KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

KDI FOCUS Improving Regulations on Abuse of Superior Bargaining Position by Digital Platforms

Applying the current regulatory framework for abuse of superior bargaining position to abusive conduct (gapjil in Korean) by digital platforms presents two key challenges: identifying harmed parties (victims) and incorporating efficiency considerations. Requiring the identification of each harmed party imposes significant procedural burdens in handling platform abuse cases and may be inadequate to remedy actual harm. In addition, given the intermediary nature of platform services, unfair trading practices may yield direct benefits for other user groups besides victims. Therefore, it is necessary to improve the relevant systems to reduce the burden of identifying victims and to examine possibilities for efficiency gains.

- Concern over platform abuse runs high, yet regulatory frameworks premised on the superior bargaining position of traditional firms fail to capture the inherent nature of platform businesses, which generate both economic harm and efficiency gains.

- Discussions on platform regulation have increasingly focused on ex-ante solutions. However, given the complementarity between new and existing frameworks, strengthening ex-post enforcement against abuse of superior bargaining positions remains crucial to reflect the distinctive characteristics of digital platforms.

- In assessing superior bargaining position, key factors are the extent of dependence by the counterparty (Party B) on the superior firm (Party A) and disparities in their scale or capacity.

- The superior data capabilities of digital platforms increase the potential for abuse of superior bargaining position.

- The rapid pace of market change amplifies the risk of abuse through expanding monopsony power.

- Conversely, the smaller scale of platform-specific investment mitigates the risk of abusing bargaining position.

- Whereas market-dominant position is absolute, allowing firms to change trading terms regardless of counterparties, bargaining position is relative, varying with counterparties.

- Earlier rulings under the Large Retail Business Act imposed a lighter burden in identifying counterparties(Party B) when establishing a superior bargaining position, but the Seoul High Court has recently required individual specification of harm for each victim.

- For platforms, the authority to set and revise transactional rules substantially amplifies the potential for abusing their bargaining position through changing trading terms, but their role as general rulesetters limits their ability to exploit counterparties individually.

- Mandating the specification of Party B in cases involving abuse of a superior bargaining position by platforms is misaligned with the economic realities of platforms with general rule-setting authority.

- The intermediary role of platforms broadens the scope of direct stakeholders in platform transactions, creating the possibility that conduct seemingly exploitative toward certain users may instead yield direct and substantial benefits for users on the opposite side or in related positions.

- Because abuse of superior bargaining position by platforms can cause widespread harm across many parties, the burden of identifying harmed parties should be eased when common circumstances among them are sufficiently established.

- When harm among users becomes widespread, regulation should consider the impact on the trade practice to ensure that it reflects real economic conditions.

- Given the possibility for directly affected third parties to benefit from abusive practices by platforms, efficiency-enhancing effects should be examined during case review.

- Because the authority of platforms to set and revise general rules endows the absolute dominant position, it will be necessary to shift toward regulating
abuses of market-dominant positions in the long term.

Summary

Policy Study KOR A Study on Strategic Procurement

Around the world, public procurement is increasingly being designed to serve broader social objectives ― such as supporting disadvantaged groups or promoting innovation ― alongside its traditional economic goals. This trend is also gaining momentum in Korea. In this paper, we refer to the use of procurement to achieve these secondary aims as “strategic public procurement” and explore its potential benefits and costs. Specifically, we conduct an empirical analysis of strategic procurement practices that prioritize certain companies or products, with a focus on Korea’s purchase target ratio system. Our findings suggest that procurement aimed at fostering innovation can be economically effective, whereas evidence supporting procurement targeted at disadvantaged groups is less consistent.

Summary

KDI FOCUS Impact of SME-suitable Business Area Designation on the Korean Tofu Market

□ The SME-suitable industry designation scheme aims to foster the growth of Korea’s SMEs by restricting the entry or expansion of large enterprises. However, without a full understanding of specific business areas, the restrictive measures can undermine SMEs’ profit as well as consumer welfare. The scheme should be intricately implemented based on both prior investigation and ex-post analysis at product level. In the case that the prior investigation reveals little substitutability between SME-made and large enterprise-made products, it would be more prudent to not designate the business as SME-suitable. Additionally, business areas that are found to have suffered from a shrinking market and falling profits (SMES) via ex-post analysis should not be subject for renewal or extension.

- More than three years have passed since the designation scheme was initiated, but disputes over its efficacy are still ongoing.

- This study analyzes the economic effect of the designation scheme with the focus on the Korean tofu market, which is currently under intense debate over its suitability as a SME business area.

- Once designated as ‘SME-suitable,’ the business area is not accessible to large enterprises and their expansion is restricted for the initial three years.

- The point of the recent disputes was on the redesignation of soon-to-be expired industries. There were heated arguments about the pros and cons among large, medium- and small-sized companies.

- Analysis of the economic effects of the scheme must be conducted separately for each industry, reflecting the features of the companies and characteristics their products.

- The tofu manufacturing business has grown consistently until recently, but posted slowing growth in 2012 and negative growth in 2013.

- The declining rate of growth in the tofu market is caused by the slowing growth rate of the packed tofu market, due to the decreased sales of large enterprises affected by the designation scheme.

- Responding to the designation scheme, large enterprises reduced the production of domestic soybean tofu and expanded that of imported soybean tofu.

- Compared to imported soybean-based products, domestic soybean-based products are sold at a higher price and reap in smaller total profits, meaning that limiting sales will inevitably weaken the incentive to produce.

- As large enterprises expanded their production of imported soybean-based products, the market witnessed heightened competition and stagnated sales of SMEs.

- Since the scheme was adopted, consumer welfare has suffered a loss of approximately 2.4 billion won (5.5%) on a monthly average basis, or 28.7 billion won on an annual basis.

- Large enterprises are estimated to have experienced a loss of 19.5% in profit in 2014, compared to 2011. The drop is particularly steep in domestic soybean products.

- The designation scheme needs to be managed in a highly selectively, considering the characteristics of each industry.

- Ironically, the scheme developed with an intent to encourage the growth of SMEs has undermined the profitability of not only large enterprises but also SMEs.

- The designation scheme should be implemented with more finesse based on thorough prior market investigation and ex-post analysis at the product level and on product characterisitcs.

Summary

Policy Study KOR The Economic Effects of Designating Suitable Businesses for SMEs: the Case of the Korean Tofu Market

The controversy over designating suitable businesses for SMEs has been constantly raised in the last three years. Ex ante verification for selecting business was not enough to elicit agreements between firms, and ex post analysis of economic impacts of the institution has been insufficient. But still, new designation, reassignment, or rescission of businesses is repeated so that social discord over the system is likely to continue in the future. This study aims to empirically test whether the institution limiting entry or expansion of big enterprises would help improve competitiveness of SMEs.

This research is significantly different from previous studies, which analyzed a number of markets at the aggregate level, in respect of empirical approach, data, and methodology. We focuse on Korean Tofu market, which fits closely with ones’ daily consumption activities, and which has been the center of controversy surrounding this system. Also, this paper uses product-level data from which we can describe consumer preference and firms’ business strategies on price and product characteristics. Using a structural model consisting of supply and demand specification, we estimate consumer preference and producers' marginal and fixed cost function, and then run counter-factual simulation to see how market equilibrium and social welfare would be today without the system.

The results show that the institution possibly limits the growth of the tofu market, and that big enterprises’ reactions to the market constraints regarding product prices and characteristics can reduce profitability of SMEs as well as consumer surplus. Based on the findings, the paper recommends that the paradigm of the institution need to be changed from regulating big enterprises to setting up a fair and orderly market and to establishing a supporting policy contributing to enhancing SMEs’ product competitiveness.

Summary

KDI FOCUS Gains and Losses of the Mandatory Duration Regulation for Rewards Programs by Credit Cards

□ Introduced in 2010, the regulation obliging one-year duration for credit card rewards programs may have provided card companies with a cost-saving justification for terminating rewards program prematurely. In addition, the recently announced revision to the Regulation on Supervision of Credit-Specialized Financial Business prohibits card companies from altering rewards program associated with a card while the card is valid. This may have the side effect of leading card companies to offer fewer benefits and restricting consumer choices. To address this issue, it is suggested that card companies be encouraged to diversify expiration dates.

- According to the survey, around 76 percent of consumers pointed to rewards programs as major consideration in opening a new credit card account.

- When card companies enact a strategy regarding the duration of services, consumer responses matter most. Consumers also consider the company’s policy on maintaining rewards programs when selecting credit cards.

- Before the introduction of the one-year mandatory duration, the rewards programs of credit cards lasted over three years on average. This implies the mandatory duration may have been too short.

- Card companies could have shortened their rewards programs duration since the one-year regulation.

- When card companies decide on the duration of rewards programs, they are likely to have given serious consideration to the one-year regulation.

- Card companies now can terminate rewards programs while acting in compliance with the regulation and the terms and conditions for membership, and do so without showing concern for consumers or keeping "the bona fide (good faith) principle".

- It is likely that “sophisticated consumers” would sign up for fewer new cards than they may have before the regulation. The card companies have responded by reducing the duration of rewards programs.

- Under the revision, consumers are left with product characterized by (fewer benefits, long duration) combination. Such a restriction of consumer choice could worsen overall consumer welfare.

- Diversifying validity periods may eliminate uncertainties and restore consumer choice. Should this be encouraged, the flexibility of card companies to choose among various terms of validity could be the resolution to the welfare-loss issue.

Summary

Policy Study KOR A Study on Switching Cost Induced by Discount on Bundled Products: Including Rewards Programs by Credit Cards

When a consumer switching cost is not negligible, firms may consider the possibility that consumers could be captured and locked-in later. Then they often want to lure consumers using special marketing strategies such as mileage programs and/or special deals on new arrivals. The rewards program by credit cards can be understood in the same vein, since it sometimes costly for consumers from one credit card to another. This work studies credit card companies’ optimal choice of duration when the reward program is maintained, and shows that the minimum duration regulation by the regulation authorities might be rather harmful for consumers. Due to the regulation, the firms are able to attract more consumers, especially the ones who were not buying since they believed the reward program would be terminated soon enough. Given the newly increased demand, however, firms have more incentives to reduce the length when the reward program is maintained.

Summary

Research Monograph KOR Improving the Regulatory Framework of Professional Services in Korea

Korea’s manufacturing sector is leading the nation’s economic growth with its world-class technological strengths. On the other hand, the service sector has lagged far behind the manufacturing, and the gap between them continues to widen over time. The slow productivity improvement in the service sector has had an adverse consequence not only for the overall economic growth but also for job creation and income distribution because of the relatively labor-intensive characteristics of the service sector.

The high competitiveness that the manufacturing sector is enjoying today is attributable to the competitive pressure that domestic firms have faced during their expansion to foreign markets and the enormous amount of investment that they have made in research and development. If there had not been challenges rising from overseas competition, domestic firms would not have had the incentives to enhance their competitiveness.

On the contrary, the service sector has been mostly protected from overseas competition thus far. Domestic competition has been also weak due to various regulations. Professional services as provided by doctors, lawyers, accountants, and other licensed professionals are a case in point. The government has long maintained tight regulations on the market entry and business activities in these sectors, reducing the competitive pressure between service providers. The low level of competition at home and abroad is believed to be one of the most critical factors behind the low level of competitiveness of Korea’s professional services today.

The stated goal of the regulations on professional services is to protect consumers. In fact, however, they appear to have done greater harm than good to consumer welfare as they weakened market competition and reduced the incentive on the part of service providers to lower prices and improve qualities. Most notably, they have failed to deliver adequate consumer protection because they were not supplemented by an effective mechanism to penalize bad quality services and help consumers to make an informed choice on providers.

The most important task is therefore to intensify market competition and streng then consumer protection through regulatory reforms. The latter consists of two parts; (1) abolishing unnecessary regulations on market entry and business activities, and (2) establishing a proper mechanism for quality assurance of individual service providers. This study aims to propose options to improve the regulatory framework of professional services from this perspective. As the first comprehensive study in this field in Korea, this study bears a significant policy implication.

Summary

Research Monograph KOR Regulatory Reforms to Improve Business Environment

Introduction
While the Korean economy is best known for its unprecedented rapid economic growth for the last forty years, it has been frequently criticized that the business environment in Korea is not particularly
favorable. Regulatory reform has been always pointed out as an imminent agenda to improve the business environment and enhance the efficiency of the economy.

Therefore, the nation exerted strenuous efforts to reform the regulation system since the mid-1990s and achieved some visible outcomes. Nevertheless, there has been strong resistance against the reform because of a temporary inconvenience or loss produced during the reform process. In addition, it has been pointed out that the outcome of the regulatory reform was not fully appreciated and utilized by economic agents.

This research monograph consists of 12 independent chapters, which are devoted to the issue on how to improve business environment of Korea, in particular, through regulatory reforms. These 12 chapters are categorized into four parts by topics. Three chapters in Part I review the history of regulatory reform in the nation, and discuss how to introduce more advanced and developed regulation reform. Five chapters in Part II analyze regulations binding business activities, and suggest the direction of reform to improve business environment. Part III consists of two chapters, where the first chapter investigates regulations related to transaction or trade, and the second chapter analyzes the effect of corporate tax on firm’s performance. Two chapters in Part IV revisit the topics related to the importance of regulation reform showing that how explicit or implicit regulations may affect industry and economy’s performance. Part IV emphasizes that the regulatory reform should be continued for further sustained growth.

1. A Critical Review of Regulatory Reform in Korea | Kwang Eon Sul

Background and Purpose
Since the early 1960s, Korea has made remarkable economic growth initiated by the government. As the private sector matured in the 1980s, excessive intervention by the government and regulations that followed as a result of such intervention were seen as obstacles to productivity and national competitiveness. In the last decade or so, there has been an increasing awareness that many of these regulations have inhibited healthy competition while increasing business costs. In some cases, the consumer’s choice of suppliers and products was unnecessarily constrained.

Main Results
The regulatory reforms, in earnest, began in the 1980s. The Chun Doo-Whan Administration tried to promote competition among businesses by knocking down tariff and other trade barriers and by withdrawing government intervention in market prices. The Monopoly Regulation and Fair Trade Act was also enacted and took effect in the early 1980s to promote competition in domestic markets. The successor, Rho Tae- Woo Administration, drove to lessen individual regulations in industries, which were closely related to the daily lives of the citizens.

The regulatory reform driven under the Kim Young-Sam Administration focused on administrative simplification and deregulation on business activities reflecting the progress of democratization and liberalization. Several reform bodies such as the Presidential Commission on Administrative Reform, of which members were composed of civilian experts, were established and played leading roles in dealing with a wide range of reform issues including deregulation.

The Basic Act on the Administrative Regulation was enacted in 1997 in order to pursue regulatory reforms more systematically throughout the government as well as to institutionalize them. The Act was a product drawn from experiences and lessons from government reforms of the past, focusing on regulatory reform by reinforcing the weakness of the fragmented and dispersed approach to regulatory reform in the past. Based on this law, the Regulatory Reform Committee (RRC) was established under the President in 1998 at the beginning of the Kim Dae-Jung Administration. Since then, the RRC has played a leading role in carrying out regulatory reforms.

The former president, Kim Dae-Jung, made it a priority to pursue regulatory reform in order to overcome Korea’s financial crisis. The RRC and all the ministries have made concerted effort to get rid of unnecessary regulations and improve the quality of existing ones. The Kim Dae-Jung Administration made strenuous efforts on regulatory reform and made substantial progress particularly in reducing the number of regulations. The RRC reviewed almost all the existing regulations and abolished more than half of the nearly 11,000 existing regulations in 1998 and 1999. The RRC found 2,382 regulations without legal basis and abolished 86% of these and left 14% to establish a legal basis. There is no doubt that it made substantial progress in regulatory reform. However, it was also true that there were still much to do to improve the quality of Korea’s regulatory reform.

The Rho Moo-Hyun Administration has taken actions to review all the existing regulations and to improve their quality. The government has been concentrating on these areas which have greater impact on business. It established the Special Task Force for Regulatory Reform, which consists of 50 people from the private sector and government ministries, to focus on existing regulation, whereas the RRC reviews proposed new and amended regulations. The task force concentrates primarily on reviewing compound/bundled regulations to improve their quality. The president checks the progress made by the task force at the Regulatory Reform Council, in which he presides.

Despite the substantial achievements that the government has made so far in regulatory reform, the majority voice of the business sector is not satisfied with the government’s performance. There are three reasons for low gratitude on the people’s part. First, the government carried out regulatory reform mainly focusing on reducing the number of regulations while leaving the compound or complicated regulations untouched. This approach limited the impact of regulatory reform and has become the primary cause of people’s dissatisfaction. Second, there has been a steady increase in the number of regulations, which reduced the effect of regulatory reform. Third, the way that the government officials deal with civil applications has something to do with the public’s frustration. Government officialsoften refuse to provide requested permits or delay the process of applications, demanding more document or materials.

Conclusion
The mixed purpose of regulatory reform misled and distorted the direction and the nature of regulatory reform. The successive Korean governments have considered regulatory reforms as part of an economic stimulus package. They have, therefore, not aimed at promoting competition and making the economy more efficient and open, but they have tried to improve the business environment
of existing businesses by eliminating bureaucratic intervention and red tape. When the economy was in recession, the regulatory reform was always an important issue for boosting the economy. However, if the economy recovers from the recession, the regulatory reform is no longer an object of the government’s concern. This is a major reason why the regulatory reform in Korea has had a limited success. A successful regulatory reform requires a right goal, proper policies, and the administrative machinery to carry them out, backed by concrete political support.

2. Regulatory Policy in OECD Countries: Its Trends and Implications | Sanghoon Ahn.MoonJoong Tcha

Background and Purpose
While the Korean economy is well known as one of the most successful countries that achieved rapid economic growth for the past forty years, the business environment in the nation was not particularly favorable. Regulatory reform has been always pointed out as an imminent agenda to improve the business environment and enhance the efficiency of the economy. This chapter reviews recent discussions in OECD countries on regulatory reform and compares recent developments of regulatory policy in OECD countries based on case studies and various regulation indicators, aiming to obtain policy implications for improving regulatory policy in Korea.

Main Results
Recent discussions on regulatory reform policy in OECD countries underline the importance of openness to global competition and the necessity of regulatory reform in service industries (e.g., distribution sectors, professional services, and network industries). Some concrete progresses were reported in reducing administrative burdens and improving efficiency in the public sectors. On the other hand, some country cases showed that regulatory reform was delayed in sectors such as professional services, distribution, and agriculture. Some other cases showed that a poorly designed regulatory reform could create serious problems.

Regulatory indicators suggest overall improvement in OECD countries since the late 1990s. Korea made a substantial progress during this period, but indicators also reveal that the degree of regulation is still higher among OECD countries in 2003. In OECD countries, it was observed that competition-hampering effects of regulation are bigger in non-manufacturing sectors.

Conclusion
All in all, it is expected that regulatory reform will continue to have a high priority in the list of major tasks for structural reform in OECD countries. The positive effects of regulatory reform would be substantial, especially in non-manufacturing sectors and in some high-tech manufacturing sectors which used to be relatively less exposed to competition.

3. Innovating the Regulatory Reform in Korea: Searching for Reformative Regulations | Iljoong Kim

Background and Purpose
The purpose of this research lies in providing innovative and substantive perspectives in order to drive the regulatory reform in full force in Korea, which has not been as successful as intended. Such perspectives, if in principle designed to be a long-term blueprint, are expected to be readily transferred into a workable guideline as well in a relatively short-term time span for relevant policymakers.

This work was launched initially upon observing a few mistaken views (or preoccupation) prevailing in Korea with respect to the substantive essences of “regulatory reform.” Taking account of such misunderstandings first would thus be critical to further suggest substantive guidelines for the future regulatory reform. Subsequently, this research focuses extensively on how to find an optimal
control device among many to contain a certain problem. In other words, the major tenet of its contribution is believed to deliver a strong message to all of us that “innovating the current state of regulatory reform” shall be equivalent to “searching for new reformative regulations.”

Main Results
The work consists of four sections. Section II rectifies the aforementioned misunderstandings about regulatory reform: For instance, “Regulatory reform is simply to resolve filed grievances from the private sector,” “Regulatory reform is identical to repealing existing regulations,” “‘Social regulations’ need to be strengthened, while ‘economic regulations’ should be curtailed,” and “frequently encountered wrongful causations between some deregulation undertaken and a subsequent occurrence of mishaps,” to name a few. This section then reviews the law and economics theory as to any regulation’s inherent relationship with (restricted) private property rights, which accordingly leads to a premise that sound regulatory reform must be based on strict constitutionalism.

Section III highlights the “regulatory taking” doctrine to feature a solid constitutional basis mentioned above. The regulatory taking doctrine originates from the “taking” clause, which is in fact stipulated in.23-3 of the Korean Constitution. Six critical and very sensible elements of regulatory taking are elaborated. These elements can be used by deregulatory agencies, courts, or even regulatory agencies in closely scrutinizing whether a certain (form of) regulation is justified; if not, the regulation will be repealed or changed to some alternative form. To emphasize their ready applicability, two cases (one currently existing regulation and a previous court judgment) are analyzed based on the six elements.

The last two sections concentrate especially on the task of “searching for reformative regulations.” Section IV starts with an important but easily neglected proposition that there exist a variety of social control methods dealing with a specific problem (say externality) arising in the market. More specifically, the following four sub-propositions are carefully demonstrated: a) there are distinctive advantages and disadvantages in the usual government regulation (i.e., “ex ante regulation”) and the liability rules (i.e., “expost regulation”); b) the exclusive use of one of these is hardly efficient except under very
special circumstances; c) a combined use of both can frequently be optimal; and d) exerting efforts to find an optimal combination (i.e., “reformative regulation”) is the backbone of the innovative regulatory
reform. Again, with the purpose of showing the applicability of these propositions, an experimental analysis is undertaken for the entire regulatory system governing the Korean securities market currently, indicating in turn a lucrative potentiality and the desired direction of further future research.

Motivated by the foregoing discussions on optimal regulatory methods, Section V goes one step further theoretically and empirically, featuring c) and d) above in particular; even in the case where ex post regulation theoretically causes some defects, considering ex ante regulation’s prohibitively high enforcement costs, an exclusive use of only the former can often achieve a higher level of efficiency. Again, for an illustrative purpose, tentative statistics are presented against the existing regulation requiring regular auto-safety inspection in Korea, although more rigorous costbenefit studies are imperative to warrant a more concrete conclusion.

Conclusion
The preceding research results particularly concerning regulatory choices can readily be implemented into the various stages of on-going deregulatory processes. Better yet, the endeavor to pinpoint an optimal social control will be beneficial to policymakers as well who, due to an emergence of varying market conditions, should introduce new regulatory instruments somehow. Innovating regulatory reform will strongly require the active participation of all three branches of the government (i.e., executive, legislative, and judiciary bodies). Particularly, it appears that there is a huge potential of contribution
on the part of the judiciary. Courts are entitled to the judicial review power as stipulated in .107-1, .111, and .107-2 of the Korean Constitution. Through judicial review, they can either get rid of nefarious
government regulations or help make them more efficient, for example, changing an ex ante regulation into liability rules. After all, it is of utmost importance for everyone to believe in and try to substantiate the penetrating ideas underlying the equation, “Innovating regulatory reform = Searching for reformative regulations.”

4. The Present Condition and Recommendations for Regulations of Startups | Kwang-Hee Kim

Background and Purpose
Starting a business plays a key role in economic regeneration and job creation. However, recent data show that the number of new startups in Korea is in a downward trend. This study has following intentions: To grasp the present regulation status of startups in the business sector, to identify and emphasize the reform that will promote startups, and finally suggest some solutions.

Main Results
■ Commercial startups without plant establishment | It requires ten steps of cumbersome procedures to establish a corporation and about 26 separate paperwork to complete these steps. In addition, it costs 195,000 Korean won to process the work including notary costs, buying public bonds, and stamp taxes.

Moreover, according to the minimum capital requirement system (50 million won) under commercial law for establishing a corporation, startups must set up a special deposit account in a bank to be eligible to receive the certification of paid-in capital, which is required as an attachment when applying for the registration of entry business. However, in most cases, startups temporally use private
debt instead of deposits. The reason for causing camouflaged-payment on a paid-in capital comes from wrong procedures. Changing the incorporation flotation procedure can easily solve this problem.

■ Industrial startups with plant establishment | It takes 499 days to fulfill necessary procedures from securing sites to completing business registration, and even though the terms of seeking site and constructing plant are excluded, it takes 179 days to implement necessary administrative procedures. When starting a business in the manufacturing industry, reforming regulations on location is a key solution, because 45% of the major regulations are related to plant site and most complaints come from individual locations.

Conclusion
In relation to regulation reform on incorporation business, the most crucial point is to find a way to simplify necessary procedures and paperwork by allowing the applicants to register on-line using the Internet and issue appropriate registrations on-line as well. As a model, in Canada, an entrepreneur submits registration form via online and registers at the tax office by obtaining a business number.
With this simple registration, the necessary registration process is completed.

Regulations on location concern the interests of two parties: One who wants to develop and one who protects the environment. Therefore a “proper regulation” through a compromise between both parties is needed.

In the case of selecting locations, irregularity of individual locations causes various problems and an increase in civil appeals, leading to more regulations. As an alternative, activating planned locations is suggested because this would reduce exceeding regulations related to overflooding plants, environmental permits, and startups. Therefore, inducement of activating planned industrial complex for the private sectors should be considered.

Last but not least, the government needs to have an accurate view on the necessary procedures, associated time, and cost by enhancing the transparency of startup procedures. Offering a guidebook, both on- and off-line, for starting a business would make the startup procedures more comprehensible, raise its transparency, and predict the results. Furthermore, it is of the utmost importance to launch an on-line system of business registration that will alleviate the frustrations faced by startups.

5. Locational Regulation on Industrial Site in Seoul Metropolitan Region | Sang-Cheol Lee

Background and Purpose Much controversy surrounds the effects of locational regulation on the industrial site in Seoul Metropolitan Region. One group of observers argues that resources would be allocated inefficiently due to the regulation, reducing external economies of agglomeration. Another group, however, highlights congestion problem from the diseconomies of agglomeration and regional
imbalance problem between Seoul Metropolitan Region and the other regions, and advocates locational regulation as a solution for these two problems.

Recently, as construction of new administrative city and relocation of public institution are underway, improving the existing locational regulation in Seoul Metropolitan Region becomes the center of public interest.

Main Results
This chapter approaches this issue by examining the effects and limits of locational regulation in Seoul Metropolitan Region for the last 20 years, and highlights the roles of metropolitan area as a consumer city as well as a producing city. And, it also focuses on the role of Seoul Metropolitan Region as an incubator for the startups, which are mostly knowledge-based ones.

Present locational regulation on industrial site cannot be the best solution for the congestion problem, if it insists on the locational regulation of manufacturing firms. Industrial structure of Seoul Metropolitan Region is changing rapidly. Seoul Metropolitan Region is transforming from the center of manufacturing towards the center of service, and non-manufacturing activities are very vigorous.
On the contrary, the size of manufacturing firms are becoming smaller and smaller in Seoul Metropolitan Region, partly because of locational regulation of manufacturing firms.

Conclusion
More and more small firms and startups are heading for Seoul Metropolitan Region, due to both localization economies and urbanization economies. But unfortunately, Seoul Metropolitan Region lacks the ability to spillover scientific and technological knowledge, which would be an essential ingredient for the knowledge-based startups to grow sustainably.

6. Examination of Employment Regulations on Hiring, Firing, and Labor Management Relations | Yong-seong Kim

Background and Purpose
In order to secure economic competitiveness in the international market, the Korean government introduced and carried out various reform measures in the labor market. In spite of enormous efforts to
enhance the labor market flexibility, many international institutions still pointed out many areas need to be improved. The Tripartite commission consisting of the representatives from the government, business, and labor unions has discussed the issues of temporary non-regular workers, and based on the results the government is now preparing the new labor legislation. In addition, the ‘Roadmap of Labor-Management Relations’ was announced and made suggestions for 34 items. Unfortunately, however, the legislation for temporary non-regular workers is still a controversial issue between the management and workers, and the implementation of the Roadmap is uncertain. This study reviews the various regulations in the current labor laws and suggests some alternatives in order to enhance the labor market flexibility.

Main Results
The study begins by briefly surveying the employment regulatory reforms in the case of developed countries and Korea and proceeds to identify what and how to reform in the current situations. First, it reviews the employment regulations regarding hiring and firing workers, and makes some suggestions. The second part deals with the issues of temporary non-regular workers. It analyzes the trend of temporary non-regular workers over past several years and discusses the matters on the duration of contract, and discrimination against temporary non-regular workers. The final part is assigned to
labor management relationship. It explains the ‘Roadmap for New Industrial Relations.’

The main points of the study are as follows. Currently, the employment regulations on hiring and firing workers enforce 60-days notification period before dismissals. However, it is desirable to introduce
a flexible notification period depending upon the size of dismissals. Moreover, the criminal disciplinary provision against unfair dismissals needs to be removed since its effectiveness is in doubt. Instead, economic punitive measure may be considered without causing excessive economic burdens on employers. The current system is insufficient to protect workers in the event of firing. By guaranteeing workers’ defensive rights and by introducing mandatory reconciliation system in the process of firing, unnecessary prolonged disputes over dismissals between employers and workers can be minimized.

Given the tensions between employers and labor unions, it is urgent to address issues of temporary and non-regular workers. In spite of increasing concerns about temporary and non-regular workers,
there is no consensus on the proportion of these workers in the labor market. This is partly because the definition of temporary and non-regular workers is ambiguous. Therefore, it is necessary to clarify the definition of temporary and non-regular workers so that the policies can precisely target these groups of workers. To prevent abuse of temporary and non-regular workers by repetitive contracts, it is important to set a term limit in contracting workers. However, specific terms and duration of contract need to consider various aspects such as types of employment contract, and the possibility of rehiring. Another issue is the discrimination against temporary and non-regular workers. Although it is unquestionable in principle to prohibit discrimination in the labor market, its implementation is not easy. Reasonable approach is to first remove non-wage discrimination (such as social insurance coverage) between regular and non-regular workers and then to solve the wage discrimination gradually.

To build credibility in international society advanced and peaceful labor-management relation is top priority. As of 2006, the labor union law allows enterprise-level multiple unions. However, there is no agreement on how to carry out collective bargaining in the multi-unionism era. Unification of negotiation window is essential and the union representative must be selected in a democratic way such as
majority or proportional rule. Employer’s payment support for full-time union representatives is controversial. In principle, it is undesirable for one party to provide monetary remuneration to the other party in the negotiation. However, given the financial fragility of small- and medium-sized enterprise unions, the employer and union workers need to share the cost of full-time union representatives for the time being. Employer demands ‘right to operate business’ by the use of replacement workers in the event of a strike. Allowing replacement workers, however, incurs unnecessary tension between the management and union workers. Accounting for this aspect, it is advisable to consolidate the principle of ‘no work no pay’ so as to share the cost of labor disputes fairly between employers and workers.

Conclusion
This study reviews employment regulations in the Korean labor market and focuses on the issues of hiring and firing workers, non-regular workers, and labor-management relations. Several cases from developed countries are also surveyed. Suggestions are made in order to improve labor market flexibility. It is important to keep in mind that legal and institutional settings are necessary conditions for the better labor market system. Breaking bad customs of long standing and building confidence among the labor market participants are much more crucial.

7. Competition Policy and Investment Efficiency | Insuk Cheong

Background and Purpose
Investment incentives are determined by various market characteristics and effects. Appropriability and various investment competition effects (business stealing effect, preemption effect, and efficiency effect) encourage firms to invest, while technical spillover and replacement effect discourage. Intensified product market competition may increase or decrease incentives to invest. As a result, the resulting investment level in competitive market may be either excessive or insufficient from the social point of view.

Main Results
There are two regulatory approaches in the context of competition policy: ex ante and ex post regulations. It may not be easy to specify clear and detailed rules on ex ante regarding which actions should be allowed or disallowed. The reason is either that the welfare effect of firms’ actions may depend on specific environments, or that different economic agents are affected differently by the actions. The latter problem may be resolved by clear policy goals like maximization of total surplus or consumer surplus. The former problem cannot be fully handled by detailed ex ante regulatory rules which on the contrary
may result in two types of policy errors; that of restraining desirable actions and that of not restraining harmful actions. It is advisable to specify simple rules and principles of ex ante regulatory approach
and strengthen ex post approach.

The policy on Chaebol needs to be reformed in such way to weaken ex ante rules and restrict policy intervention to the cases where specific firm actions caused clear harmful effects on the society. ‘Unfairness’ in the restraint of abuse of market power should be interpreted as anti-competitiveness, and that in the restraint of unfair trade behaviors should be restricted as violating the social norms or ethical codes. On telecommunications market regulation, rigid and political rate-setting process reduces incentive to invest in local telecommunications markets, and asymmetric regulation in the mobile sector discourages and distorts competition and investment incentives.

Conclusion
Rigid and political rate-setting process reduces incentive to invest, and asymmetric regulation discourages and distorts competition and investment incentives. Desirable policy intervention as to investment decisions will be to decentralize individual firm’s diverse decisions as long as they are not very likely to disrupt lively market competition.

8. An Innovative Approach to Environmental Regulation | Jong Ho Hong

Background and Purpose
Environmental problem is an exemplary case of market failure, which allows for market intervention by the government. There can be, however, many approaches to the extent and method of the intervention. While understanding the importance of integrating environmental performance and creative firm activities to attain sustainable development, the purpose of this chapter is to design the
future direction of environmental regulatory policies of Korea. An innovative approach, such as information-based incentive mechanisms, will be introduced and investigated.

Main Results
Based on Korean environmental laws and government documents, the current status of Korean environmental regulatory policies is investigated in relation to starting businesses and firm activities. It can be said that most of the regulatory measures fall in the category of command-and-control approach, which may not necessarily be desirable in providing the right incentives for the firms to improve their environmental performance.

As an alternative, the mandatory environmental information disclosure program is introduced. It is a structured information release program by regulatory authority relying on non-regulatory measures to create incentives for firms to improve their environmental performance. To explore the effect of the release of Monthly Violation Report (MVR) by the Ministry of Environment of Korea, the event-study methodology is used to see the extent to which investors react to environmental news.

The result shows that, of those events with negative market reactions, the average percentage reduction in market value has been calculated to be 9.7%. This average reduction in market value is much higher than results obtained in Canada and the United States. This would tend to say that capital markets in developing countries may attach a greater premium to information which otherwise may generally not be as readily available as in more developed markets.

Conclusion
A more innovative approach to environmental regulatory regime is needed to enhance the effectiveness of environmental policies and to integrate company’s economic and environmental performance. An environmental disclosure program, unlike the traditional command- and-control regulatory approach, can provide a viable option to this cause. Korea’s environmental policy can be benefited from shifting to more flexible and incentivebased regulatory alternatives such as information disclosure program.

9. Trade Regulation: Regulatory Reform and Competition Policy | Jae Hyung Lee

Background and Purpose
This paper aims to evaluate the regulatory reform performance and the factors that contributed to the rapid progress in the area of trade in Korea for over the past 20 years. Presently, the effects of comprehensive regulation in the field of trade are almost nonexistent, hence firmly establishing trade rules that will enhance competitive market order is the utmost importance. Therefore, this paper reviewed the relationship between government regulations and competition policy on trade in order to examine the ways to improve the future trade policy reform.

Main Results
In general, trade denotes the balance between supply and demand in the market and hence, it is the fundamental activity of business in the market. However, many concerns about the scope and speed of regulatory reform currently underway are raised, although the reform efforts in the area of trade have produced remarkable results over the past two decades. This negativity can be seen mainly due to the fact that business trade is an area where the market factor plays a influential role and regulations can be overcome by changes of economic environment and conditions, and the dynamics of the market, as well as the changes in the mindset and attitudes of market participants whereas regulations in other areas depend more on the system than the market forces.

Regulatory reform in the area of trade has been pushed by three different forces: 1) the market forces overriding regulations, 2) continuous regulatory reform, and 3) the introduction and development of competition policy.

The regulatory reform in trade shows great improvement from the past although the degree of advancement differs according to different industrial sectors. Therefore, what is necessary in the future in this area is a more sophisticated method of regulatory reform and the fine-tuning of policies to streamline existing regulations to meet the needs of different industrial sectors and markets, rather than a fundamental overhaul of the present framework of regulations. This will create demands for better policy development capabilities. In the past, reforms that took a general and fundamental approach were more prominent, but in the future, more detailed and proficient approach will be required in order to enhance the quality of policies.

Conclusion
This paper focuses on the three major tasks of regulatory reform in trade centering on competition policies: 1) countermeasures for restraining competition in connection with administrative guidance, 2) improvement in regulatory measures against unfair trade practices, and 3) resolution of problems involving business associations and government-led cartels. These tasks can be met using the basic idea of regulatory reform. The objective of regulatory reform is to enhance the efficiency and dynamics of economy through fostering competitive market environment. In pursuing this goal, regulatory reform and competition policy are the two wheels of a same wagon. While regulatory reform streamlines government regulations, competition policy sculpts private regulations. The market economy will be
advanced with the two policies supplementing each other producing a significant synergy effect.

10. Industry-level Tax Regulation and Its Impacts | Tae-Jong Kim.Young Lee.Taeyoon Sung

Background and Purpose
This chapter measures the industry-level differences in tax burden by using the OSIRIS database which provides the balance sheet data of 30,000 firms in 120 countries. Given the estimated tax burdens, we also analyze the impact of industry-level tax burden differences on the growth of total economy and each industry. From the analysis, we could provide the policy implications in terms of taxation, regulation, and industrial and economic growth.

Main Results
The main results and policy implications of this analysis are as follows:

First, the effective corporate tax rate is about 29% in the 2000s, which is in the middle range. Since the 1990s, the effective corporate tax rate dropped rapidly due to lower legal tax rates. In the 2000s, we could also observe the reduction of corporate tax rates in other countries. Particularly, in Hungary, Taiwan, Hong Kong, and Singapore, lower effective corporate tax rates are considerably notable.

Second, we could find only little evidence on the industrial policy through taxation, compared to other countries. After the late 1980s, discriminative taxation has been significantly reduced. Internationally, the degree of discriminative taxation at the industry level shows cross-country differences significantly. Specifically, Asian countries show a higher degree of discriminative taxation at the industry level, while the U.S., the U.K., Germany, and Japan show lower levels.

Third, the depreciation rate was quite low in Korea but recently, the depreciation rate has been increased up to 3.7% against assets. However, this level is still quite low compared to the international average. This provides a policy implication that we need to find out the reasons why corporations are not fully utilizing the depreciation scheme. Fourth, the industrial policy or industry-level distortion
through taxation could induce an increase in the industry output. However, the policy does not enhance the economic growth of total economy. This indicates that the impact of industrial policy on economic growth is not positive, at least in the case of industrial policy through taxation. Finally, in Korea, we could observe low effective tax burden in the finance, technology, and energy sectors, but high effective tax burden in telecommunications, medical industry, and utilities.

Conclusion
Since the differences in industry-level tax regulation indicate some sort of industrial policy through taxation, this study can be interpreted to measure a kind of industrial policy and its impact on economic
growth and industrial output. The effective corporate tax rate was about 29% in the 2000s, which is in the middle range. Since the 1990s, the effective corporate tax rate dropped rapidly due to lower legal tax rates.

11. Analyses of the Effects of Regulation on Industrial and Economic Growth | Sanghoon Ahn.MoonJoong Tcha

Background and Purpose
This chapter analyzes the impacts of regulation on economic growth. It is conjectured that regulation has a strong influence on business activities, and hence, an effective improvement in regulation could work towards enhancing and sustaining long-term growth of an economy as well as industries. At the industry level, this chapter looks into the links among entry regulations, the entry rate, and the growth rate of each industry. At the cross-country level, this chapter investigates influences of regulation on economic growth using IMD’s data covering 42 countries.

Main Results
From industry-level analyses, we found that the regulations on entry have substantial deterring effects on entry. It is also shown that growth of an industry (in terms of establishments’ number, shipment, and employment) is strongly affected by entrants to that industry. It means that the entry regulations tend to have negative effects on industry growth by hampering entry and competition.

This study also uses country data published by IMD, and shows that (explicit) regulation affects the economic growth of nations. The quadratic relationship between regulation indexes and economic growth indicates that countries with few regulations do not necessarily grow faster than those with more regulations to some extent, while countries with many regulations are found to grow slower.

Conclusion
The main contribution of this study includes that this is one of a few studies which quantitatively examine the effects of entry regulations to industry growth, using the Korean data. In addition, as it is
believed that firms’ and industries’ growth is closely related to growth throughout the whole economy, in general, regulations are supposed to have negative effects on economic growth. This study explores this possibility, and confirms the relationship between regulation and growth.

12. Social and Institutional Environments as Implicit Regulations and Economic Performance | MoonJoong Tcha

Background and Purpose
Recent rapid changes that Korea has experienced include intensive reforms of social and institutional environments. Social and institutional customs and variables are known to affect economic environments, and work as indirect regulations on firms. Scholars and researchers have been interested in these phenomena and analyzed the effects of these variables on economic performance.
While the detailed results are different across individual research depending on countries, variables, and periods observed, they, in general, support the view that some social and institutional variables affect economic performance through various channels. This study concentrates on the effect of corruption, as an exemplary variable of implicit regulations, on a range of economic activities. International Country Risk Guide (ICRG) data are used for empirical analyses, and implications for Korea are drawn out.

Main Results
The study uses both theoretical and empirical analyses, and provides several results. First, a theoretical analysis indicates that when corruption plays a role in the entry regulation, it may decrease the output of firms which already entered and operate in the industry, as well as decrease the total output of the industry. Further, profit of a firm also may decrease due to that implicit regulation. Second, implicit regulations such as corruption distort the intertemporal consumption behavior of consumers.

Third, an empirical analysis shows that corruption and economic growth are somehow related, while there is no evidence that the relationship is linear. This result may arise because the corruption
variable used is an “index.” Nevertheless, given the results, it is shown that the level of corruption Korea maintained during the 1990s and early 2000s was, in general, high, which strongly implies that if some were removed, the growth rate could have increased. Also the relationship between corruption and economic growth found in this study indicates that growth rate slows down in the process
of removing corruption.

Conclusion
From these results, it is suggested that the possibility of higher growth may have been lost due to implicit regulations such as corruption. A higher growth rate will be obtained if the existing implicit regulations in the form of social customs and institutions are removed. The results also suggest that patience and continuous efforts to fight corruption should be needed as a temporary slowdown of the economic growth may be experienced when corruption is being eliminated.

Summary

Policy Study KOR Economic Analysis of Regulation on Market Activities: From the Competition Policy Perspectives

1. Introduction

According to the Korean Regulatory Reform Committee, there are 7,722 official regulations in Korea as of December 2004. A majority of these regulations relate to economic activities. On the other hand, some of these regulations were introduced for a specific purpose of protecting a certain relevant party without proper understanding of its effect on the economy or competition as a whole.

During the industrialization era, it was a common practice to adopt policies that mainly benefited the interests of producers. However, in the era of services or service-based economy, the possibility of such policies playing the impeding role to growth and innovation would increase if left alone. Excessive protection of producers and industries, which distorts the market equilibrium, may deteriorate the economy’s structure and competitiveness.

There are, of course, cases where the economic costs induced by anti-competitive regulations are worth to pursue or even inevitable due to international relationship. However, the problem lies in the fact that not enough attention is given to such costs during the policy-making process, and such decisions are not based on accurate comparison between the benefits and costs.

2. Synopsis

Based on this background with current situation given, this study tries to evaluate selected cases of such regulations on market activities from the perspective of competition policy using simple theoretical models though under very limited assumptions. The cases selected are prohibition of shuttle bus provision by department stores and fixed price regulation imposed on books.

In each analysis, the overview of the regulatory status and related industry, in addition to the survey of related literature is provided. Based on such understanding, economic model is constructed so that the economic impact of pertinent regulation could be analyzed. The models used in the analysis are neither unique nor completely innovative. The goal of using a theoretical model is in the provision of common and objective language. From this regard, as long as the model can handle the central issues at hand, the simplest models are adopted. In both cases, the horizontal product differentiation models are used so that the diverse preferences of consumers and retail channels could be reflected in the analysis. The analysis intends to estimate the direction of economic effect of regulations on consumer surplus and social welfare. Policy suggestions are derived from the result of theoretical analysis.

First, the analysis concludes that the prohibition of shuttle bus provision by department stores, an example of regulation imposed on non-price marketing activities, is likely to decrease the consumer surplus and social welfare as a whole. Considering the fact that the assumptions taken can be considered not too far apart from the reality, following implications could be derived. The provision of shuttle bus would actually diminish the difference between the departmental stores and local supermarkets thereby intensify the price competition. As a result the consumer surplus would increase in the relevant market, while the profits of both department store and the local market should decrease. This means that if we focus on the relevant market, no incentive can be found for the department store to provide shuttle bus service.

Considering the fact that the department stores actually provide the service in reality, there must be some other reason that is not directly considered in the model. The analysis seeks the potential explanation in another market where the department store allures the consumers without confronting the competition from the local retailers. As long as there are multi-markets, and in some of the markets the department store operates as a monopolist, there could exist some incentive for the department stores to provide the shuttle bus service since the additional profit from such monopoly market may exceed the loss from the intensified competition in the competitive market.

Such behavior by the department stores should enhance the welfare status of consumers, as well as increasing the profit of department store. The only party that stands to loose from such provision would be the local retailers. However, their loss should not be included in the societal loss because they are mere transfer of welfare from the retailers to the consumers.

Considering the aforementioned, the introduction of prohibition of shuttle bus provision could be considered as a policy that deteriorates both the consumer surplus and societal welfare level. The intervention by the government in such a market in an attempt to protect the local retailers cannot easily find its rationale in the traditional economics.

The fixed price regulation, a form of resale price maintenance, imposed on books is an example of price regulation. This also can be concluded to adversely affect the consumer surplus and social welfare except under a few very restrictive conditions. Even when such conditions are met, increase in the social welfare from the fixed price regulations are mainly from the increase in the profit of retailers. The consumer always suffers from the introduction of such regulation.

First, the entry of online internet bookstores in the market entirely composed of offline retail bookstores should increase the consumer surplus. When the efficiency of internet bookstores surpasses the offline bookstores’, the intensified competition as well as the better matching of consumer preferences would work positively for the consumer surplus and social welfare. Even when the efficiency of internet bookstores falls far behind that of retail bookstores, the difference must be huge for the social welfare to decrease and the consumer surplus will not suffer even in this situation.

Second, the introduction of fixed price regulation on books can increase the social welfare only under a very limited circumstance. Even when this is true, the consumer surplus will always decrease.

Considering the fact that the relative efficiency of internet bookstores to the offline stores are generally accepted, it is very likely that the introduction of fixed price regulation would decrease the social welfare. In addition, even if the increase in the profit surpasses the decrease in consumer surplus, such regulation cannot be considered to be efficient from the societal point of view. When there is a conflict between the consumer surplus and producer profit, the competition policy should support the consumer. Fundamentally speaking, it is not considered to be the proper role of competition policy to protect the interest of small and medium offline bookstores against the price competition pressure from the online internet bookstores. It is the competition itself and not the competitor that the competition policy should protect.

3. Conclusion

The results of current analysis are derived from very simple models, therefore it is not recommended to consider them as a perfect reflection of reality. This means that a very cautious interpretation is required when using the results for the evaluation of when evaluating related policies. However, it is worthwhile to question why such regulations are introduced and maintained continually.

As was seen in both cases dealt in the current analysis, regulations of this sort would result in the re-distributiveon of welfareeffect between the related parties. Both regulations are targeted to protect the small and medium retailers who are categorized as the economically weak group. This implieds that such regulations were introduced due to the organized voice of such interest groups while the voice of consumers are being neglected. Inspection of the possibility of our institution being too generous to the “too loud to lose” phenomena must be performed. It is not permissible to introduce additional regulations that are intended to protect the interest of producers and retailers while sacrificing the welfare of consumers. Even when the protection of specific industry or specific interest groups are needed, the measures taken should be neutral to the welfare of other related parties such as consumers.

Industries have characteristics to evolve to the direction of more competitiveness and efficiency. Competition works as a catalyst in such a process. Any policies that distort the industrial structure, and prevent the exit of specific groups do not help competitiveness of the relevant industry but only produce other damages. The task of protecting the failing parties in competition should be approached from the social welfare policy perspectives and not by the suppression of competition.

Summary

Research Monograph KOR Regulation fo Collective Investment Schemes in Securities : Legal and Economic Analysis

1. Background and Purpose

Legislation of the consolidated asset management act is underway. I have been participating in the legislation process under an advisory capacity for the past years. Initially, in the year 2000, upon the request of the Ministry of Finance and Economy I have submitted a consultation report, where discussions on more needs for legislation and other issues on improving regulations were included. In the following year, as I prepared a report titled as 'Agenda for a Competitive CIS (Collective Investment Schemes) Industry' on request by the Korea Investment Trust Companies Association, I had another chance to study how to improve asset management regulation. Although I have tried to establish a logical background for a new asset management act through these reports, I had my own doubts on the prospect of the legislation process due to two main reasons. First, as I advanced the research on the topic of asset management regulation, I realized the number of related issues to be resolved kept increasing. Second, given that a lot of interest groups would be affected by the change in regulations, I thought it would be difficult for the government to embark on such a project during the transition period of political power.

However, out of the two, the latter turned out to be my miscalculation. In 2002, MOFE (the Ministry of Finance and Economy) made systematic efforts to carry out the legislation of the consolidated asset management act and on September 28th, the drafted bill was passed to the National Assembly. Although it is still open whether the National Assembly will approve the bill, I believe the development so far deserves its own record, which is the basis for my writing this paper.

With this backdrop, there are three goals for this study: To find the principle of regulations on Collective Investment Schemes in transferable securities by analyzing the US and the UK cases; thereby to evaluate the current state of the Korean regulation; and finally derive reform measures.

2. Summary

The rationale of regulatory intervention in the Collective Investment Schemes is to mitigate the 'agency problem' existing between investors and the asset manager. In this study, the fundamental principles of the regulatory intervention are summarized into three categories based on theoretical arguments and the analysis of the US and UK examples. The first is the elevation of market discipline by reducing the extent of information asymmetry. Some of the methods for implementing the principle include the daily market value accounting, prohibition of borrowings by investment funds, and rigorous enforcement of mandatory information disclosure. The second principle is the structuring of fund governance in such a way that a third party provides a monitoring function over the asset manager for investors. The third is the elevation of public surveillance discipline by specifying conducts such as 'conflict of interests' and banning such conducts.

After assessing the Korean regulation, three agendas are selected for review. First, a further examination must be conducted on the regulation system whether it should move from the institutional regulation regime to the functional regulation. Secondly, the importance of the fund governance needs to be acknowledged and a way to establish a third party monitoring function must be developed. Thirdly, a new plan must be devised to improve the efficiency of current regulating method for conducts of conflict.

In the paper, for the transition to the functional regulatory regime, the concept of "functional regulation" is first discussed. Then I indicate that the reform is fundamental to enhancing the market discipline, the strongest device in resolving the agency problem in asset management business. This argument is supported by the finding that the US and UK all adhere to the functional regulatory system, and that the reform in this direction is required by most of the exemplary reforms in the international scene. The two sub-topics specific for such a transition are then discussed. The fist sub-topic concentrates on the legal system. Regarding the legal issues, decree of a single law in the comprehensive form is proposed. The law should manifest itself on basis of the economic function of CIS, and bringing all the schemes performing the function under the rule.

The second sub-topic details how to distinguish the CIS from the bank trust. The third sub-topic discusses whether or not to allow banks to play the role of asset managers. Historically in Korea, the bank trust practically carried out the role of the Collective Investment Schemes in transferable securities. The regulatory problems arising from such a practice is that the difference between the trust system and the CIS has become thin in practice while not in regulation. In order to introduce the functional regulation, a clear-cut remedy for the problem must be devised. Noting that a similar problem existed in the US, a conclusion is drawn based on the analysis of the US experience. First of all, it is emphasized that the institution of trust and that of CIS have evolved to convey different economic functions, and thus must be distinguished in concept and also in regulation. This means that the bank trust should be strictly prohibited to carry out the role of the Collective Investment Schemes.

Regarding the next issue of reforming the investment fund governance, the regulation method for the legal formation of investment fund, the role of investors' general meeting, and the choice of the third monitoring party between the 'trustee' and the 'board of directors' are discussed. Analyzing cases of the US and UK, I argue that the regulations regarding the formation of the investment funds must be kept at a minimum. This specifically implies that both contract-type and corporate-type investment funds need to be allowed. This follows from the observation that no regulatory goal is achieved by selecting one of the two forms against the other. It is more appropriate, however, that the regulations regarding the structural formation of investment funds be all specified in the law governing the Collective Investment Schemes. This implies that the current regulation on the formation of company-type investment fund, which considers the investment fund as a joint stock company under the commercial law, needs to be changed.

With respect to the investors' general meeting, I argue that the regulation should introduce the meeting as a mandatory institution for an investment fund. Considering the actual economic function, however, the general meeting must be given a smaller function in comparison to stockholders' meeting of general joint stock companies.

Regarding the final sub-topic of third party monitoring, I identify the functions that the law should assign to the third party monitor. Then, I note that when analyzing the US and the UK examples, there are two types of third party monitoring: the trustee type and the board of director type. I suggest that the coexistence of two types should be seen as 'multiple equilibria' or 'path dependence', where initial conditions of a country determine which type to follow. Further, I contend that considering various circumstantial conditions, the appropriate type of third party monitoring for Korea is the trustee type.

3. Assessment

Collective Investment in Transferable Securities are defined to be an economic behavior which forms a fund by issuing residual claims to the general public, and manages the fund by investing in stocks and bonds. In the US, the CIS industry has already replaced the banking industry and is becoming the largest among financial industries in terms of the asset size. Although it may not be as spectacular as in the US, a substantial growth is also expected for the Korean CIS industry. At the same time in tandem with the expansion of the industry, the question of how to mitigate the agency problem in the CIS industry is expected to gain more importance.

But in spite of the recent efforts for the improvement, there seems to be much to be desired with regulations of the CIS. It has much to do with the fact that an international standard for the CIS regulation does not exist. In the absence of an international standard, previous to the financial crisis, we imported the regulatory framework from Japan. But as the operational mechanism of the Korean economy is changed, it has become clear that the previous Japanese system is now obsolete. Hence, it is time that Korea considers accepting the regulations applied in the US and the UK as a benchmark, since CIS institutions originate from the two countries and stable development has been observed for the past half century in both countries. This paper's contribution may be appreciated in this aspect. As far as my understanding, there has been no systematic study of either the US or the UK CIS regulations in Korea, not to mention of comparing one to the other.

** The rationale of regulatory intervention in the Collective Investment Schemes is to mitigate the 'agency problem' existing between investors and the asset manager. In this study, three agendas are selected for review: how to transform the current institutional regulation regime to a functional regulation; how to establish a third party monitoring function in the investment fund governance; how to improve the current regulating conducts concerning the conflict of interests.

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