KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

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

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

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

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

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

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

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

Summary

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Summary

KDI FOCUS The Ascent of K-Content: Industry Structure and Growth Drivers

Korea’s cultural content industry has seen rapid growth. Key drivers include improved content quality, a maturing digital ecosystem, and increasingly interconnected business networks. As the industry takes on a more prominent role in the national economy―generating a significant production inducement effect―policy efforts should focus on strengthening copyright protection and enforcement, advancing digital transformation among small and midsize firms, and diversifying export markets through deeper industry linkages.

- This paper analyzes the structural changes and growth trajectory of Korea’s content industry, assesses its economic impact, and identifies key drivers of firm-level growth.

- The industry composition is shifting toward digital content production and online distribution.

- Knowledge information has been the largest contributor to sales growth in the content industry.

- Content exports reached $12.45 billion in 2021, continuing a streak of record highs since data collection began.

- Rising domestic production capacity and declining reliance on foreign content have boosted net exports of K-content, contributing to a surplus in intellectual property trade.

- The content industry shows higher self-input coefficients than most service industries and even some manufacturing industries.

- The content industry has grown through close integration with the diverse industries comprising the CPND value chain.

- One unit increase in final demand in the content industry generates 1.572 units of output across all industries―64% within and 36% in other sectors.

- In 2020, the total production inducement effect of the content industry amounted to 113.7 trillion won.

- The content industry’s power dispersion index ranks 19th of 33, placing it in the mid-range.

- The content industry demonstrates aboveaverage sensitivity, highlighting the need for industrial and policy responses to external market changes.

- K-content has solidified its position in global markets through high production quality and artistic merit.

- Changes in CPND factors can also significantly influence the growth of content firms.

- Copyrights increase firm revenue by 11.6%, playing a key role in revenue generation by protecting creative works.

- Development of platforms, networks, and digital devices has also contributed significantly to growth in the content industry.

- Expanding sales channels improves market access and exposure to diverse customer segments. Overseas expansion helps broaden the consumer base and stabilize firm revenue.

- Engagements with content firms generate over twice the revenue growth compared to noncontent firms.

- Copyright acquisition and protection should be embedded across the entire support system for content firms.

- Promoting digital transformation―paired with measures to enhance adaptability―can help steer policy in a more strategic direction for small and midsize content firms.

- The government should systematically develop region-specific entry strategies through the K-Content Export Council.

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 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

Research Monograph KOR An Economic Analysis of Mobility Service: Modeled from Taxi Demand

The mobility market is rapidly evolving in line with digital transformation. This study suggests the mobility industry's future trajectory based on the Korean taxi business. To understand the mobility market comprehensively, we use supply and waiting time data to estimate taxi demand and combine it with customer survey data. Due to the high frequency of supply and waiting time data, we can estimate taxi demand in detail by 10-minute and village units in Seoul and Gyeonggi-do. As a result, the peak demand for cabs came more after work in the evenings than during working hours. Furthermore, the demand estimation demonstrates that there is always extra demand in a Gyeonggi-do suburb, although severe excess demand occurs in Seoul at night. The result shows that finding a policy to address the imbalance is difficult because the imbalance for taxis varies significantly depending on the features of the location (commercial area, residential area, etc.) and time.

In addition to the market analysis, we surveyed customer preferences for new mobility. According to the survey results, there is a massive demand for ride-hailing services and efficient platform taxi services. And there is a relatively large willingness to pay for additional payments during peak times. We also examine the effect of new mobility services, such as an efficient platform service, to reduce waiting time and ride-sharing service. Even if the price increases, the overall market demand increases when two services are available. The emergence of ride-hailing services has helped to reduce excess demand dramatically.

Finally, when various mobility services are introduced to consumers, we can expect the whole mobility market to improve as relaxing excess demand and raising supplier income. Therefore, it is required to further revitalize the platform transportation business (Type 1), which may lead these services, as well as to lower the transportation sector's entrance barrier. On the other side, to prevent unfair trade practices in the mobility platform, a plan to encourage competition must be developed, allowing diverse company operators to enter and compete.

Summary

Policy Study KOR A Study on the Change of Sales Concentration Linked to Platforms Providing On-demand Services

This study analyzes the impact of food delivery service platforms on the restaurant market in South Korea. The appearance of a delivery app leads to many changes in the food service industry. Using monthly sales panel data of restaurants nationwide in 2020 provided by a credit card company, this study examines the revenue growth of restaurants which use a delivery platform. It also relates to sales redistribution among restaurants that use a delivery platform.

The study finds that restaurants which use a food delivery service platform have higher sales than those which do not. During the COVID-19 pandemic in 2020, sales through delivery apps played a role in compensating for the sharp decline of in-person dining at many restaurants. In particular, restaurants with low sales are more likely to raise their position in the market with a food delivery platform. It implies that small restaurant owners should be more actively encouraged to use a delivery platform.

Second, it also shows that sales changes occurred when a restaurant started or stopped using a delivery service platform. Each restaurant can expect a 33.0% sales growth due to the use of delivery apps. In addition, it turns out that restaurants with lower sales have higher expectations of sales growth with a food delivery platform than those with higher sales.

Finally, this study shows sales inequality of entire markets could worsen due to food delivery service platforms. As a result of the Gini index, a food delivery sales component has a more significant contribution to worsening inequality as compared to dine-in sales.

Based on the above empirical analysis, this report can suggest several implications for the growth and distribution of the delivery platform market. Food delivery platforms increase consumers’ convenience and benefit owners of both small and large restaurants. Therefore it is essential to set a policy direction that does not hinder this effect. However, as all restaurants begin to use delivery apps, the larger restaurants are able to increase their market share more than smaller restaurants. It suggests that new policies address ways to maintain a competitive market.

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 A New Direction in Korea’s Service Industries A New Direction in Korea’s Service Industries

Despite the remarkable achievement of entering an era that boasts 30,000 dollars per capita, the Korean economy faces growing concerns over whether the quality of life is one of an advanced country, and whether the current growth strategy is still viable as we move forward. Indeed, the rapidly changing global environment has exposed Korea’s vulnerabilities, and the stagnation in major exporting industries, which have long driven growth, has stalled job creation. Further still, the number of jobs is expected to increasingly diminish in the long-term due to slowing growth, low birth rates, population aging, and technological progress.

One solution to secure sustainable and inclusive growth is to bolster the service industry; a vital component of the national economy which accounts for more than half of the national GDP and about 70% of total employment. However, current productivity is so low that little contribution has been made to economic growth and the creation of quality jobs. This underscores the significance of the service industry and the role it plays in improving quality of life and building a better future.

This study aims to present measures to drive growth and job creation, and to enhance the public service sector which is expected to be in growing demand. To that end, the problem areas and current status of five service industries―child care, lifelong learning, elderly care services, healthcare and tourism―are identified, and overseas cases are analyzed in-depth to draw the policy implications and introduce a direction for practical short- and long-term measures.

Summary

Policy Study KOR A Study on Service Expenditure Slowdown in Korea

This article investigates structural transformation of domestic consumption in Korea.

Korean economy exhibits a typical pattern of structural transformation commonly observed in advanced economies; In a long term perspective, the share of service consumption expenditure increases while the share of agricultural consumption expenditure shrinks over time.

However, a unique feature of structural transformation is also observed. After the global financial crisis, the share of service consumption expenditure stagnates, at most.

This article analyzes these features of structural transformation in Korea through the lens of the utility maximization framework. In particular, this article aims to explain the structural transformation in Korea with income and price effects.

The estimation result suggests that the key source of structural transformation in Korea is a income growth. At the same time, the price effect, summarized by the rapid increase in relative price of service to other consumption goods, also plays non-negligible role in a long run perspective.

Limiting the scope of the analysis to the post global financial crisis period, the estimation result suggests that the weakening relative price of the service to manufacturing goods played a central role in explaining the stagnation of the share of service expenditure. The relative price of the service to manufacturing goods seems to have decreased as a result of the great trade collapse and the weakening of global value chain after the global financial crisis.

If the relative price of service to other consumption goods and the income have evolved following the pre-global financial crisis trend, the share of the service expenditure would have been 3.2~3.6 percentage points higher as of 2018.

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