KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Policy Study KOR Effects of Transportation Infrastructure Investment on Manufacturing Productivity

Do large-scale financial investments in transportation infrastructure have positive effects on regional development such as inducement of firms to relocate to a new region? Do transportation infrastructures affect productivity of nearby firms, besides spatial changes in the distribution of economic activities? Does such productivity increase come at the expense of others endowed with underdeveloped transportation infrastructure? Is the increased productivity resulting from large-scale investment in transportation infrastructure durable? The first question has already been answered by Kim⋅Ahn (2009) in their previous study concerning West Coast Expressway in which they demonstrated that increased accessibility from large-scale transportation infrastructure opening, was indeed a significant determinant in location decisions for new manufacturing firms. However, the answer to the second question has still remained a question mark, despite its significance in formulating effective regional development policies. In this regard, this study attempts to follow up the previous works of Kim⋅Ahn (2009). It takes West Coast Expressway as a research subject and examines the impacts of large-scale transportation infrastructure supply on total factor productivity growth in individual manufacturing firms from a period of 1997 to 2003. Key findings of the analysis are as follows.

First, in all cases, the distance from the highway interchange to the location of firms is found to have a statistically negative effect on the productivity growth rate of manufacturing firms: the longer the distance is, the lower the productivity growth becomes. This implies that the accessibility to the expressway has contributed to productivity increase of individual firms. Second, separate analysis of newly located firms and existing firms reveals that the opening of West Coast Expressway has improved the "accessibility effect" for newly located firms by a huge margin of 50 percent compared to that of existing firms. This indirectly suggests the presence of a selection effect between new transportation infrastructure and productivity and a potential negative repercussions to neighboring regions. Third, the rapid decrease in the size of the negative effects of the productivity growth rate regarding distance to the expressway interchange in the third year from its initial opening implies that the effect of new transportation infrastructure may not be long-lasting.

Policy implications drawn from above findings are as follows. First, building expressways could bring positive effects on the productivity growth in manufacturing firms and requires a certain level of investment for those that are determined feasible by prudent socio-economic cost-benefit analysis, as there appears to be a positive correlation between expressway construction and balanced national development. Second, careful considerations need to be made in order to minimize negative effects when deciding on new transportation infrastructure, considering that local authorities compete for large-scale transportation infrastructure which are essentially government-funded and that providing one region with new transportation infrastructure could bring negative repercussions on economic activities in other regions. Third, decisions on future investment should be made after careful considerations and emphasis should be placed also on managing the demand side of new transportation infrastructure as well as the supply side in order to maintain the effect of productivity growth at a certain level. This is due to the fact new transportation infrastructure effect could be transient as demonstrated by preceding study.

Summary

Policy Study KOR Study on Land Price Change in Residence Development Projects

The current report investigates impact of developing residence area upon movement of land price, and tries to elicit policy implication on project implementation along with on land acquisition. We analyze price change within and outer of residence area development site, with the timeline of designation, development planning, and detailed implementation planning stages. Also pattern of price change in capital region is compared with that in other regions.

14 project sites are selected for the analysis and the prices of unit piece of lands in those sites are collected for 2000 to 2010. We find out that the price of land has increased rapidly upon designation of residence area project and steadily been on uprising trend during following implementation stages. Especially the price of land within the sites increased dramatically even before designation stage and the change rate has hit the peak upon designation. Yet this change turns out to be much severer in capital region.

The result implies that adjustment or improvement of land compensation practice, specifically in timing as well as in detailed procedures. It is suggested that the compensation of land acquisition should be based on earlier stage of development in order for principle of fair compensation.

Summary

Policy Study KOR Regional Industrial Location Policies to Stimulate Manufacturing Investment

With an objective to provide policy implications to help establish effective regional development policies and the so-called ‘KTX (Korea Train Express) Economic Zone’plans, this study intends to analyze the impacts of the changes in industry location factors, including the opening of the KTX. one of the recent largest infrastructure investment projects, on the spatial distribution of a high-tech industry which is closely related to discussions on the so called ‘KTX Economic Zone.’ To this end, this study divides stations into existing stations in hub cities and new stations in order to reflect differences in land use patterns between the two different station types. This study selects the analysis period of a decade before and after the KTX was opened, and links the micro data of the mining & manufacturing industries and the explanatory variables such as average land prices in terms of time-series at the smaller spatial units of Eup, Myeon and Dong. Then, through applying a panel negative binomial model using fixed-effects, this study attempts to analyze the impacts of the changes of location factors including the opening of the high-speed railways on the location of new hi-tech manufacturing establishments. The main findings of the analysis are as follows.

First, it is found that the opening of the KTX tends to reduce the location preference of the high-tech industry near the existing stations located in hub cities. On the other hand, as for new stations, the opening of KTX itself does not appear to produce statistically meaningful changes on the location of the high-tech industry, whereas the improvement of overall road infrastructure appears to bring positive impacts on its location near the new stations. This implies that policies to reduce traffic congestions by improving the overall transport infrastructures nearby the KTX stations has a potential for a successful execution of the regional industrial location policy that aims to lead the development of regional economic zones by creating high-tech clusters near the KTX station. However, given that the pattern of the land uses near the station varies among regions, the regional industrial location policy should be differentiated in accordance with the conditions of the land use near the stations.

Second, the increase in the average land prices turns out to have highly statistically meaningful effects on the location of the new high-tech establishments regardless of differences in the type of stations. Specifically speaking, it is found that an increase of 10,000 won in the land price per square meter is expected to decrease the number of new hi-tech companies by about 0.23~0.30%. This indicates that the supply price of industrial land would be critical for stimulating investment of hi-tech industries.

Third, an increase in the number of employees in the manufacturing industry located in the region, which is used as a proxy variable to control agglomeration benefits, turns out to be a very positive factor for the location decision of a new establishment. This result is overall consistent with the findings from preceding studies. Furthermore, this study finds that clustering by each technology sector is a significant factor for the location decision of a new establishment. This implies that even when the large-scale investment is made on the transport infrastructure and the land is supplied at lower prices, the effects of location policies would be limited without the consideration of industrial clustering effects, particularly of the same technology sectors.

Summary

Policy Study KOR The Impact of Transport Infrastructure Investment on New Manufacturing Location

Since the 1960s, Korea has consistently expanded the investment in transport infrastructure in order to enhance the competitiveness of the national industry. Despite the input of a huge budget, however, studies conducted on the economic effect, particularly the spatial changes of economic activities, of the expressway construction, are almost nonexistent. In this regard, this study intends to analyze the impact of the transport infrastructure investment on the spatial distribution of economic activities through location changes of new manufacturing establishments. To that end, this study chooses the West Coast Expressway which was constructed with an objective to develop relatively underdeveloped regions, compared to those along the Seoul-Busan expressway. Based on the analysis, this study attempts to provide policy implications to help establish effective regional development policies and transport infrastructure plans.

This study selects the analysis period of a decade before and after 2001—when the West Coast Expressway was launched, and then links the micro data of the mining & manufacturing industries and the explanatory variables in terms of time-series at the spatial analysis unit, Eup, Myeon and Dong. Then, through applying a fixed-effects panel model, this study attempts to overcome limitations of the cross-sectional analysis, which can explain only the correlation, and clarify the causal relationship between the new expressway construction and the location of new manufacturing establishments.

Consequently, this study finds that the accessibility to existing expressways is still an important location factor for some new manufacturing establishments, but the launch of the West Coast Expressway has brought out very significant effects on the spatial distribution of new manufacturing establishments regardless of their technology level or size. This indicates that the expressway has a potential in playing the role of satisfying the construction objective of developing the underdeveloped regions. In addition, this study finds that average wages, average land prices, and agglomeration effects, are also significant determinants to the location decision of new manufacturing establishments. In particular, average wages do not significantly affect the location of a high-tech industry, but, for establishments with lower technology level, do seem to affect the location decision of manufacturing establishments more negatively. The average land price turns out to significantly affect the location decision of new manufacturing establishments regardless of their technology level or size.

The policy implications of this study are as follows. First, the investment on transport infrastructure such as the West Coast Expressway could be an effective tool for regional development, but without the agglomeration and sector clustering effects of existing businesses, the effect of new expressways would be only limited. Therefore, the government should give a sufficient consideration to the location of existing business activities and the planned industrial complex when it comes to setting the new express line and intersection locations. Second, the significant impact of the average land prices on attracting new manufacturing establishments is the testimony to the fact that the high prices of industrial lands would result in limited effects of new transport infrastructure, even if the large-scale investment is made on the transport infrastructure. This demonstrates how careful and cautious the government should be in setting the selling price of industrial lands.

Summary

Research Monograph KOR Global Production Network in East Asia and Its Implication to Korea‘s Innovation System

1. Introduction

As globalization proceeds, industrialized countries tend to concentrate on knowledge-based industrial activities at home and to relocate simple and labor-intensive productions to developing countries. Such geographic realignment of industrial activities is led mainly by multinational corporations that are capable of integrating and coordinating each stage of value chains that are spread over many different regions.

Regional bases specialized in R&D activities, production based on skilled workers, and simple labor-intensive assembly production are emerging in the world, accruing from global network formed by multinational corporations. Although each regional basis is specialized in a function assigned in terms of global context, it is inclined to take the shape of regional cluster in order to enhance its core competence by interfacing intimately complementary activities within the region.

Accordingly, national competitiveness in the global economy is summarized to how many such competitive regional clusters a nation has that are capable of actively taking part in global networks.

2. Synopsis

The phenomenon of losing competitiveness of almost all U.S. industries took place in the 1970s. Consequently, entire industrial restructuring had proceeded in the 1980s along with the globalization of industry and the emergence of new industry, that is, IT industry, which brought about a very different industrial structure from the past.

Today, new generation businesses such as Microsoft, Intel, Cisco and Oracle are governing the market. Their business characteristics are quite different from the past predecessors, which were integrated vertically along value chains, from finished products to parts and components. They partition their value chains and are specialized in a specific activity.

These new generation businesses are able to specialize in their core competence activity through globally integrated production networks. A typical example is the IT industry of the U.S., which formed a global production system by collaborating with East Asian countries' firms. It is generally believed that without such globalization strategy, the U.S. IT industry could not have been sustainable.
In the past multinational corporations set up their offshore subsidiaries for the purpose of penetrating foreign market and utilizing low wages of local labor force. Nowadays, new generation firms establish global production networks even at the start-up stage in East Asia so that East Asian subsidiaries are able to be solely in charge of production.

In their search for partners of production networks in East Asia during the latter part of the 1980s, Korea was allegedly considered as a site. However, Korea failed to cozy up with these new IT companies, since Korea's electronics firms had concentrated on conventional technology products with a exclusive and closed tie between large and small firms. In contrast Singapore, which had endeavored to attract foreign investment early on, and Taiwan, which had abundance of small parts and components makers with high level of production technology and skill, could easily be selected as production bases for U.S. IT firms in East Asia.

Singapore did not only induce foreign investments but proceeded to relocate low technology production processes to neighboring countries such as Malaysia and Thailand so that its own production base could be rearranged into a high value-added industrial structure that could accommodate its high-risen wages.

Taiwan proceeded to relocate much of its production facilities to mainland China in an effort to counter rising wages from the late 1980s and to invite Taiwanese venture-business entrepreneurs working in the U.S., particularly in IT industry.

Successful industrialization of China accrued mostly to foreign direct investments of Taiwan and Hong Kong in the late 1980s. Japan and Korea also began to make direct investments actively in China in the early 1990s. As a result, Northeast Asia came to form an international production networks. Based on its low wage labor force, China was able to export assembled products to regions outside of Northeast Asia such as the U.S. and EU. Core parts and components of Chinese products are imported from Taiwan, Japan, and Korea.

The integration of the world economy has enabled multinational corporations to select the most competitive regional site for each industrial activity. Each region is to compete for joining global production network. Governments set priority of industrial policy on developing regional clusters that are competitive enough to be connected with global network.

Competitive advantage of region, especially the capability to create innovation, is said to be realized most effectively when clusters are formed, that is, firms and institutes such as universities and laboratories are agglomerated within a region so that they can compete and cooperate simultaneously.

Consequently, traditional industrial policies, which had sought economies of scale and scope through market protection such as import restriction is no longer kept up. They are to shift toward aggressive open policy through which linkages with international production networks are expected, and R&D policy, which support infrastructure for industrial and/or science parks to promote innovation capability of local firms.

Unlike other East Asia's new industrial countries that had shifted toward active open policy strategies since the late 1980s, Korea had maintained its closed industrial structure until the IMF crisis of 1997. Even in the era of globalization in the 1990s, Korea's imperative of economic growth relied on such traditional large-scale production as automobiles, shipbuilding, and semiconductor that had been developed in the era of industrialization. Instead of actively taking part in the global production network initiated by industrialized countries, Korea had been indulged in strengthening competitiveness in those traditional industries. Their efforts were centered on the development of technology for themselves that became difficult to acquire from abroad and also the improvement of productivity through factory automation in order to secure competitive advantage in price.

However, thanks to rapid industrialization of China, Korea began to take part in the formation of international production network in Northeast Asia by both supplying technology intensive parts and materials and expanding local production to China since the mid 1990s.
It is fair to say that, during the era of industrialization, Korea was active in international production networks with industrialized countries by exporting assembled products such as textile, footwear, electronics, and other products of OEM. However, Korean products rapidly lost their price competitiveness, and their role in international production networks became limited as new networks between industrialized countries and developing countries emerged in the late 1980s.

Korea's investment for overseas production in China implied that Korea was given a useful opportunity to regain the role in global production networks through China.

The nature of network between China and Korea is basically role division in production. Korean industries could supply core parts and components in which technology acquired from industrialized countries or accumulated through intense R&D efforts is embodied.

When the drain of technology and knowledge to China continues without Korea's refilling from abroad, sooner or later, reserve of knowledge and technology will be exhausted and the international division of labor between China and Korea will be difficult to maintain.

Recent decline of competitiveness of Southeast Asian countries IT industries shows that there is a limit to the strategy of relying solely on foreign technology. It is a natural consequence that when a nation, with poor national knowledge base, relies only on the globalization strategy of multinational corporations, its position is likely to become vulnerable. In the case of Southeast Asian countries, the China variable came into being so that their positions are being weakened gradually as multinational corporations' attention shifts more to China.

There remained a problem that Korea was not concerned with establishing regional clusters since export-driven industrialization by big firms was pursued by the central government. In Korea, critical policy agenda for regional cluster can be summarized as improving innovative capability of small and medium-sized enterprises (SMEs).

In order to promote development of innovative SMEs, foreign investments need to be enhanced to bring in advanced technology into regions so that they could be given greater opportunities to form production networks with foreign companies. When domestic small businesses are tied vertically only with domestic large firms, their opportunities for innovation capability are limited. Their businesses might even be in a position of shrinking as domestic large firms shift to overseas production.

At the same time it needs to greatly enlarge government's support for local co-operative R&D projects between local firms and institutes. It is expected that setting up local technology assistance facilities for nurturing technological capability of small businesses will be helpful.

So far, small businesses have kept their position as assembly vendors to support large firms' efforts of securing price competitiveness. As a result, they suffer from low profitability and productivity in value added terms. Under the present conditions, they do not have enough room or funds to increase R&D investments. Therefore, government support needs to be increased significantly.

For such support measures to be effective, however, there must be a demand-oriented technology support system that SMEs desire. Most desirable for this purpose would be that effective technology demand survey systems for local small businesses should be installed and they should be managed and monitored by local small businesses themselves. In case such a system is difficult to implement, technology demand surveys need to be performed and assessed from the viewpoint of small businesses so that the results are properly fed into operation of the government's support agency.

3. Conclusion

Korea's policy should focus on securing supply source of technology through foreign direct investments and absorbing cutting-edge technology by establishing technological bases in the U.S. and other countries. Korea's economic and social structure must also be transformed into an open form and its knowledge base system must advance to allow active learning and utilization of knowledge.

In addition, to open policy strategy to take part in international production networks, greater efforts are required to secure local competitive advantage. For such an end, forming regional clusters is necessary in order that innovative capacity of the region may be upgraded by the intimate linkage of local core competence.

Summary

Working Paper Impact of the Seoul Olympic Games on National Development

The Seoul Olympic Games, commencing with the splendid
Opening Ceremony and continuing for two weeks with
excitement-filled competitions, greatly influenced many aspects of
Korean society. When the Olympic torch which brightly
symbolized the Olympic ideal was extinguished at the Closing
Ceremony, everybody stood hand-in-hand, hoping that the
moment would last a little longer.

The Seoul Olympic Games, hosted with the support of all
the Korean people, will be remembered as the most successful in
modern Olympic history, realizing the Olympic ideal and
capturing the Olympic spirit while showcasing to the utmost the
potential of the Korean people. Looking back at the beginning
stags, when Seoul first made its bid, there were many critics
who voiced fears and were skeptical about hosting the Olympic
Games. However, by overcoming many obstacles, and thanks to
the new foundation of national strength and the wholehearted
efforts of the organizers, the results in many cases exceeded our
expectations.

Through its report, 'Evaluation of the Economic Feasibility
of the 1988 Olympic Games and Analysis of it Effect,' published
in 1984 and 'The Significance of the Seoul Olympic Games for
National Development,' published in 1987, the Korea Development
Institute(KDI) analyzed the political, diplomatic, social, cultural
and economic repercussions that hosting the Olympic Games
would have on Korea. Now, as the curtain has fallen on the
Olympic Games, it is time to analyze the comprehensive effects
and significance of the Seoul Olympic Games.

(※서문에서 발췌한 내용임)

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