KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Research Monograph KOR Digital Transformation Strategy for Digital-Based Growth

COVID-19 has caused many changes socially and economically. While closing their workplaces and stopping face-to-face meetings, companies expanded non-face-to-face activities such as working from home, webinar. In addition, consumers switched activities such as education, daily necessities purchase, food delivery, and fitness to online or mobile methods. COVID-19 caused a rapid change in the existing supply and demand system, and the changed pattern of economic activity is more likely to continue in the future.

The rapid transformation of lifestyle in the global pandemic situation was possible thanks to digital technology that has continued to develop over the past 30 years since the spread of the Internet in the 1990s. Digital technology has become a general-purpose technology that causes fundamental changes in economic, industrial, and social environment, including education, jobs, and lifestyles, beyond the level of limited use for specific products or services.

In particular, digital technology has undergone a rapid commercialization due to the expansion of infrastructure for high-speed transmission and computation of large amounts of data, the emergence of data-based applications, and the simultaneous development of hardware technology. The demand for digital technology has soared due to COVID-19, and it has emerged at the forefront of our society.

This phenomenon, also called digital transformation, is felt as a rapid and overall change in society. However, Companies has been feeing the impact of digital transformation before Covid-19. Advances in digital technologies such as the Internet of Things, Cloud, Big Data, and Mobile have provided companies with opportunities to innovate through new business models, while causing fundamental changes in the way companies work.

Digital transformation is expected to be positive for productivity improvement and economic growth by promoting the emergence of new products and services and enhancing work efficiency. In addition, digital transformation will promote the expansion of digital trade, thereby expanding export opportunities for products and services through digital. On the other hand, while the risk of cyber security is expected to increase due to high dependence on digital technology, there are also concerns that automation and digitalization of work may have a negative impact on employment.

Accordingly, this study examines tasks for digital transformation and policy directions for stable transition to a digital society in six dimensions: corporate, government policy, regulation, job, education, and global environment.

Chapter 1 identifies the key elements and expected effects of a company's digital transformation, and presents the patterns and levels of digital transformation of domestic companies. Chapter 2 examines policy challenges for digital transformation of SMEs so that SMEs can grow into small and medium-sized enterprises by using digital to increase productivity and strengthening innovation capabilities. Chapter 3 preemptively examines all problems related to the emergence of new industries using digital technology to seek ways to improve regulations that help the smooth growth of new industries. Chapter 4 quantitatively analyzes whether industrial robots, a specific form of automation, replace domestic jobs. Chapter 5 discusses the transition to digital education using artificial intelligence and its tasks as an alternative to solving the problems of our public education. Chapter 6 analyzes the current situation centering on digital trade, a new economic opportunity in the digital era, and examines recent trade issues.

This report summarizes the policy directions that can minimize the side effects that may be caused by digital tansformation while using digital transformation as a stepping stone for the growth of the Korean economy.

First of all, in order to produce a good performance for digital transformation of domestic SMEs, it is necessary to diagnose the readiness of SMEs for digital transformation and provide necessary policy support to SMEs while conducting consulting on what digital technologies and capabilities to be equipped with. In addition, policy integration and coordination is needed so that the government's various digital transformation policies for SMEs can be linked to each other.

Second, it is necessary to clarify regulations in order to harmonize newly emerging technologies and industries with the existing system in the process of transition to a digital society. Regulatory reform has been recognized as deregulation, but the current rapid digitization requires clarification of regulations, preemptive modification and timely provision of regulations, and advancement of regulatory quality.

Third, the trend of robot increase is expected to continue due to continuous digital transformation and industrial structure reorganization, so it is necessary to protect the vulnerable, centering on mid-skilled jobs in the manufacturing industry. It is necessary to expand vocational education so that workers can move smoothly to areas where labor demand is expanding, and to help higher education acquire robot utilization skills and complementary skills.

Fourth, the educational gap should be narrowed by using artificial intelligence. It is analyzed that non-face-to-face education due to COVID-19 has decreased academic ability and widened the educational gap. In order to solve this problem, policy efforts to improve the quality of education, such as strengthening learning feedback, spreading customized education at each student level, and introducing a continuous academic diagnosis system, are considered to be feasible through transition to digital education using artificial intelligence.

Finally, in order to expand the market through digital trade, digital trade statistics should be advanced, digital trade agreements should be expanded, systems should be established to preemptively respond to overseas data regulations, and support measures should be prepared to resolve digital trade disputes for SMEs.

Summary

Policy Study KOR Offshoring vs. Reshoring: Trend, Drivers, and Policy Implications

The discussion on the side effects of offshoring and reshoring has gained momentum since the 2010s, leading to an increasing need for related research. This study analyzed 1,200 multinational corporations in South Korea from 2008 to 2019, classifying their investment types into four categories: (i) expansion with investments in both domestic and foreign markets (expander), (ii) offshoring with reduced or withheld investments domestically while investing abroad (offshorer), (iii) reshoring with reduced or withheld investments abroad while investing domestically (reshorer), and (iv) retention or downsizing with reduced or withheld investments in both domestic and foreign markets (idler). The study examined the characteristics of firms for each investment type, factors influencing investment type decisions, and the overall investment trends.

During the sample period, the overall trends of the four investment types remained relatively stable and evenly distributed. Offshorers and reshorers accounted for approximately 20% and 24% respectively. Moreover, around 40% of reshorers repeated the same investment strategy in the following years, indicating persistence in their decision-making.

Reshorers experienced short-term growth in revenue and employment, but their productivity growth rate was the lowest. Additionally, their activities in the foreign market, such as exports and imports, also decreased. This suggests a high likelihood that the observed short-term growth may not be sustainable. On the other hand, offshorers had a faster growth rate in productivity but had a negative impact on domestic employment. Offshoring and reshoring were thus economically conflicting.

The analysis of factors influencing investment type decisions revealed that expanders showed significantly higher numbers in size, productivity, and R&D investment compared to other investment types. Following expander, offshorer, reshorer, and idler exhibited lower levels of productivity in that order, highlighting the importance of productivity in investment type decisions. Reshorers had relatively high labor intensity, limited experience in overseas production activities, and their investment destination country was closer to South Korea. This suggests that firms with lower fixed costs of foreign investment and less burden in returning to the domestic market tend to choose reshoring as their primary option.

Reshoring policies have gained popularity in major advanced countries due to reasons such as national security, supply chain stability, and promotion of domestic employment. South Korea is also pursuing related policies. However, considering the characteristics of firms engaging in reshoring, it is desirable for the policy to aim at assisting reshoring firms in increasing productivity and eventually transitioning into expansionary investment firms, rather than focusing solely on reshoring itself.

Summary

Policy Study KOR Impact of International Trade on Firm’s Innovation and Business Portfolio

This study empirically analyzes how international trade affects the technological innovation of domestic incumbent firms. While international trade is divided into exports and imports, the research focuses on whether it increases the innovation incentives of local firms or instead reduces the incentives for innovation when competition between imports and domestic products intensifies in the domestic market. According to the literature, it is relatively well established that expansion of export markets promotes innovation activities of domestic firms, but the effects of import competition are shown differently among the analyzed countries. This calls for a specific investigation of the Korean case.

The firm-level intensity of innovation is measured through the number of patent applications per employee, representing that the more patents are applied by a firm, the more innovative it is. Next, this study divides import competition into two country groups: one from developed countries and the other from developing countries. The relationship between the level of import competition for each group and the intensity of innovation activities is then investigated.

The analysis finds that Korean firms' innovation activities are significantly affected by the competition between the two groups. Specifically, the import competition from developing countries is shown to promote domestic innovation, but innovation from developed countries tends to reduce innovation incentives. This result unveils two different motives (i.e., escape-competition incentive and Schumpeterian force) that exist between market competition and innovation and thereby supports Aghion et al. (2005, 2009). In particular, firms that have little technological gap with imports from developing countries, including China, are found to be the most sensitive to competition with developing countries, showing that the escape-competition incentive is working well. In other words, firms are responding to import competition according to market mechanisms in Korea.

The findings have important implications for policy-making. Import competition from developed countries occurs mainly high-tech and high- value-added industries that our economy is aiming for. In these industries, market competition has made it difficult for domestic firms to step up as leaders by weakening their innovation incentives. This implies that appropriate government support is necessary, at least concerning technological innovation. Of course, further research is needed specifically on which supporting policies are the most appropriate. However, at least it would be desirable that the government support should be provided in a way that encourages corporate innovation incentives without distorting competition in the market.

Summary

KDI FOCUS China’s Structural Change and the Impact on Korea’s Industrial Growth

□ Until 2014, demand for durable goods was at the heart of China’s domestic market growth. This, combined with the expansion of global value chains(GVC), contributed significantly to the rise of Korea’s key industries, particularly that of heavy and chemical products, including electrical and electronic devices. Today, however, China faces two concurrent challenges, a slowdown in growth and a structural shift in domestic demand to services. As a result, a considerably large impact will likely be felt across the Korean heavy and chemical industries, the biggest beneficiaries of the rapid increase in China’s domestic demand. Under the circumstances, Korea’s policy makers and industrial entities need to enhance their understanding of the changes in the Chinese economy and develop preemptive countermeasures by reforming existing business structures. Additionally, researchers must provide more in-depth studies on China’s evolving domestic market.

- The rapid expansion in China’s domestic market was led by the demand for durable goods until 2014.

- China’s durable goods-led growth in the domestic market combined with the expansion of GVCs has contributed significantly to the growth of the Korean economy.

- Korea’s heavy and chemical industries were the biggest beneficiaries.

- However, China is currently faced with two concurrent challenges, slowdown in growth and changes in its industrial structure, which are also occurring in the domestic market.

- In fact, the shift in China’s domestic demand towards services is a natural phenomenon given its current economic structure and income level.

- China’s slow growth and the structural shift in domestic demand will deal a heavy blow to Korea’s key industries, whose growth has been largely attributed to China’s strong demand.

- If the series of recent events in China are regarded as an integral part of the shift in the industrial structure, it would be possible to predict the direction of China’s changes.

- Korea’s industries must be aware of the changes in the Chinese economy and develop countermeasures that include reforming business structures.

- Simultaneously, more in-depth studies are needed on the changes in China’s domestic market.

※ Written based on Chung, Sunghoon, “Global Value Chains and Impacts of China’s Structural Changes,” in Kyungsoo Choi (ed.), Structural Changes of the Chinese Economy and New Opportunities for Korea, Chapter 2, Research Monograph 2015-09, Korea Development Institute, 2015 (in Korean). (*The full text of Research Monograph will be released later on.)

Summary

KDI FOCUS China’s Stronger Enforcement of the Anti-Monopoly Law and Korea’s Response

□ Tougher enforcement of the anti-monopoly law in China is expected to open markets and bolster the competition environment. In response, Korean companies must make efforts to take full advantage these changes to expand their business into the Chinese market while avoiding the risk of violating the stricter laws.

- China’s enactment of the anti-monopoly law is considered a leap forward towards a market economy.

- China adopted a market economy, but still emphasizes the role of government.

- China’s market structure is highly competitive although there exists institutional imperfections that disturb the efficiency of market functions.

- Anti-monopoly law, price law and anti-unfair competition law constitute China’s competition laws.

- China’s anti-monopoly law is a medium through which to develop a socialist market economy.

- China’s anti-monopoly law corresponds to global standards but “impartiality” has become the highest legal purpose and the basis for illegality.

- China has shown strong willingness to correct administrative monopolistic practices, but the institutional mechanisms to make this happen are not yet properly established.

- Illegal practices are subject to severe sanctions; Qualcomm was fined approximately RMB 6 billion (1.37 trillion won).

- China has actively applied its anti-monopoly law to cases of international cartels and business combinations with foreign - companies.

- It has been pointed out that China’s law enforcement has problems including lack of independence, forced investigations and excessive discretionary power.

- China will likely further strengthen the enforcement of the anti-monopoly law.

- China’s stricter antimonopoly law must be viewed positively and Korea should actively work to adapt.

- China’s anti-monopoly law considers excessively high prices to be a violation, and business combinations are reviewed based on industrial policy considerations.

- In the long-term, stricter enforcement will provide more opportunities for Korean companies as it increases openness and transparency and removes competition-restricting regulations in the Chinese market.

Summary

Research Monograph KOR Openness and Economic Development

We identify whether open economic policy has played a key role in facilitating economic development in Korea, and if so, through what mechanism the openness has induced Korean economic performance by applying modern economic theories and empirical analyses. Many studies that deal with the relationship between openness and Korean economic development tend to assess it from the perspective of economic history, lacking systematic approaches in explaining causal relationship based on theoretical and empirical analyses. Thus, this collection of individual study, incorporating forceful theories and empirical evidence into research, supplements the existing literature and open a gate for further researches. We also discuss the policy implications of the findings at the end of each chapter.

Summary

KDI FOCUS Korea’s E-Commerce Exports to China: Direction for Corporate Strategy and Government Policy

□ On the back of the emerging trend in global cross-border e-commerce, Chinese cross-border online shopping has exhibited extraordinary growth. This phenomenon provides Korean manufacturers and e-commerce platforms with invaluable opportunities to expand into a broader market via e-commerce exports. Accordingly, future strategies should focus on attracting new Chinese consumers, building a powerful brand image and improving product quality and post-purchase services, while taking full advantage of the popularity of the Korean Wave. Meanwhile, the government must step up policy efforts such as improving e-commerce export statistics, simplifying logistics and clearance procedures, and building Chinese consumers΄ trust.

- This study conducted a survey on Chinese cross border online shoppers’ experiences of buying Korean products to draw implications for corporate strategy and policy-making to boost e-commerce exports.

- B2C is expected to drive the future growth of China’s e-commerce.

- Chinese cross-border online shopping has expanded incredibly fast and is projected to record 200-400 trillion won in size by 2018.

- Korea Customs Service’s clearance records are not suitable to understand the current situation of Korea’s e-commerce exports.

- China is Korea’s largest e-commerce export market and e-commerce exports to China present valuable opportunities for Korean manufacturers to broaden their market.

- At present, there are no statistics available on e-commerce exports via Chinese platforms.

- A considerable portion of Chinese consumers’ online shopping of Korean products seems to be done via Chinese platforms.

- Main reasons for Chinese consumers to not buy Korean products online include limited knowledge of Korean brands and the lack of conasumer trust in post-purchase services, product quality and authenticity.

- Main reasons for Chinese consumers’ online purchases of Korean products include their preference for Korean brands and trust in product quality and authenticity.

- The Korean-Wave is found to actually affect Chinese consumers’ initial purchase of Korean products online.

- Almost 99% of Chinese consumers with online shopping experience of Korean products expressed their intent to repurchase.

- The Korean Wave, product quality and price, and information provision are factors affecting Chinese consumers’ repurchase intention.

- Given the fact that Chinese cross-border online shopping is at the incipient stage and consumers have expressed a strong

- intent to repurchase, customer conversion should take precedence.

- Statistics on e-commerce exports conducted through Chinese platforms should be provided.

- By simplifying logistics and clearance procedures, the Korean government can help domestic manufacturers strengthen their competitiveness with regards to the needs of Chinese consumers.

- Policy support is also necessary for the protection of Chinese consumers.

Summary

KDI FOCUS Korea's Participation in Global Value Chains and Policy Implications

□ The expansion of global value chains during the past 20 years has widened the gap between export value and domestic value added, diminishing the per-unit contribution of exports to the country’s economic growth. Thus, policies now need to target creating value added rather than increasing gross exports and focus on enhancing the competitiveness of input and production activities. In particular, regulatory reform must take place in the service sector to eliminate unnecessary obstacles to competitiveness. Moreover, to utilize global value chains more effectively, efforts should be made to enhance the efficiency of offshoring and attract production to the country’s shores in order to create more domestic valued added and jobs.

Summary

Policy Study KOR Korea’s Industrial & Trade Policies through the Lens of Global Value Chain

The concept of Global Value Chain (GVC) is garnering renewed attention as the production processes become more internationally fragmented with the development of technology and the reduction of trade costs. Korea has also actively participated in GVCs ever since it adopted export－driven growth strategy way back in 1960s and fully liberalized its import market in 1980s. Such active international production sharing led to low domestic value added embedded in Korea’s export. However many still see export itself as the primary objective for Korea. With this in mind, this study attempts to reinterpret Korea’s trade and industrial structure from the perspective of GVCs with the aim to better understand Korean economy and suggest policy direction that can lead to further economic development.

The study first defines the concept of GVC, and then shows how deeply Korea is involved in the GVCs using the World Input Output Table (1995~2011) and the relevant Socio－Economic Accounts. Then it shows how much Korea has exported in value added terms and compares it with the traditional gross exports. Lastly, the relationship between the evolution of GVCs and the income and employment structure of domestic industries is analyzed.

The findings and policy implications can be summarized as follows: Korea has conducted internationalization of production activities at a significantly higher speed than other countries. Meanwhile, the increase in foreign final demand has boosted export of domestic value added which led to growth in GDP. This was achieved by exporting intermediates rather than final goods. It was also identified that the internationalization of production activities increased the demand for domestic high－skilled labor and replaced domestic middle－ and low－skilled labor with those from abroad. Based on these findings this study suggests to (i) strengthen the competitiveness of domestic inputs, (ii) systematically analyze foreign final demands and actively break into foreign markets, and (iii) develop the capacity of domestic workers.

Summary

Research Monograph KOR Internationalization of Production in East Asia and Changes in Employment Structure

This research monograph looks into the theoretical and empirical links between the international organization of production processes in East Asia and the changes in employment structure in Korea. The main focus is on the impacts of foreign direct investment (FDI) and outsourcing on employment dynamics in Korea since the late 1980s. The monograph consists of six chapters as follows.

Chapter 1 “Structural Changes in the Korean Economy and the Internationalization of Production” provided an overview of the structural changes in the Korean economy since the 1980s focused on the trends and shares of manufacturing and services in comparison with those in major countries. Based on the establishment-level micro data, job creation and job destruction at the industry-level were decomposed into the entry, growth, decline, and exit of individual establishment. Employment share of low-tech manufacturing declined steeply since the late 1980s, when intra-regional trade of intermediate inputs expanded rapidly in East Asia. Chapter 1 also reviewed main empirical findings from abroad on the effects of the internationalization of production on the employment and wage development.

Chapter 2 “Internationalization of Production and Manufacturers’ Employment: An Empirical Study on Establishment-Level Micro-Data” looked into micro-data of Korean manufacturing (1990~2003) from the Annual Survey of Mining & Manufacturing linked with industry- level data on trade and foreign investment. It was found that manufacturers in an industry more exposed to competition from China via FDI (foreign direct investment) and trade had showed lower employment growth. This finding is consistent with the finding from the US which detected negative impacts of offshoring to low-wage countries on domestic employment. This finding is also consistent with the finding from Korea reported in Chapter 3. While most existing studies focused on the “China effect” via FDI, findings from Chapter 2 suggests that there exist other important channels (such as trade and outsourcing) of the “China effect” on domestic employment.

Chapter 3 “Effects of FDI on Employment and Productivity” paid attention to the fact that effects of FDI would be different depending on its motivation and destination. Therefore, the analysis separated FDI to developing countries from that to developed countries, and investigated the impact of outbound FDI on domestic employment (and productivity). Using firm-level data on 462 multinational companies which started FDI during the period from 1981 through 1995(treatment group) and on 3,763 comparable domestic companies which were not involved in FDI(control group), a difference-in- difference estimation based on the propensity score matching detected a negative short-term effect of FDI to developing countries including China on domestic employment. Furthermore, those companies which implemented FDI were employing more, producing more, more productive, and paying higher wages relative to other domestic companies.

Chapter 4 “Effects of FDI on Wage” analyzed the effects of the increasing cross-border mobility of capital on labor market using industry-level data from Korea and the US. According to the Nash Bargaining Model approach, the higher the profit achieved from FDI is, the equilibrium level of negotiated wage level becomes lower. Empirical studies on 31 manufacturing industry-level panel data from the US(1983~96) and 20 manufacturing industry-level panel data from Korea(1993~2005) detected negative effect of FDI on wage premium both in the US and in Korea. In particular, such negative effect of FDI was more pronounced in case of unskilled workers who had attained secondary or lower education.

FDI is the main vehicle of the narrowly-defined “internationalization of production”. In a broader sense, however, international outsourcing or offshoring is another important format of internationalization of production. Chapter 5 and Chapter 6 were focused on effects of outsourcing intermediate inputs on employment and industrial structure, while previous chapters were focused on effects of FDI on employment and wage.

Chapter 5 “Internationalization of Production and Labor Market in East Asia” looked deeper into the progress in East Asia using the OECD-WTO Trade in Value Added database and then investigated effects of intra-regional international outsourcing in East Asia on domestic labor demand using industry-level data from Korea and Japan. In case of Korea, outsourcing to China and outsourcing to Japan had opposing effects on labor demand. Outsourcing to China shifted labor demand from workers with secondary education to workers with tertiary education, while outsourcing to Japan shifted labor demand from workers with tertiary education to workers with secondary education. In other words, intermediate goods imported from China embodied unskilled labor and hence outsourcing to China substituted for production activities which hired unskilled labor intensively, while intermediate goods imported from Japan embodied skilled labor and hence outsourcing to Japan substituted for production activities which hired skilled labor intensively. The finding on outsourcing in this chapter is consistent with findings on FDI from Chapter 2 and Chapter 3. All in all, both FDI and outsourcing to developing countries in search of lower wage could have negative impacts on employment and wage of unskilled workers in domestic labor market.

Chapter 6 “Effects of Service Outsourcing on De-industrialization and Employment Structure” offers a different view on de- industrialization. While earlier chapters emphasized the “international” factors behind changes in employment structure, this chapter was focused on “domestic” factors. Chapter 6 compared existing hypotheses on the reasons behind de-industrialization and offered service outsourcing in the manufacturing sector as a major factor behind declining employment share of manufacturing. This hypothesis of service outsourcing also provides an explanation for the expanding productivity gap between manufacturing and services in Korea. Chapter 6 plays an important role in this research monograph in that it reveals major limitations of the book and is complementary to other chapters in the book. Earlier chapters were focused on manufacturing and international factors. Current changes in employment structure requires further research on service sectors and domestic outsourcing, which could have been totally missed without Chapter 6.

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