reviews. In addition, major jurisdictions, including Germany, the EU, and the US, have taken legislative actions to bolster regulations over their market dominance outside the purview of current competition or antitrust law. This policy shift stems from recognizing the limitations of existing competition policies, as enforcing such laws against the anti-competitive behaviors of digital platforms becomes increasingly challenging, and there is criticism about the asynchronicity in ex-post regulatory approaches.

Against this backdrop, this report puts forth directions for competition policy reform to effectively address anti-competitive behavior by digital platform firms. The focus is on the abuse of market power and mergers that contributed to acquiring and strengthening their dominance. This report consists of four chapters as follows. The first two chapters deal with the unilateral conduct of digital platforms. Chapter 1 analyzes self-preferencing practices resulting from their dual roles, drawing out appropriate regulatory improvement measures based on their categorization, a review of their economic effects, and empirical analysis results. Chapter 2 examines the issue of platform fees, which has become a significant social concern. While exploring desirable approaches, this chapter assesses whether this issue can be viewed from the perspective of price abuse whenhigh platform fees areproblematic by reviewing price abuse cases.

The next two chapters include studies on platform mergers, focusing on vertical and conglomerate mergers, which are receiving increasing attention as they are actively used to form platform ecosystems and diversify businesses. Chapter 3 analyzes how to consider the potential for self-preferencing by platforms in the merger review process. Self-preferencing is possible only when a platform has a dual role, securing its own or affiliated firms that compete with its business users, and non-horizontal mergers are a primary means of acquiring this dual position. Based on literature reviews and theoretical analysis, this chapter identifies considerations for non-horizontal merger reviews related to self-preferencing. Lastly, Chapter 4 investigates the formation and reinforcement of entry barriers due to platform mergers. Through theoretical analysis and reviews of past cases, this chapter provides recommendations for effectively evaluating entry barrier issues in merger reviews.

The collective conclusions can be summarized in two points. Firstly, competition policy reform should fully reflect the unique characteristics of digital platforms. The analysis of their typical unilateral conduct and mergers indicates that their economic effects and pathways are not fundamentally different from those of traditional companies. However, the distinct features of digital platforms can lead to new or multiple forms of anti-competitive behavior, make certain actions more pronounced or severe, and heighten the complexity and technical challenges in analyzing and judging their anti-competitive effects.

Secondly, caution is needed when introducing or strengthening antitrust regulations that extend beyond existing legal frameworks. This report emphasizes the importance of better market monitoring and industry-led discussions on active regulatory intervention on platform fees. For self-preferencing and platform mergers, it highlights the value of case-by-case reviews with assessment criteria for effectiveness. Without sufficient consideration for the dynamism of the digital market, where rapid technological change and innovation lead to emerging business models and blurred market boundaries, regulations mayend up hindering innovation incentives, ultimately hurting competition in the long run. Digital platform competition policy should achieve a delicate balance between reducing the harms of monopolies and protecting the incentives for innovation and healthy competition. At present, a flexible response approach to competition law is deemed necessary, tailored to the specific context of each case, while enhancing enforcement through improved timeliness and effectiveness.

Summary

KDI FOCUS Competition Policy for Online Platforms’ Self-Preferencing Conducts

Self-preferencing by online platforms encompasses a spectrum of conduct types, all with implications for both anti-competitive and pro-competitive effects. Therefore, it is desirable to maintain the current ex-post regulatory framework, which applies the rule of reason and intervenes only when such practices are deemed to be unjust or harmful to fair competition, rather than imposing a blanket ban. However, the timeliness and efficiency of enforcement mechanisms should be improved in light of the distinct characteristics of the online environments and self-preferencing conducts.

- Online platforms are increasingly central to daily life, with some experiencing exponential growth to reach enormous scales.

- As concerns grow about the over-concentration of economic power in a small number of online platforms, discussions on improving competition policies related to market dominance have intensified.

- As major countries strengthen regulations on online platform monopolies, self-preferencing practices have become a key area of focus.

- This paper proposes directions for improving competition policy to effectively address self-preferencing practices by online platforms.

- Self-preferencing refers to the conduct of a platform favoring its own or affiliated products and services over those of competitors, arising from the platform’s dual role.

- Self-preferencing encompasses heterogeneous conduct types, so it needs to be categorized and specified for proper discipline.

- In this paper, self-preferencing is categorized into four types.

- First, preferential placement through undisclosed algorithms involves favoring a platform’s own products in search rankings or other prominent positioning.

- Second, identifiable preferential placement involves platforms pre-installing or setting their own software as default.

- Third, discriminatory access to data occurs when a platform exclusively uses non-public data to develop its own products.

- Fourth, discriminatory access to other inputs and markets arises when a platform grants preferential access to inputs and market for its own products.

- The primary impact of self-preferencing conduct on competing business users varies depending on the type, potentially reducing business opportunities, weakening innovation incentives, or lowering quality.

- As a result, price, quality, and innovation competition in adjacent markets may be stifled.

- Preferential placement also has the characteristics of exploitative abuse.

- Conversely, self-preferencing can also have positive effects, such as lowering product prices, maintaining or improving quality, reducing consumer search costs, increasing product diversity, and promoting competition and innovation.

- Self-preferencing can have both anti-competitive and pro-competitive effects, and the overall impact cannot be definitively determined.

- Self-preferencing by online platforms should be regulated appropriately.

- As overregulation may result in even greater unintended side effects, it would be desirable to apply the rule of reason to self-preferencing, regulating it only when deemed unjust.

- While the current ex-post approach for competition law enforcement does not require material changes, it is necessary to enhance its timeliness and efficiency.

- Undue strictness should be avoided in market definition and assessments of market dominance.

- For the implementation of ex-ante designation, it would be advisable to limit its scope to certain conduct types where efficiency effects are limited and enforcement is difficult.

- Explicitly banning selfpreferencing requires a clear description of the specific conducts involved.

- To mitigate enforcement challenges, it is worth considering granting competition authorities timely access to platform algorithms and data or imposing obligations on platforms to retain relevant information.

- If the burden of proof is to be shifted to businesses to ease the load on competition authorities,

- it should be limited to certain types.

- A commitment decision can be an effective tool to complement the enforcement of competition law.

Summary

Research Monograph KOR Green Transition Strategy and Implementation

It is imperative for the Republic of Korea to prioritize the development of elaborate green transition strategies and implementation plans. In light of this urgency, this study offers ten chapters addressing select issues on green transition, which provide policy recommendations drawn from identification of problems, assessment of current policies, and empirical analysis.

Chapter 2 (Dr. Yong Hyeon Yang) assesses the national greenhouse gas emission reduction plan the Korean government announced in Oct. 2021. It finds the sectoral strategies to be insufficient for the stated targets and suggests that an energy transition ambition has to be increased as either targets have to be decreased in other sectors or there could be a need for more extensive electrification. Chapter 3 (Prof. Wonhyuk Lim) offers insights on energy transition strategies and their implication for the electricity industry. Periodical simulations should be conducted for multiple scenarios, and the overall cost of transition, including the expenses for networks and standby facilities as well as the levelized cost of energy, should be minimized. Accordingly, transition and phase-out of fossil fuel plants should be systematically planned in stages.

Chapter 4 (Dr. Yeochang Yoon) points out the limitations of the Korean emission trading system (ETS) and presents potential solutions. The current restrictions on banking need to be relaxed to keep the ETS allowance prices from dropping, but such adjustments should be introduced gradually to prevent a sudden decline in supply. Chapter 5 (Prof. Hyungna Oh) raises a possibility of insufficient investment in decarbonization technologies due to first-mover disadvantages. It advocates introduction of carbon contracts for difference to incentivize R&D in green technologies, especially when carbon prices are low or uncertain. Chapter 6 (Dr. Karam Jo) presents the empirical result that patents in some digital transformation technologies can increase patents in climate technologies by an average of 17.3% and underscores the need to promote such digital transformation technologies.

Chapter 7 (Dr. Junghyun Kwon and Dr. Joseph Han) reveals that elevated outdoor temperatures decrease working hours in an inequitable manner and deteriorate workers’ health. These observations imply that climate change could magnify income inequality. As such, protective measures for outdoor workers against high temperatures and support for their job transitions are crucial. Chapter 8 (Dr. Hyunseok Kim) proposes selective subsidies for regions heavily impacted by climate change and green transition, and highlights the necessity of assessing those impacts objectively. Most importantly, local governments should formulate transition plans in line with central government guidelines.

Chapter 9 (Prof. WooRam Park) indicates that a large portion of greenhouse gas comes from establishments with more than 300 workers, and in such industries as petrochemical and steel. It also shows higher carbon productivity in industries with lower greenhouse gas emissions and establishments using less energy. Chapter 10 (Dr. Joseph Han) reveals the empirical result that firms who entered in the first stage of ETS had significantly lower greenhouse gas emissions, energy usage, annual turnover, and employment than those who did in the second stage. The performance of these firms was influenced by the design of the ETS, for example, on what basis the allowances were assigned free of charge or for a fee. Hence, policy design for green transition should pay particular attention to its effects on businesses and employment. Lastly, Chapter 11 (Dr. Sora Chon) observes that the global green transition might trigger both green and energy inflation. Analyzing the effect of inflation factors on the Korean economy finds that such impacts vary based on whether inflation arises from a demand or a supply shock. Consequently, the Korean government's responses should differentiate between inflation factors that are demand-side and supply-side.

Summary

Policy Study KOR A Study on Information Provision and Consumer Protection in Online Platforms

This study investigates how suppliers respond to consumers exhibiting behavioral biases due to drip pricing, specifically whether suppliers will take advantage of this situation. Previous research indicates that when exposed to drip pricing, consumers can react in two opposing ways: (i) becoming less sensitive to later-revealed additional charges due to behavioral biases, potentially increasing demand; (ii) perceiving such practices as deceptive, potentially decreasing their intention to repurchase and damaging the reputation of the supplier and product. Consequently, suppliers face conflicting incentives when determining base and additional charges: the pursuit of immediate profit, achieved by using consumer behavioral biases, against enhancing their long-term reputation through price transparency. In light of this, it aims to empirically analyze which of these incentives prevails in the real market.

Focusing on Airbnb, a representative accommodation-sharing platform, where mandatory cleaning fees are not disclosed until later in the transaction process, this research utilizes new panel data to examine the evolving pricing strategies of suppliers. An analysis of major cities where Airbnb is actively operational reveals a steady relative increase in cleaning fees compared to room rates, which are base prices, from the second half of 2015 to the end of 2018. Furthermore, in analyzing the relationship between cleaning fees and host experience in New York City, controlling for accommodation and host characteristics, transaction conditions, and market situations, the study finds that more experienced hosts tend to charge separate cleaning fees and set hidden cleaning fees higher relative to base prices.

Summary

KDI FOCUS Strategies for Refining the Jeonse Deposit Return Guarantee System

Jeonse, a housing lease model unique to Korea, has long served as a cornerstone of housing security for many families. However, recent significant fluctuations in housing prices have highlighted concerns such as underwater jeonse and reverse jeonse, amplifying calls for reform. A crucial step in addressing these challenges and ensuring the stability of the jeonse system is to expand the scope of the Guarantee for a Return of Jeonse Deposit. In pursuit of this, it is important to accurately reflect risks in return guarantees and to consolidate jeonse guarantees under the unified framework of the Guarantee for a Return of Jeonse Deposit.

- As a uniquely Korean housing rental system, jeonse has enhanced housing stability for ordinary families, but recent fluctuations in the housing market have exposed the risk of tenants not getting their deposits back.

- Approximately 8 million general households in Korea reside in properties owned by others under lease contracts. Of all jeonse and wolse transactions, jeonse takes up nearly half, underscoring its sustained significance for the foreseeable future.

- Jeonse prices started to decline in the latter half of 2022, a trend expected to persist through 2024, accompanied by increasing concerns about reverse jeonse.

- While the jeonse-to-price ratio based on the publicly disclosed value decreases as the property value increases, multi-household units consistently show higher ratios than apartments, implying that the former households are at a greater risk of not recovering jeonse deposits.

- The deposit return guarantee system ensures that if leaseholders fail to meet their return obligations, a guarantor agency will refund the deposit. Presently, guarantees from public guarantor agencies amount to around 170 trillion won.

- Due to a marked rise in guarantee-related incidents from 2022 onwards, the application requirements for the refund guarantee were tightened in May 2023.

- Low-priced houses are mostly excluded from the deposit refund guarantee due to stricter eligibility requirements.

- Regrettably, the jeonse deposit return guarantee system does not adequately shield vulnerable tenants from the risk of not retrieving their deposits, as the guarantee fee rate does not accurately reflect the actual risks involved.

- The Guarantee for a Refund of Jeonse Deposit (HUG) has a lower guarantee fee rate compared to other products, especially against the actual incidence rate of guarantee defaults. Hence, guarantee fee rates should be recalibrated to accurately represent risks, taking into account the actual default rates.

- Since recalibration of guarantee fee rates might increase the rates for lower-priced houses, short-term remedies targeting vulnerable households are necessary.

- As the Guarantee for Jeonse Deposit Loan can drive up jeonse prices by expanding jeonse loans, mitigation is necessary by mandating the purchase of deposit refund guarantees during jeonse loan acquisition process.

- A hybrid guarantee system that utilizes escrow not only ensures the protection of the tenant’s deposit but also allows for the application of LTV regulations, typically exclusive to home mortgages, across all housing types.

- In addressing the inherent weaknesses of the jeonse model, all related guarantee products should be consolidated within one unified framework while adjusting and differentiating guarantee fee rates.

- It is essential to expand the scope and availability of market price data for jeonse properties and strengthen the duties and responsibilities of realtors.

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