KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Other Research KOR Aid for Trade: Global Trends, Cases, and Implementation Framework

This study analyzes global trends and shifting policy agendas in Aid for Trade (AfT) and compares the AfT implementation systems of major donor countries, including the Republic of Korea, to draw policy implications for improving Korea's AfT policy.

AfT currently faces a challenging funding environment. Total Official Development Assistance (ODA) from members of the Organisation for Economic Co-operation and Development (OECD) Development Assistance Committee (DAC) fell by 23.1 percent year-on-year in 2025 to USD 174.3 billion, marking the sharpest decline on record. This decrease was driven by simultaneous cuts from the five largest donors, namely the United States, Germany, France, the United Kingdom, and Japan, with the United States alone recording a 56.9 percent reduction. This decline in development finance is also expected to have a significant impact on Aid for Trade (AfT), although responses vary across donor countries. While European donors have reduced both the share of AfT within ODA and its absolute volume, Japan has instead expanded both its AfT share and overall commitments, maintaining its position as the largest AfT donor since 2022.

Globally, AfT continues to center on economic infrastructure and productive capacity building―accounting for 56.7 percent and 40.6 percent of total AfT in 2024, respectively―while its policy agenda has steadily broadened from global value chain participation and regional trade integration (2011-2015) to the
Sustainable Development Goals (SDGs) and climate action (2016-) and supply chain resilience and digital trade (2021-). Korea's AfT expenditure nearly doubled from USD 0.58 billion in 2015 to USD 1.12 billion in 2024, ranking among the top seven donors, with an AfT share of ODA (about 31 percent) exceeding the global share of 18.1 percent. However, Korea's portfolio remains disproportionately concentrated in economic infrastructure (68.9 percent, above the global share of 56.7 percent), while trade policy and regulation support accounts for only 0.9 percent. Meanwhile, its digital economy and innovation share has grown rapidly, from 8.2 percent in 2015 to 23.4 percent in 2024, the highest share among major comparator donors.

A comparative analysis of Japan, the United Kingdom, the Netherlands, and Australia identifies common features across policy, governance, financing, and performance management: these donors explicitly reference AfT (or trade-development linkages) in top-level policy documents, institutionalize consultation channels between development and trade authorities, and separately manage, brand, and communicate AfT outcomes through international platforms such as the AfT Global Review. Japan, in particular, coordinates across different ministries through Japan International Cooperation Agency (JICA), an integrated grant-and-loan implementing agency, and a cabinet-level coordination council, explicitly linking economic security and supply chain connectivity to its development cooperation charter.

Benchmarked against these cases, Korea's AfT implementation system reveals clear gaps in policy strategy, governance, and performance management. No single authority is responsible for AfT planning and inter-ministerial coordination―a structural consequence of the bifurcation between grant aid (Ministry of Foreign Affairs) and concessional loans (Ministry of Economy and Finance), as well as the presence of a separate trade ministry (Ministry of Trade, Industry and Resources). As a result, Korea's AfT achievements remain scattered across individual ministry reports and are undervalued both domestically and internationally, while its participation in the AfT Global Review has been limited to survey-level monitoring and evaluation reporting.

This study argues that Korea's AfT challenge lies not in a lack of resources or performance, but in how AfT is recognized and institutionally designed: Korea already possesses proven achievements―such as the export of the UNI-PASS customs system to seven African countries and Korea International Cooperation Agency (KOICA)'s smart farm projects―that have yet to be integrated into a coherent AfT policy framework. This governance gap also entails a strategic opportunity cost, as emerging AfT agendas in which Korea holds comparative advantages―supply chain security and critical minerals, digital trade rules, and climate-trade linkages―are being shaped by other donors while Korea remains largely absent from the discussion.

The study proposes five institutional tasks for building a Korean AfT implementation system: (1) establishing a cross-cutting integrated policy framework by reclassifying AfT-relevant content scattered across regional and sectoral strategies; (2) formalizing governance through official consultation channels among the Ministry of Foreign Affairs, the Ministry of Economy and Finance, the Ministry of Trade, Industry and Resources, KOICA, and the Economic Development Cooperation Fund (EDCF); (3) developing verified achievements such as UNI-PASS and smart farm projects into impact stories and elevating Korea's engagement in the AfT Global Review to the level of session hosting; (4) building an integrated performance management system to consolidate and report AfT outcomes across ministries; and (5) proactively engaging in the formation of emerging trade-development agendas through the WTO Committee on Trade and Development and the AfT Global Review. The 10th AfT Global Review, to be held in Geneva in October 2026 to mark the 20th anniversary of the AfT Initiative, represents the nearest opportunity for Korea to demonstrate progress on these tasks.

Ultimately, building an AfT implementation system is not merely a matter of improving aid efficiency and effectiveness. It is about positioning AfT as a policy instrument linked to Korea's trade and economic diplomacy strategy, and laying the groundwork for Korea to serve as a norm-setter amid the ongoing reshaping of the global geoeconomic order.

Summary

Other Research KOR Evaluating the Effectiveness of Korea’s Materials, Parts, and Equipment (MPE) Policy

This study evaluates the effectiveness of Korea’s first Materials, Parts, and Equipment (MPE) Competitiveness Enhancement Plan (2021-2025) and draws policy implications for supply chain diversification and resilience. Following export restrictions imposed by Japan in 2019 and the growing fragmentation of global supply chains, Korea elevated MPE policy from a conventional industrial competitiveness strategy to a key pillar of economic security. Against this backdrop, the study examines both structural changes in the MPE sector and the performance effects of major policy instruments.

Using industry-level and firm-level data, the study analyzes changes in domestic production, value-added, trade structure, and corporate performance before and after policy implementation. At the industry level, self-sufficiency ratios, import penetration ratios, and trade diversification indicators are employed to assess structural changes in production and trade. At the firm level, the impacts of three major policy measures―R&D support, designation as a National Champion Firm, and participation in specialized industrial complexes―are evaluated using propensity score matching (PSM) and difference-in-differences (DID) methods.

The empirical findings reveal notable shifts in Korea's MPE trade structure: import dependence on Japan declined, while import dependence on China increased and exports to China contracted. In particular, the analysis demonstrates that deepening import dependence on China exerts a negative effect on domestic production, whereas exports to China contribute positively to domestic output―underscoring China's dual role as both a critical upstream supplier and a key downstream export market within Korea's MPE value chain.

Firm-level analysis indicates that R&D support is the most effective policy instrument, generating positive effects on profitability, innovation, and productivity. National Champion Firm designation strengthens innovation capacity, while participation in specialized industrial complexes contributes to financial stability in the early stages. Moreover, policy packages combining R&D support with National Champion Firm designation produce considerably stronger outcomes than either instrument alone, pointing to significant complementarities across policy instruments. In contrast, policy combinations without R&D support exhibit weaker innovation and profitability outcomes.

Based on these findings, the study argues that Korea’s MPE policy should evolve from fragmented project-based support toward an integrated, R&D-centered policy package spanning the entire innovation cycle. It also highlights the need to strengthen long-term technological capabilities, develop ecosystem-based industrial clusters, and shift policy objectives from import substitution toward strategic indispensability and supply chain resilience within global value chains.

These findings should be interpreted with caution. The firm-level analysis compares treated and untreated firms and cannot fully rule out the influence of unobserved firm characteristics; moreover, a uniform treatment-timing assumption (2019 for R&D, and 2020 for National Champion Firm designation and specialized industrial complexes) may not fully capture firm-specific variation in the timing of policy benefits. The results should therefore not be interpreted as a definitive assessment of the overall success or failure of Korea's MPE policy. Further research―incorporating firm-specific treatment timing, longer time series, and complementary qualitative evidence―is needed to validate and refine these findings.

Summary

Research Monograph KOR Structural Changes in Korea’s Retail Markets and Their Economic Impacts

This report examines structural changes in Korea’s retail markets and their economic impacts, focusing on the interactions among market structure, regulatory policy, and demand-side transformation. Rapid growth in online retail channels, adjustments to offline retail regulations, and long-term demographic shifts have jointly reshaped retail market outcomes in ways that differ across regions and retail formats. The study aims to provide an integrated empirical assessment of these changes and to clarify the mechanisms through which they affect retail performance.

The analysis draws on large-scale administrative and transaction-level data, including nationwide credit card transaction panels at the sub-district level, online platform payment information, detailed records on local regulatory changes, and official population statistics. A combination of panel regression models and quasi-experimental designs is employed to identify the effects of online retail expansion, regulatory adjustment, and demographic change on offline retail sales, store counts, and market structure, while accounting for regional and format-specific heterogeneity.

The first set of results shows that increases in online retail spending are, on average, associated with declines in offline retail sales. The magnitude and direction of the effects, however, vary considerably across retail formats. Large discount stores exhibit the strongest substitution effects; meanwhile, super supermarkets (SSMs) and other mid-sized offline retailers also experience adjustment pressures in the form of declining sales and store counts. In contrast, convenience stores and certain proximity-based specialty retailers display weaker substitution effects, with some evidence of complementary outcomes at the local level. The expansion of rapid delivery services, such as same-day or next-day shipping, exerts an additional negative effect on offline sales, particularly in food and daily necessities segments, indicating that logistics innovation constitutes an independent channel of competitive pressure.

The second set of results evaluates the economic effects of policy changes that allowed large retail stores and SSMs to shift mandatory closure days from weekends to weekdays. Exploiting variation in policy timing across local governments, the analysis finds that weekday conversion is associated with a statistically significant increase in sales for large discount stores―a pattern that is robust across alternative specifications and that persists after controlling for COVID-19-related disruptions. The effects on SSMs and convenience stores are more heterogeneous and appear to depend on local market structure and consumption patterns. Notably, no systematic decline in traditional market sales is detected on average, suggesting that the regulatory adjustment does not uniformly disadvantage such formats.

The final set of results highlights the role of demographic structure in shaping long-term retail market outcomes. While population decline generally leads to market contraction, the adjustment mechanisms differ significantly across retail formats. While small-scale, proximity-based retailers (e.g., convenience stores) have shown consistent growth, they primarily respond to demand shocks through store exits, suggesting structural fragility often associated with excess entry. In contrast, corporate-type retailers, such as SSMs and supermarkets, tend to buffer the shock through adjustments in sales per store, potentially benefiting from product differentiation capabilities. Furthermore, population aging―specifically the rising share of the elderly and the shrinking baby boomer generation―is found to structurally dampen overall retail vitality. These findings suggest that policy frameworks need to move beyond uniform protection to support fundamental competitiveness, accounting for format-specific adjustment paths and the qualitative shift in demand.

Overall, these findings indicate that structural changes in Korea’s retail markets arise from the combined influence of market-driven forces, regulatory design, and demographic trends, generating heterogeneous adjustment paths across regions and retail formats. The results imply that uniform, format-based retail regulation may be increasingly misaligned with evolving market conditions, and that policy frameworks incorporating regional characteristics, retail heterogeneity, and long-term demand shifts are more likely to prove effective.

Summary

KDI FOCUS Policy Agenda for Effecive Expansion of Renewable Energy Deployment

Greater urgency in renewable expansion has driven a corresponding rise in the cost of policy incentives. Can the rollout be accelerated while enhancing policy efficiency? This analysis finds that the current RPS-REC scheme clears only a baseline cost-benefit test, leaving room for improvement. Interlocking bottlenecks in grid connection and financing slow renewable deployment and risk eroding the cost-effectiveness of subsidies. Achieving both speed and efficiency will require coordinated progress on three fronts: rationalizing subsidy design, expanding grid infrastructure, and improving financing conditions.

- Achieving the 100 GW renewable target by 2030 requires a fourfold acceleration in the pace of deployment.

- The sharp rise in subsidy spending underscores the need to assess its cost-effectiveness.

- This study explores ways to rapidly expand renewable energy deployment while improving the cost-effectiveness of subsidies.

- By providing REC sales revenue in addition to electricity generation revenue, the current scheme strengthens incentives for power producers to expand renewable capacity.

- For both solar PV and wind, social benefits exceed subsidy costs (over 1 won per won spent), indicating that the system passes a basic costbenefit test.

- Social benefits arise mainly from lower carbon emissions, improved air quality, and reduced generation costs as cumulative installed capacity increases (learning-by-doing).

- Rising REC prices risk eroding estimated subsidy benefits, underscoring the need to enhance cost-effectiveness.

- Designing subsidies to deliver stable and predictable revenues encourages large-scale capacity expansion, strengthening learning effects and improving subsidy cost-effectiveness.

- Easing institutional constraints on investment enables power producers to respond more sensitively to price signals, increasing the effectiveness of subsidies.

- Even after accounting for high generation costs, Korea’s renewable deployment remains relatively low, pointing to non-cost structural barriers.

- Cross-country panel analysis shows that better grid and financing conditions lead to higher renewable deployment rates.

- In Korea, the transmission network has not kept pace with the growth of renewable capacity, and market arrangements to bridge supplydemand gaps remain underdeveloped, resulting in repeated instances where power cannot be delivered when needed.

- Limited access to stable long-term revenue streams and insufficient financing capacity make it structurally difficult to attract investment into renewable energy projects.

- Creating a vicious cycle, the two bottlenecks risk slowing renewable deployment and undermining subsidy cost-effectiveness.

- Only with all three pillars―grid infrastructure, financing, and deployment support―in place can Korea improve both the pace and efficiency of renewable energy deployment.

- Timely expansion of transmission capacity and flexibility resources is needed to reduce curtailment and connection delays. Long-term contracting arrangements, policy finance expansion, and more diverse revenue channels are also required to improve revenue predictability.

- Subsidy policy should be designed to reinforce the virtuous cycle between learning-by-doing and supply elasticity, with regular costbenefit evaluation to maintain long-term policy support efficiency.

Summary

Research Monograph KOR Renewable Energy Deployment in Korea: Economic Drivers, Barriers, and Policy Implications

Despite the rapid global decline in the levelized cost of electricity (LCOE) for solar and wind power, Korea's renewable energy generation share remains markedly low. This study examines the economic drivers and impacts of renewable energy deployment in Korea through four complementary analyses: firm-level decomposition of industrial greenhouse gas emissions, cross-country panel estimation of deployment correlates, country-level learning-by-doing (LBD) estimation, and a public expenditure efficiency assessment using the Marginal Value of Public Funds (MVPF) framework.

The firm-level analysis finds that emission reductions in Korea have been driven primarily by energy efficiency improvements, while fuel switching and process-level reductions remain limited; technological lock-in among large firms suggests a heavier potential burden from carbon pricing. The cross-country analysis finds that LCOE is not significantly associated with deployment shares on average, but a negative correlation emerges among low-deployment countries; non-cost factors ― including grid quality, financial access, and revenue certainty ― are each significant on average. LBD estimates reveal that cumulative capacity and cost reductions co-move on average, but global technology spillovers account for much of this pattern; onshore wind, however, exhibits a statistically robust inverted-U-shaped learning path that persists after controlling for common trends, with learning pathways that vary across countries and are amplified by revenue certainty and technological proximity. Applying the MVPF framework to Korea's Renewable Energy Certificate (REC) scheme yields estimates of 1.33 for solar and 1.18 for wind, with learning effects accounting for 21-50% of total benefits. Taken together, the evidence points to a policy agenda extending beyond price signals: accelerating renewable deployment requires targeted interventions in grid infrastructure, financing conditions, and institutional design ― investments that the MVPF estimates confirm to be economically justified.

Summary

Research Monograph KOR Macroeconomic Impact of AI Diffusion

This report examines how artificial intelligence (AI), particularly modern, data-driven, and increasingly generative systems, is likely to affect Korea’s productivity, growth, employment, and wages over the next decade or two. Three layers of evidence are integrated within a unified task-based framework: (i) micro-level measures of AI exposure and economic viability at the task and occupation levels, (ii) firm-level panel evidence on AI adoption and productivity, and (iii) a macroeconomic general-equilibrium model that aggregates task-level shocks into total factor productivity (TFP) and long-run labor market outcomes. The study defines AI as software systems that replicate human capabilities in learning, prediction, pattern recognition, perception, and natural language processing―a definition consistent with that used in the underlying firm survey and broad enough to encompass both earlier, narrow algorithms and more recent foundation models and AI agents.

Chapter 2 offers an accessible overview of the technological evolution of AI from traditional machine learning to transformer-based large language models and emerging agent-like systems. It emphasizes two features of particular macroeconomic relevance. First, advances in general-purpose and multimodal models have greatly expanded the range of tasks technically exposed to AI. Second, effective deployment requires complementary investments in data, organizational capacity, and human capital, suggesting that technical feasibility alone is a poor predictor of short-run economic impact.

Chapter 3 develops a task-based measure of AI automation potential tailored to the Korean labor market. Using detailed work descriptions from the Korean Employment Classification of Occupations (KECO) and Workpedia, the study decomposes 537 occupations into 6,824 unit tasks and scores each task along five dimensions: measurability of outcomes, data availability and quality, context dependence, required human judgment necessity, and agentability (the ease with which an AI agent can execute a given task). These components are combined into a task-level AI score that captures effective automation potential rather than mere technical exposure. A cost-benefit framework inspired by recent work on computer vision and AI costs is then applied to identify tasks and task·firm combinations for which automation is economically viable, given realistic assumptions about data, development, inference, integration, and maintenance costs relative to labor savings. The findings are conservative by design. Under a naive exposure-only criterion, AI could potentially affect roughly 8-12% of current employment and 10-11% of current sales, concentrated in finance, insurance, R&D, ICT, and certain transport and business services. Narrowing the focus to tasks that are both technically automatable and economically viable reduces these shares to about 1-3% of employment and 1-2% of sales. This suggests that, in the near term, AI will likely induce selective and partial automation in specific occupations and industries, rather than a broad-based, immediate displacement of labor.

Chapter 4 analyzes firm-level evidence using the nationally representative Korean Survey of Business Activities for 2017-2023, which asks firms whether they use AI―defined in the questionnaire as software that replicates human learning, reasoning, perception, and natural language understanding―and other fourth industrial revolution (IR4) technologies. To address the endogenous timing of AI adoption, the analysis employs panel IV (2SLS) models with firm and year fixed effects, instrumenting AI adoption with industry-level economic viability measures from Chapter 3. In the preferred specifications, firms that adopt AI and related IR4 technologies exhibit statistically significant increases in log sales per employee on the order of 5-20%, driven primarily by higher sales rather than systematic employment cuts. Pure “AI only” effects, net of broader digitalization, are estimated with less precision, consistent with AI operating as a general-purpose technology that must be embedded in a broader digital and organizational transformation. As a robustness check, propensity-score matching and difference-in-differences estimates for AI first movers suggest modest but positive short-run effects on labor productivity, with limited evidence of strong dynamic effects within the short observation window.

Chapter 5 incorporates these micro-level estimates into a task-based general-equilibrium model following the approach of Acemoglu and Restrepo to simulate AI-induced TFP paths over the next 10-15 years. Hulten’s theorem implies that, under certain assumptions, aggregate TFP change can be approximated by a Domar-weighted sum of task-level cost savings. The model therefore combines (i) the economically viable task shares by industry, (ii) firm-level productivity effects of AI, and (iii) alternative adoption scenarios―baseline, optimistic, and pessimistic―to trace out possible TFP trajectories. Under baseline assumptions, AI contributes a cumulative TFP gain of about 2.3% over a decade, nontrivial but below some of the more optimistic global projections. These simulations focus on the task automation channel and treat parameters as exogenous. They abstract from structural transformation, intangible capital accumulation, idea-generation effects, and potential discontinuities in AI capabilities. Then the analysis turns to long-run employment and wage effects across occupations. Using a cross-section of Korean 2-digit occupational categories over 2014-2024, the analysis estimates reduced-form relationships between changes in employment and real hourly wages and measures of routine and structured task content, while instrumenting for endogenous employment changes with leave-one-out labor-demand shocks. Occupations with higher routine task shares experience lower employment growth and somewhat lower wage growth over the decade, consistent with international evidence that automation pressure exerts downward pressure on labor demand and wage growth in exposed jobs. Combined with the AI exposure metrics presented earlier, these estimates imply that, under realistic adoption scenarios, the annual displacement and wage-drag effects attributable to AI are likely modest relative to existing demographic and structural trends, but non-negligible for specific groups.

Chapter 6 synthesizes these findings and discusses their implications for policy and business. For policymakers, the central message is that AI is unlikely to trigger an immediate, economy-wide employment collapse, but will require active management of selective automation, task restructuring, and skill upgrading in exposed sectors. The study argues for a market-friendly policy mix: clarifying AI-related regulation and liability, investing in data and compute infrastructure, strengthening education, training, and retraining systems, and fostering complementary innovations and organizational change. For firms, the key insight is that productivity gains derive less from AI in isolation and more from integrating AI into workflows, data pipelines, and human capital strategies.

Summary

KDI FOCUS Online Retail Growth and Reforming Korea’s Retail Policy

Amid the robust expansion of online retail, the retail sector has shown a conspicuous divergence: hypermarket sales have decreased due to competition from online channels, whereas smaller formats like SSMs and convenience stores have expanded by capturing distinct, proximity-based demand. This asymmetrical outcome underscores the need to reform the Distribution Industry Development Act, shifting away from current hypermarket restrictions toward a framework that bolsters the competitiveness of brick-and- mortar retailers and addresses the regulatory imbalances between online and offline channels.

- The rapid growth of online retail has widened the gap between the market the Distribution Industry Development Act was designed for and today’s retail reality.

- The current regulatory framework, still designed around offline retail, is undermining both fairness and efficiency across the retail sector.

- Online retail has expanded rapidly, driven by competitive pricing, a wider range of products, and logistics advancement.

- Online retail, once a supplementary channel, has become a core pillar of the retail industry.

- The expansion of online retail is exerting competitive pressure on traditional offline retailers, particularly hypermarkets.

- The explosive growth of Coupang, which built its name on Rocket Delivery, brings efficiency gains and consumer benefits, but also risks reducing competition.

- Although online retail expansion was expected to reduce offline sales through a businessstealing externality, the analysis shows that higher online spending is associated with higher offline sales.

- Offline retail expansion driven by online growth occurs primarily through quantitative expansion, such as increases in the number of establishments and consumers.

- While online expansion erodes hypermarket sales, it drives market growth for proximitybased retailers, such as SSMs, convenience stores, and other specialized retailers.

- Higher online spending may stimulate latent consumer demand and broaden the overall retail market.

- Higher online spending may encourage new business entry and customer inflows among neighborhood-serving offline retailers.

- Policy discussions should move beyond the zero-sum assumption that equates online retail expansion with offline retail contraction.

- Rocket Delivery has reduced visit frequency at offline retailers, though its aggregate impact remains limited.

- The offline-oriented Distribution Industry Development Act should be revised to remedy the regulatory asymmetry between online and offline channels.

- Policy support should help traditional markets and offline retailers strengthen their local consumer base and expand product offerings that online channels cannot easily replicate.

- Advances in logistics infrastructure should be continuously monitored, with the findings promptly reflected in retail policy.

- Abuse of superior bargaining position by online platforms should be actively curbed to promote fair competition.

Summary

Policy Study KOR Energy Market Design with Local Content Requirements

As governments accelerate the push toward carbon neutrality―while advancing strategies for emerging industries, responding to tighter protectionism, and adapting to shifting supply chains―pressures to build domestic industrial capacity, strengthen energy security, and secure technological autonomy have intensified. Although support for renewables and low-carbon processes is expanding, preferential measures for domestic producers risk distorting price signals, weakening allocative efficiency, and increasing exposure to trade disputes. This report examines how such industrial support interacts with energy-market design and assesses the implications for market participation, competitive dynamics, and overall efficiency.

We develop an asymmetric auction model that reflects cost and capability gaps between domestic and foreign firms and incorporates a lower-bound constraint on domestic firms’ ex-ante winning probability. Within this setting, we compare three instruments: (i) horizontal measures that reduce entry costs (e.g., grid and other infrastructure investment, market and regulatory reform); (ii) conditional, flat subsidies paid when a domestic bidder wins; and (iii) market-based, multi-dimensional (scoring) auctions that award non-price premiums for domestic content. When entry costs are significant, conditional subsidies tend to dampen participation less than scoring-based linkage and can deliver higher allocative efficiency. Combining horizontal and vertical tools helps meet domestic-content objectives while limiting distortions and widening competition relative to reliance on vertical measures alone.

Building on these results, the report recommends: defining measurable short- and long-term objectives; prioritising sectors with meaningful yet bridgeable capability gaps; translating non-price scores into “equivalent subsidies” for transparent calibration; embedding regular evaluation and sunset provisions; and continuously ensuring consistency with international trade disciplines.

Summary

Policy Study KOR Evaluating the Impact of Government Policy in the Pharmaceutical Sector: Analysis and Key Implications

This paper examines the effects of Korea’s government-sponsored Fund of Funds, a form of indirect public equity support, on innovation outcomes and capital formation among domestic biotech ventures. We combine firm-level data on venture investment, financial statements, and patents for the period 2000 to 2023 and use a event-study design and a difference-in-differences framework to identify the effects of venture capital backed by the government-sponsored Fund of Funds relative to non-Fund-of-Funds venture capital.

This paper reports that Fund-of-Funds investment is positively associated with innovation and initial public offerings among technologically linked biotech firms, where technological linkages are measured using patent citation networks. The results further suggest that the Fund of Funds is associated with crowding in, rather than crowding out, subsequent private capital, with particularly strong effects among early-stage firms younger than seven years. I also find a positive association with private investment in technologically connected firms. These findings suggest that Fund-of-Funds investment can serve as an effective policy tool for strengthening the dynamism of the innovation ecosystem.

Finally, I discuss several policy implications for revitalizing the venture capital market, including measures to encourage investment in financially constrained early-stage firms, mechanisms to reduce information asymmetries, further regulatory easing, and policies to deepen exit markets.

Summary

KDI FOCUS Rebuilding Scale-up Support Policies: Toward an Integrated Framework

As firms rapidly lose dynamism beyond the early stage, resolving their growth bottlenecks has emerged as a critical policy priority. Empirical analysis shows that successful scale-up is closely tied to R&D investment, AI adoption, and exports in manufacturing, whereas brand strength and design capabilities are key drivers in services. This highlights the limitations of single-track, R&D-centric support and the greater effectiveness of coordinated policy mixes based on firm-specific growth bottlenecks. Achieving this requires pivoting toward a more effective model―one that brings scale-up programs under integrated management and overhauls the performance evaluation framework.

- The core of an economic growth strategy lies in firm growth, yet business dynamism in Korea has weakened markedly.

- While HGFs are key drivers of growth and job creation, their share in the Korean economy is declining, with scale-up firms showing a sharp contraction in activity.

- Turning the government’s growth strategy into concrete action is emerging as a key priority.

- A higher share of HGFs within an industry is positively and significantly associated with aggregate productivity growth, accompanied by improvements in average
firm productivity and allocative efficiency.

- Given the recent decline in HGF activity, the potential link to the slowdown in industry productivity growth warrants close examination.

- Effective scale-up policy requires a solid grasp of what drives firms to achieve high growth.

- Productivity improvement is a key driver of high growth, but the factors at work differ across industries. Reliance on a single instrument such as R&D support risks
limiting overall policy effectiveness.

- The system should shift to a one-stop model that identifies growth bottlenecks before firms apply for individual programs and rapidly designs, integrates, and delivers the most effective combination of existing policy instruments and private sector services.

- Private-sector engagement should be voluntary by default. Direct public support through vouchers or performance-linked mechanisms is warranted only in cases of market
failures or urgent needs, with provider evaluation in place to control quality and guard against moral hazard.

- Firms with urgent growth bottlenecks should be placed on the Fast Track, with simplified procedures and prioritized access to private-sector services.

- The government should streamline and integrate the management of scale-up support programs and establish a performance management framework linked to tangible firm growth and capability development.

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