KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Policy Study KOR Analysis of the Effect of Management Education and Consulting on Small Business Owners

This study examines the impact of management education and consulting on small businesses in Korea. It focuses on whether such support improves business performance (employee numbers and sales amounts) and reduces the likelihood of financial delinquency (payments overdue by more than 90 days). The analysis compares these outcomes to those of businesses that did not receive such support. Through propensity score matching, a control group was selected to closely resemble the treatment group, and the Difference-in- Difference method was then employed to assess the impact.

The results indicate no significant differences in employment growth or delinquency rates between businesses that received this support and the control group. However, an exception was observed in the wholesale and retail sectors, where supported businesses experienced a notable increase in sales relative to their counterparts.

To effectively enhance business performance through management education and consulting, broadening the expertise of instructors and consultants is crucial for meeting the diverse needs of different businesses. Furthermore, diversifying the content and methodologies of these services could offer business owners a wider range of options, potentially leading to a greater impact and improved efficacy of the support provided.

Summary

KDI FOCUS South Korea Needs More Big Company Jobs

South Korea stands out among OECD countries for its lowest proportion of jobs in large enterprises. Good jobs, often synonymous with employment opportunities in large enterprises, are in short supply. This shortage prompts various societal issues: the overheating of college admission competition, a decline in social mobility, decreased birth rates, stagnating employment rates for women, and increased concentration in the capital area. There is a pressing need to identify and address policy barriers to company scale-up.

- Despite the stronger employment preference among young adults in large enterprises, the majority of available job opportunities are actually in smaller businesses.

- Larger establishments tend to offer higher wages and better working conditions.

- The marked wage gap between graduates of top and bottom universities intensifies competition for admission to top-ranking schools.

- The scarcity of good jobs results in both low utilization of maternity protection programs and female underemployment.

- Even at the city and province levels, larger establishments are observed to have higher labor productivity.

- Identifying and addressing policy barriers that impede company scaleup through targeted policy improvements is a necessary course of action.

Summary

KDI Policy Forum The SME-Suitable Industry Reservation Policy: Economic Effects and Policy Direction

■ After marking the ten-year milestone since the adoption of the SME-suitable industry reservation policy, this study investigates whether the policy has enhanced the competitiveness of SMEs by safeguarding them as intended and offers implications for its future implementation.

- This SME policy involves the selection of specific products to protect the business territories of SMEs and limit the entry or expansion of large enterprises; however, evidence-based discussions on its effectiveness have been limited.

- While the production and employment of large businesses decreased after the adoption, the business activities of SMEs did not change much.

■ This reservation policy aimed to "ensure the competitiveness of SMEs through their protection." It successfully fulfilled its protective role by reducing the likelihood of SMEs exiting the market. However, the reservation policy had limited impact in terms of improving their performance or competitiveness.

- Following the designation of a set of industries (products) reserved for SMEs, the probability of exit for SMEs engaged in the production of those specific products significantly decreased. However, these SMEs did not show significant differences compared to other product producers in terms of most performance and input indicators.

- The industry-level analysis shows that the policy contributed little to the performance of overall industries to which the designated products belong.

■ The disappointing outcomes of the policy’s stringent measures highlight its limited effectiveness, as the restrictions on the expansion or entry of large enterprises did not lead to significant improvements in the performance of SMEs.

■ Based on the findings, it is recommended to suspend new applications for the designation of SME-suitable industries and gradually phase out the already designated reserved industries.

- In any business field, when there is greater uncertainty about future market restrictions, firms are less incentivized to engage in that market and invest in domestic production facilities.

- A policy that restricts production activity in a specific business area solely based on firm size may inadvertently undermine the efficiency of resource allocation in the broader economy.

■ Instead of protecting specific business areas, a win-win policy between SMEs and large firms should prioritize providing effective support for the growth of capable SMEs through appropriate regulatory measures to address anti-competitive and unfair practices.

Summary

KDI Policy Forum Can Artificial Intelligence Improve the Effectiveness of Government Support Policies?

■ Despite high hopes for artificial intelligence (AI) to generate powerful innovations across the public sphere backed by its strong prediction skills, Korea has not fully brought the technologies into the public sector in tasks like identifying policy target groups and managing follow-up tasks in line with its policy objectives.

- Recent cases of AI-applied public services in Korea show limited usage, mainly replacing simple repetitive tasks.

- Few leading countries are trying to apply AI-based analysis to select promising policy target groups to effectively achieve policy goals and follow up on the performance of public projects.

- While the existing management system for policy performance is mostly about ex-post assessment of project outcomes, the application of AI technologies signifies a shift to data-driven decision-making that uses ex-ante forecasts of policy effects.

■ An analysis of AI-applied recipient selection of small and medium enterprise (SME) policy support programs demonstrated the efficiency of AI in predicting the performance of beneficiary firms after the program and AI's potential to significantly improve the effectiveness of public support by providing helpful information in screening out unfit SMEs.

- Using firm-level data, this study applies machine learning to various public financing programs (subsidies or loans for SMEs) funded by the Ministry of SMEs and Startups and finds that AI helps predict the growth of recipient firms in the years following policy support.

- The application of AI in identifying fitting recipients likely to achieve intended objectives may increase project effectiveness.

■ In a KDI survey in 2020, respondents pointed out that what hinders transitioning into a system of AI-applied, data-driven policymaking in the public sector are: 1) incomplete standardization and linkage of policy information between governmental ministries and 2) lack of expertise in technology utilization in the public sector.

■ By developing a strategy to propel a transition into data-driven policymaking in the public sector, coordinated national-level efforts must be made to heighten policy effectiveness across different public fields, including education, health care, public safety, national defense, and business support.

- One way to adopt AI technologies in the public sector is by designing a policy to support technology adoption for competent public institutions. Support measures may cover system, data platform, security, organizational consulting, training, etc.

- Detailed strategies are: 1) unifying existing data management systems into one single platform, 2) reorganizing the way government work gets done to enable efficient exchange of policy information, and 3) building a trust-based public-private partnership.

- By examining the policy cycle from planning and implementation to evaluation, it is important to clarify areas for AI to contribute to policy decision-making. Also, the government needs step-by-step strategies toward data-driven policymaking, such as setting clear project objectives, selecting and sharing data, establishing system and security, and promoting operational transparency.

Summary

Research Monograph KOR Designing the Criteria on the SME Support Policy: Focusing on the Definition of SME and Small-Scale Reservation Policy

Government support programs for small and medium enterprises (SMEs) and regulations for large firms are all size-dependent policies. The purpose of this study is to evaluate the effectiveness of the SME definition and the small-scale reservation policy on SMEs' performance. This study intends to provide policy implications when designing the criteria for the SME support policy.

Chapter 1 introduces the criteria for defining SMEs and presents the distribution of firms according to the SME size categories. In Korea, SMEs account for over 99% of the total number of business enterprises, meaning that the definition of SMEs is broad enough to include most firms. There are numerous policy programs and tax benefits for SMEs in Korea and this chapter lists those support policies according to various size categories.

Considering all SME policies are size-dependent, Chapter 2 examines the effect of size-dependent policies overall, not of individual and specific policy, by analyzing changes in firm performances and employment with a change in the criteria used to categorize SMEs. We exploit the changes in the SME status of each individual firm by the change in the criteria to measure the effects. The result shows that the criteria change from the employment size categories into the turnover size categories has little impact on achieving the intended growth in employment. However, newly designated SMEs show significantly increased sales. This finding can be interpreted as indirect evidence of positive effects from tax benefits and support programs targeting SMEs, but further research is needed to find direct evidence. We also found that there is a significant decrease in sales per employee for the firms whose SME status is withdrawn, suggesting that there exists an incentive to maintain the status.

Chapter 3 demonstrates the economic effects of reservation policy for SMEs. Among an array of size-dependent policies, the reservation policy is one of the most restrictive policies since it directly regulates the entry and production activities of large enterprises for specific goods. The analysis demonstrates that although reserving certain markets may temporarily safeguard the SMEs producing the products, this effect is temporal and not beneficial to the industry's overall growth. The reservation policy may be of little use in securing the competitiveness of SMEs and can potentially exacerbate the misallocation of the resources among the enterprises within the economy. This study also points out that even in the markets not reserved for SMEs, investment incentives may shrink on the uncertainty that their production activities could be restricted at any time.

The findings of this study are consistent with recent studies arguing that the diverse distribution of firm characteristics such as productivity and size should be considered when designing SME policies. The overall productivity of an economy can increase when resource allocation shifts from low-productive firms to high-productive ones. In turn, it shows the need to check whether a policy operates against efficient resource allocation when examining the impact of a specific policy on the economy as a whole. Furthermore, this study is relevant to the field of measuring the effectiveness of SME policy by providing empirical analysis at enterprise or establishment levels.

Summary

Policy Study KOR Causes of self-employment management difficulties and policy directions

This study analyzes the factors affecting the sales, operating profits, and expenses of the domestic self-employed by using the MDIS data of the wholesale and retail industry for the last 20 years.

First, the operating profit of the self-employed has been on a downward trend since the 2010s. As of 2019, the average operating profit fell to 16.87 million won in the wholesale and retail business and 12.89 million won in the lodging and restaurant business. This was significantly lower than the operating profit of 20 years ago (on a real value basis).

Second, the decline in operating profit was attributed to cost increases while sales growth was limited due to market competition. In particular, the biggest increase among expenses was ‘other expenses’. The proportion of other expenses to sales more than doubled from 4.6% in 2000 to 9.5% in 2019 in the wholesale and retail industry, and in the lodging and restaurant industry, it increased from 45.8% to 66.9% during the same period.

In addition, as a result of analyzing the factors affecting the sales of the self-employed, there was a tendency for the surplus of self-employed people to significantly decrease sales. When the surplus increased by 1,000 people, the sales of the self-employed in wholesale and retail business decreased by 0.76 to 0.94 million won, and the sales of the lodging and restaurant businesses tended to decrease by 1.49 to 2.36 million won.

Lastly, the surplus of self-employed and rising costs in the wholesale and retail business lowered the average annual operating profit by 1.26 million won and 1.11 million won, respectively, and these magnitudes were strong enough to reach 3.95% and 3.48% of the operating profit. In the case of the lodging/ restaurant industry, the decrease in operating profit due to oversupply and rising costs was found to be 6.07 million won and 2.12 million won on average, which corresponded to 25.04% and 8.75% of the average operating profit.

Summary

KDI FOCUS Transaction Types of Large Retailers and Policy Directions

□ In their transaction with retailers, suppliers tend to earn less as the share of purchases under special contract grows. This is due not only to the high sales fees (commission) and frequent unfair practices but also, more fundamentally, to the blatant imbalance in bargaining power. When investigating into unfair trade practices in the retail sector, the government should pay closer attention to how such violations are tied to the type of transaction. It should also work to enhance the negotiation power of suppliers by, for example, diversifying retail channels and strengthening suppliers’ rights to adjust payments. Indeed, ensuring equal bargaining power can contribute to expanding direct purchases and fairness in retail transactions.

- Although the ‘2020 Korea Sale FESTA’ fared better than previous events, both consumers and businesses expressed dissatisfaction.

- The type of transaction contract between supplier and retailer is the causal factor in the disputes over the shopping event.

- This analysis looks into the current status of transaction types, determinants of the transaction type, and the economic impact on suppliers. It then presents the policy suggestions.

- Of the transactions between large retailers and suppliers, 47% is via direct purchases, followed by purchase under special contract (21%), consignment sales (18%), and store leases (14%).

- The share of direct purchases is 68% at large retail chains, 90% at SSMs, and almost 99% at convenient stores.

- Over 95% of the sales at department stores and outlets are achieved via special contract transactions.

- In online and TV shopping categories, the share of consignment sales is overwhelmingly high. Over 95% of the sales at department stores and outlets are achieved via special contract transactions.

- The imbalance in bargaining positions and power between retailer and supplier may be smaller in direct purchasing due to the significant average transaction amount.

- Direct purchasing is preferred for essential items e.g. raw/fresh /processed food, office stationery and toys, and kitchen and bathroom hygiene products.

- Purchase under special contract is preferred for baby products, cosmetics, sports/leisure goods, clothing and accessories, and furniture/interior items.

- The type of transaction chosen is affected by the characteristics of the type of retail and goods and the interplay between the two.

- Suppliers are less likely to choose direct purchasing if they have a low level of trust in the retailer.

- The more advanced retailers’ purchase systems are, the higher the share of direct purchases.

- Meanwhile, the more salespeople or interior decoration is needed, the lower the share of direct purchases.

- The share of direct purchases tends to increase when the supplier expands its retail partners and is the party that proposes transaction type.

- The share of direct purchases tends to decrease when the margin rate, sales fee, and rental rate os determined by the retailer.

- The sale of flagship products shed 260 million won for every 1%p increase in the share of direct purchases.

- Retailers’ margin rate and sales fee are lowest in direct purchases and the highest in purchases under special contract.

- In purchases under special contract, the supplier will likely have less bargaining power.

- The gap in bargaining power is relatively large in purchases under special contract which increases sales fees and reduces sales.

- This study analyzed the relationship between transaction type and unfair trade practices based on the FTC’s resolutions in the retail business industry (‘98-‘20).

- Unfair trade practices occur 2-3.5 times more often in purchases under special contract.

- One of the most frequently reported violations in terms of special purchase contracts is the imposition of disadvantages. This is not isolated from the finding about the relationship between special contract purchases and reduced sales.

- The most frequent violation in direct purchases is the ban on returning goods.

- Most disputes between retailer and supplier are due to the flaws in the initial transaction agreement.

- Questions and contents in the written survey on the retail sector need to be revised to better capture the transaction patterns and alleged violations from the view of transaction type.

- The unfairness of changing contract details should be included as an important criterion for the ‘Guidelines for Examination of Injustice on Purchase under a Special Contract.’

- Careful consideration is needed when seeking policy intervention in the selection of a specific type of transaction contract.

- Transactions via direct purchases should be pursued by improving suppliers’ bargaining power which is a significant underlying factor.

- Korea Sale FESTA needs an overhaul and a new concept by, for example, making changes to the sales environment and purchasing propensity.

Summary

Research Monograph KOR Study on Self-Employment and Policy Suggestions

Self-employment plays an important role as the foundation of our economy and as an economic and social safety net. However, profitability declines and business difficulties are continuing, and as the recent Covid-19 pandemic has prolonged, a large number of business closures have occurred.

In order for the self-employed community to become a healthy and sustainable ecosystem, it is necessary to explore the underlying causes of management difficulties in multiple ways and design comprehensive policies based on them, beyond short-term income or expense support. Therefore, this study comprehensively diagnoses the management vulnerability of self- employment from various viewpoints of industrial organization, labor economics, macroeconomics, and financial economics and presents necessary policy directions.

Chapter 1, “Determinants of the proportion of self-employed and excess level” proceeds with an empirical analysis on the long and short term trend of the size and proportion of self-employed and their determinants. Furthermore, by deriving an appropriate number of self-employed suitable for the scale of the Korean economy and an excess level, the paper examines causes of the profitability decline.

Next, Chapter 2, “Choice and Motivation for Self-Employment” analyzes the life cycle patterns in which individuals choose self-employment and the main motives considered when entering.

Entry into self-employment can be influenced by various institutional factors governing the labor market. For this topic, Chapter 3, “Factors for the change in the number of self-employed persons in Korea,” describes changes in Korea's demographic structure and economic and labor market factors for identifying their impact on the number of self-employed.

Furthermore, the size of the current self-employed can be related to the degree of exit as well as entry. Therefore, Chapter 4 “Effect of financial support policy for individual business owners” examines the effects of the government financial support system on individual owners’ sales and the prevention of business closure.

By adding a wealth of analysis to these various topics, the authors examine various difficulties seen in the domestic self-employed industry in fundamental and multifaceted ways, and eventually provide detailed and comprehensive policy suggestions.

Summary

Research Monograph KOR How to Build a Government System for Data-driven Decision Making

Artificial intelligence (AI) or big data analysis are increasingly applied in very diverse fields such as marketing, healthcare, management, manufacturing, economic policy, not to mention professional sports. As available data explodes and AI technologies advance fast, the combination of these two is already transforming businesses and our lives. The goal is to augment human intelligence to be more accurate in detection, prediction, or decision-making. AI technologies offer new possibilities for policy-making and public administration helping the governments become more data-driven. In this respect, the combination of AI technology and government policy is an inevitable option to greatly increase the efficiency and effectiveness of the public service. At this point, the discussions for the successful introduction of AI technology in the public sector and policy-making are very urgent.

In this study, we explore the possible benefits of AI technology in the public sector by clarifying the connections and distinctions between AI technology and the existing evidence-based policy-making process. Besides, we identify the factors that hinder the introduction of the technology and suggest policy recommendations to overcome the challenges. We intend to provide information on how to build a government system for data-driven decision-making.

Chapter 2 argues that to reap the benefits of AI, it is necessary to change the current policy-making process to be more evidence-based. A fundamental transformation must be accompanied in the government system by reviewing the overall decision-making process including practices in collecting, managing, and sharing data. This chapter studies the development and application of evidence-based policies in Korea and other major countries and discusses the role of AI technology. Chapter 2 also deals with the possibilities and constraints when implementing AI technology in public policies especially in selecting policy targets.

Chapter 3 empirically presents the benefit of using AI technology in business support policy. It presents methods and results of applying machine learning, an AI technology, to the actual Korean government’s business support policies. We discuss important issues in the actual implementation of machine learning in policy targeting. The Korean government is implementing hundreds of business support policies to enhance corporate competitiveness and strengthen the overall competitiveness of the industry. The success of a business support policy can largely depend on the selection of a company that meets the purpose of support. This chapter discusses ways to improve the effectiveness of government support programs by comparing the results of selected targets by machine learning with the actual recipients of the programs.

The biggest advantage of AI technology lies in its infinite scalability. The advantage can take place when policy-makers use relevant data and the results from the analysis to improve the policy. The government holds a vast amount of personal and corporate information through administrative data. When the information is combined with private big data, the advantage becomes even greater. Besides the business support policy, AI technology can significantly increase policy effectiveness when it is applied to education, medical care, policing and defense to name a few. Still, we face the gap between the possibility and reality in the AI application. In Chapter 4, we conducted a survey on the perception and actual status of the introduction of artificial intelligence into the policy-making process with public sector workers related to business support policy and business people who are beneficiaries of the policy. The survey results showed that the respondents were recognizing the positive aspect of the application of AI in terms of enhancing fairness and reliability in selecting the policy targets. We identified technical, institutional, and cultural implementation barriers through the survey and suggested recommendations to overcome the barriers and increase the effectiveness of business support policies. The policy recommendations include a suggestion to form an organization that can oversee data management and artificial intelligence-related tasks scattered across various ministries. The organization is necessary to reinforce the strategic management capacity of information assets at the national level.

In conclusion, chapter 5 suggests that the current Korean national strategy for AI should include a data-driven government strategy across the public sector. The data-driven government strategy should prioritize activities in transforming governments’ decision-making process to be data-driven or evidence-based. The chapter ends with a four-step guide to a data-driven organization.

Summary

KDI FOCUS Conflicts in the Franchise Industry: How to Forge a Win-Win Partnership

□ Korea’s franchise market is wavering. Amid the heavy concentration of food service businesses and the high number of inexperienced franchisors, franchisees have had little opportunity to grow. Moreover, the terms and conditions of franchise agreements have become a source of contention due to their contradicting impact on the performances of franchisors and franchisees. Accordingly, government efforts are needed to overhaul information disclosure documents so that they accurately reflect the information and data on, for example, the franchisor’s experience and background, and the franchise store’s average sales figures, etc. At the same time, the fixed-percentage royalty should be promoted through discussions with respective industries and guidelines established for essential items. Actions must include exploring temporary measures to strengthen the qualifications for franchise businesses, particularly in sectors that show a high concentration of certain businesses.

- Korea’s franchise market is growing rapidly, not only in size but also in terms of the number of franchisors, brands and franchisees.

- The growth has come with increasing conflict over issues such as information asymmetry and imbalances in bargaining power.

- The growth has come with increasing conflict over issues such as information asymmetry and imbalances in bargaining power.

- Just as in the self-employed sector, food service accounts for a huge percentage of the franchise market.

- More than half of food service franchise stores sell fried chicken, traditional Korean food (hansik ) and coffee.

- About 60% of franchisors have no experience in operating directly-managed stores and rely solely on their franchisees.

- The percentage of brands with directly-managed stores is high in lowsales sectors such as fried chicken, drinking establishments and hansik .

- The more franchisors are in contact with the market through direct management of stores, the more likely it is for franchisees to improve their sales.

- The setup cost that franchisees pay to franchisors is approximately 120 million won on average.

- Fanchise fee is the price of a brand’s reputational capital and tends to rise as the brand adds more directlymanaged stores or stays longer in business.

- Costs for interior fit-outs account for the largest percentage in the setup cost.

- When a franchisee independently hires an interior contractor, the franchisor charges a high supervision fee which cuts into the franchisee’s cost savings.

- 25.4% of brands adopted a fixed-percentage royalty while 41.8% use a fixed-sum royalty.

- In the fixed-sum royalty contract, franchisors have less incentive to work to improve the sales of franchisees.

- In some cases, franchisees are given royalty discounts (70-100%) in return for purchasing raw materials and equipment from a supplier designated by the franchisor.

- Closed territory is an exclusive geographic and administrative area where a franchisee may conduct its business. 80% of closed territories are established based on distance.

- High franchise fees tend to entail significantly high sales gains.

- The number or percentage of direct stores can be a useful metric to measure the stability of sales.

- The sales increase from the fixed-percentage royalty implies that franchisors are more motivated to improve franchisees’ sales if their profits are aligned.

- Increases in franchise fees and royalties erode the operating profit of franchisees.

- Of the franchise agreement conditions, what actually improved franchisees’ sales and operating profits was the protection of closed territories.

- Franchise fees and royalties generate certain increases in franchisors’ sales.

- Increases in the franchise fee and royalty also incur an increase in franchisors’ operating profits.

- Franchise disclosure documents should contain more specific information particularly about the franchisor’s experience with directly-managed stores to enable prospective franchisees to make prudent decisions about the business item and brand.

- Franchisors should strive to establish IT infrastructure to transparently examine franchisees’ sales.

- Guidelines should be drawn up for essential items through discussions between the government and industry, and franchisors should be encouraged to include the distribution margin for raw materials and equipment in the royalty.

- Actions should be taken to temporarily impose stricter requirements for franchise businesses in sectors with a heavy concentration in a few items.

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