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Summary

Research Monograph KOR Policy Strategies for Sustainable Regional Development

Rapid aging and low birth rates have sparked concerns over population extinction in some provinces, and fundamental questions have been raised over the sustainability of basic local governments and effectiveness of regional development systems. In particular, amid the swift progress in digital and new technologies, the accelerating pace of low growth has precipitated the need to enhance regional industrial competitiveness and build innovative growth engines more than ever before. Therefore, the research in this paper was conducted with the following in mind: ① determinants of the transfer of industries or companies; ② effects of the transfer of public regional development institutions; ③ differential factors of regional industrial diversification and innovation systems; ④ sustainability of local government finances; ⑤ measures to resolve the inconsistency between the administration and daily life, and strengthening the connectivity between cities and their surroundings; ⑥ housing policy measures for regional development.

Regional development policies must consider both fiscal efficiency and economic growth at the national level, and connect and cooperate with the central and local governments to narrow regional gaps and bolster uniqueness while enhancing the effectiveness of policies. This highlights a crucial point in Korea's regional development policy. Indeed, when the issues of low growth, aging, and regional gaps facing Korean society and economy are considered, an examination of the sustainability of regional development must first be conducted followed by a guarantee of sustainable growth in which finances are managed.

Accordingly, this study first identifies a strategy for industrial diversification that is effective for regional economic growth, and provides implications by dividing the local environment into the dimensions of industrial diversity and innovation capability. It is found that the diversity of industries can have a positive effect on regional development but the economic impact can vary according to industry. As such, the industrial characteristics and conditions of a region should be considered. Secondly, it is also shown that while the relocation of a company can positively effect employment and investment in the short-term, it can diminish its soundness and profitability in the long-term, and the possibility of survival and growth decreases; which has negative repercussions for regional development. Thirdly, the relocation of public institutions is found to have boosted employment in local manufacturing and services which relates to the improvement of settlement conditions. However, no significant effects were observed in the employment in knowledge-based industries suggesting that the main industry must be nurtured for the region to continue growing. Fourthly, an examination of the financial conditions of local governments confirms that, with the exception of Seoul, unsustainable fiscal operations were implemented in 2013-2018. Fifthly, a direction for the reorganization of administrative districts is suggested as metropolitanization could accelerate the decline of non-capital cities. Besides the linkage between administrative districts, it is also recommended that areas with declining populations identify the living area system and strengthen their connections with neighboring areas. And lastly, a direction for housing policy is also presented since an inflow into and concentration of the metropolitan area can exacerbate the polarization of asset prices and income by region. In particular, this paper proposes a shift from the jeonse-centered lease policy to a guaranteed monthly rent and in the policy direction to respond to the increase in vacant homes in the non-metropolitan area.

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

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 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

Policy Study KOR Contract Type Selection and Economic Effect in Large-scale Retail Industry

This study analyzes the status of contract types between large retailers and manufacturing suppliers. It also demonstrates the factors affecting the choice of contract type as well as the economic effect of the contract type on the supplier’s performance.

The study found that direct purchase transactions accounted for 47% of total transactions, with the highest proportion, while contract types differed by product group and by industry, depending on the stability of demand, the importance of professional salesman service, and the degree of inventory risk.

The regression analysis showed how transaction cost and bargaining power affected the selection of contract types. As for transaction cost, the proportion of direct purchases tended to increase as retailer’s distribution system was developed, the more the supplier trusted the retailer, and the lower the level of interior decoration or specialized salesperson required for sales process. Regarding the bargaining power of the supplier, the proportion of direct purchase increases as the number of trading companies increases, and the type of transaction and the decision of margin ratio were based on the supplier's proposal.

Furthermore, the paper found that a supplier’s sales tend to decrease on average as the gap in the bargaining power between the retailer and the supplier increases, and the portion of the special contract purchase increases.

As a policy recommendation, this paper suggests that policy for enhancing supplier bargaining, including customer diversification, should be strengthened and that retailers should double their innovation efforts in the face of rapidly changing retail markets.

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.

Summary

Policy Study KOR Preventing Unfair Subcontracting Behaviours

The disparity in bargaining power between contracting parties can engender unfair subcontracting behaviours. This calls for policy measures to resolve such issues within subcontracting practices, especially in setting subcontract prices for which fairness is difficult to determine. At the same time, the government should consider the negative effects of the policies on social welfare as an increase in subcontract prices may raise the price of final goods. Accordingly, this study examines policy measures that reduce the bargaining power gap without diminishing welfare.

Since exclusive contracts are impeded by hold-up possibilities, it is reasonable to suppress the bargaining power of purchasers engaging in exclusive contracts. Suppliers will then find it profitable to switch to exclusive contracts. The more contracts become exclusive, the less costs are incurred by the contracting parties in production and transaction, which enhances efficiency. One way to curb the widening of the bargaining power gap under exclusive contracts is forcing purchasers to prove why a price cut is necessary. Stronger penalties may also be effective. But, before measures can be implemented, a clear definition of “exclusive contract” is required. A useful criterion would be whether a purchaser is in the dominant position in terms of supply-side substitutability.

The bargaining power gap would shrink if suppliers formed coalitions; the coalitions could become lawful under the Monopoly Regulation and Fair Trade Act if certain conditions are met. The key criterion is whether there are any harmful repercussions to social welfare. The double marginalization theory implies that group-bargaining reduces social surplus, but this study shows that social surplus may not decrease as much as expected, especially when the final good market is competitive. Moreover, there is no welfare loss if suppliers’ coalitions are paid a share of the margin in addition to their marginal costs. Therefore, as a precondition to legitimize the coalitions, the government must force the contracting parties to divide the margin and to make their own cost structures transparent to the other parties for verification of the exact margin.

Summary

Research Monograph KOR Impact of and Strategies for Regional Industrial Restructuring

From the perspective of a regional economy facing industrial restructuring, this study intends to seek strategies that could bring cental and local governments and corporations together to alleviate the detrimental effects local and industrial cities are experiencing in the midst of the local economic slump and in the mid- to long-term, retain or enhance the competitiveness and dynamism of industrial cities. Based on a macroeconomic analysis of the current conditions of regional industrial restructuring and progress projection of industrial cities, this study examined key topics and response measures to effectively cope with the restructuring at the regional level in respective categories such as unemployment and vocational training, regulatory reform, innovation capacity maintenance and enhancement and industrial cluster advancement. Furthermore, case studies were conducted to review important overseas cases related to industrial restructuring and implications were drawn upon from the analyses.

Against this backdrop, this study is composed of three parts. Part 1 discusses the theoretical and empirical aspects of regional industrial restructuring, policy issues and the current status and direction of restructuring in Korea’s major industrial cities. Using these discussions as the framework for empirical analysis, Part 2 looked into the effectiveness of unemployment and employment policies, regional R&D measures to create an innovation ecosystem and industrial cluster restructuring policies, and presents policy implications for successful restructuring of regional industries in the future. Part 3 is the appendix, covering specific case studies on overseas cities and regions with industrial restructuring experience and supplementing the general policy implications suggested in the previous chapter.

In Part 1, preceding theories and literatures on regional industrial restructuring were outlined and relevant basic statistics were analyzed to provide a discussion basis of empirical analyses for the entire study. Then, they examined Korea’s leading industries and the economic conditions of cities where those major industries are located, analyzed what caused the decline of these cities and how to respond, and suggests the projection of respective industries and the direction for Korea’s major industrial cities, adding to the analysis of current specialization level of industrial cities.

Part 2 lists diverse policy research and findings related to regional industrial restructuring. The paper, “Employment Policy Responding to Regional Industrial Restructuring,” uses the survival function analysis to study the effectiveness of the unemployment allowance and training programs for unemployed workers—policies designed to resolve unemployment problems that occur in the short- to mid-term—at regional and sector levels. It found that policy effectiveness could be better obtained when the allowance and programs are implemented together, highlighting the importance of the quality evaluation of relevant programs. Another paper, “Regulatory Improvement to Bolster the Regional Economy,” assumes that the driving force of regional economic growth is the relocation of resources to highly productive sectors through consistent regulatory reform and empirically analyzes the economic-boosting effects of regulatory reform in respective regions. Using the analysis findings, it emphasizes the necessity of applying differentiated regional regulations to heighten the value-added of existing industries and foster new industries and adopting special regulatory policies for regions in crisis using special zones. Also, “Roles of Innovation Investment and Policies in Regional Industrial Restructuring” analyzes important roles of regional-level technology innovation capacity and ecosystem creation in restoring regional economies in dire condition and then presents implications for the Korean economy by exploring possible response strategies in terms of innovation capacity improvement, focusing on case studies of foreign local economies in crisis. The final paper, “Restructuring Strategy for Regional Cluster,” reviews the overall conditions of old industrial complexes in major cities and conducts an empirical analysis to seek various policy alternatives that could revive the role of industrial clusters as a hub to heighten the competitiveness of cities. This paper emphasizes the need to reform existing support policies for obsolete industrial complexes that are over 20 years old and, at the same time, to ameliorate the governance of regional cluster policies.

Lastly, Part 3 presents cases of regional industrial restructuring and diverse policy responses attempted in countries around the world: PPP in Wolfsburg, Germany; industrial diversification in Gothenburg, Sweden; deindustrialization in Espoo, Finland; maritime cluster in Imabari, Japan; and reclamation in the urban-industrial complex in Milwaukee and investment promotion in Alabama, the US. These case studies help to understand the causes of success and failures in restructuring efforts in major industrial cities, providing implications on Korea’s strategies for the regional economy.

Summary

Policy Study KOR Structural Changes in Korea’s Regional Industries: The Case of Co-patenting networks in Daejeon

Korea’s regional industries are facing new challenges that encompass a weak knowledge base, unstable industrial base, weak inter-industrial linkages, and stagnating start-up activities and networking, amongst others. Accordingly, this study investigates the structure and characteristics of co-patenting networks in Korea’s Daejeon region using co-patenting data for the 2005-2015 period. Dajeon Metropolitan City is regarded as the center of innovation―after the capital region, including Seoul and neighboring Gyung-gi Province―and is home to leading higher education institutions, such as Korea Advanced Institute of Science and Technology, and the majority of government-funded research institutes. Indeed, under this favorable institutional environment, networking is expected to be active and exemplary for other regions.

Contrary to expectations, however, co-patenting networks among patent applicants in the Deajeon region are not showing a growing trend. Despite the number of co-patent applicants doubling between 2005 and 2015, from 281 to 590, that of co-patents has remained almost the same, marking 1,201 and 1,194 during the same period. The network itself has become more complex, but the relationship between the actors is static and fragmented. This reveals that there is a stagnation of networking in Korean industries; which is also prevalent in other forms of industrial collaboration.

Statistically, co-patenting networks in Daejeon conform well with power law distribution. The co-patenting network can be explained by the preferential attachment model in social network analysis. The estimated values of exponents in power-law fitting range from 1.87 to 2.26, all with statistical significance. The estimation results imply that the network is located between an anomalous network and small-world of power-law networks. The results also hint at the existence of an underlying mechanism blocking the growth of co-patenting networks in the Daejeon region.

This study conjectures that the anomaly derives from the conspicuous disparity among patenting entities. That is, there is a small number of highly innovative giant organizations that produce the lion’s share of patents while the remaining only produce a tiny fraction and are scattered and fragmented. The finding infers that as long as the disparity exists, the stagnation of co-patenting networks in Daejeon will continue. Further studies will follow to explore ensuing issues on: the similarities and differences between Daejeon and other regions; the underlying factors and mechanisms for the stagnation; and how the government can intervene in order to escape the stagnation.

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