KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Policy Study KOR Strategies for Upscaling Regional Innovation Clusters: Empricial Analysis and Case Studies

This study investigates the growth dynamics of businesses within regional clusters through empirical analysis and identifies the success factors of regional innovation clusters through case studies. Adopting a practical approach, the empirical analysis uses the data from industrial complexes―recognized as the foundation of Korea’s industrial cluster policy―in connection with the establishment level data from Mining and Manufacturing Survey. The empirical analysis addresses three questions: (1) Do businesses within clusters demonstrate superior growth performance compared to those outside? (2) What specific attributes of cluster-based businesses contribute to their growth patterns? In particular, do they demonstrate linkages with regional innovation capacity? (3) How does cluster membership influence recovery from economic crises such as the global financial crisis?

The case studies focus on Pangyo Techno Valley and the Wonju Medical Device Industry Cluster, analyzing their current status, success factors, and challenges to derive policy insights.

Key findings and policy implications are summarized as follows:

First, businesses located in industrial complexes outperform those outside both in employment and production. According to the analysis model, the businesses in industrial complexes demonstrated approximately 3~5% additional growth in employment, production, and value-added during the investigated period. This trend is consistent across most types of industrial complexes. However, their performance shows no significant correlation with the region’s innovation capacity, suggesting limited impact from the collaboration with regional innovation actors on business outcomes.

Second, there are no additional effects from the government’s cluster policies, such as Free Economic Zones and Research and Development (R&D) Special Zones, at least within the scope of the empirical analysis. While further research is needed, these findings indicate that overlapping designations and investments may dilute the effectiveness of existing cluster policies, calling for more cautious and strategic planning in future cluster policy implementation. As the Korean government is introducing Opportunity Development Zones, it should evaluate the effectiveness of previous policies and better utilize already-invested resources by connecting with existing clusters.

Third, businesses within regional clusters exhibit stronger recovery from external shocks, such as economic crises, than those outside. This advantage appears to stem from the agglomeration of industries within clusters, facilitating information sharing and access to resources. These attributes are noteworthy for building sustainable and resilient regional economic ecosystems. Moreover, the case studies reveal that the establishment and development of regional innovation clusters rely on key success factors, including leadership by regional stakeholders and the capacity to develop and manage these clusters―specifically, planning led by local actors, tight-knit collaboration among innovation actors, and cooperative governance to mobilize resources. While generalizing these findings requires caution, they provide valuable insights for fostering successful regional innovation clusters.

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 How to Save Local Communities Where Young People Are Leaving?

■ As young people are increasingly concentrated in the Seoul Capital Area (SCA), there is growing interest in policies for supporting young people to settle outside of the SCA; however, a better understanding of young people’s location choice is a prerequisite for policy effectiveness.

- The growing presence of young adults in their late 20s and early 30s in the SCA since 2015 requires empirical investigations of the determinants of their location choice.

■ This study empirically analyzes the residential location choice of young people at two distinctive stages---college education and labor market entry---and finds that the policy intervention at the stage of college education is ineffective, while more visible impact is observed for the policy intervention at the stage of labor market entry.

- When high school graduates in the SCA had to out-migrate to a non-SCA region for higher education due to an exogenous demographic shock, most of them eventually returned to the SCA at the later job-search stage. The deterioration of local economic conditions at graduation also resulted in the increased return moves to the SCA.

- Simulations from a two-stage locational choice model that estimated from micro data show that wage subsidies are more cost-effective than educational subsidies for the settlement of young people in the non-SCA areas.

■ Policies for youth require a nationally-coordinated design, considering the impact on location choice, and policies for local higher education should focus on the original goals, not the supplemental goal of mitigating youth outflows.

- Policies for youth need to be better designed in consideration of regional circumstances so as not to encourage youth migration to the SCA. In particular, policy alternatives targeting subsidies and tax benefits for local youth workers are needed.

- The policy for local higher education needs to prioritize improving the quality of education and research functions and strengthening the tie with the local community.

Summary

Research Monograph KOR A Study on Local Acceptance of Renewable Energy Installations: Focusing on Externalities

By providing externality estimates, and analyzing the determinants of the time period for renewable project preparation, this study aims to contribute to rationalizing measures for improving the local acceptance of renewable-energy power plants. To that end, the analysis is divided into three main parts. Chapter 2 reviews contemporary literature to identify the elements that form local acceptance and summarizes Korea’s key policies in relation to local acceptance before presenting two major empirical analyses. Chapter 3 quantitatively estimates the externality of renewable energy capacities―a source of many community-level complaints―in order to provide empirical findings for the rationalization of regulations and incentives. Chapter 4 empirically analyzes the causes of delays during a project preparation period, and verifies the impact of factors that form local acceptance, including the externalities. Based on the above analyses, Chapter 5 summarizes the results and draws on the policy implications.

Chapter 2 examines preceding studies and finds the main determinants of local acceptance of renewable energy capacities to be 1) the costs of negative externalities borne by individuals and; 2) fairness issues with respect to spatial proximity and fair procedures. This is followed by a review of major policies designed to improve local acceptance which are divided into three main types: i) site standards such as separation distance regulations implemented by local governments; ii) compensation strategies for local residents who are directly affected including support programs under the Act on Assistance to Electric Power Plants-neighboring Areas and the benefit-sharing schemes at individual power plant projects; and iii) project procedures such as locating planning systems that aim to guarantee fairness. Reviewing these policies, this chapter confirms that, in order to enhance the effectiveness of relevant measures designed to improve local acceptance, it needs to understand the factors that cause delays in project planning as well as on the negative externalities on areas near plants.

Chapter 3 attempts to estimate the scale of the externalities through the difference-in-differences method under the hedonic model after identifying negative externalities from solar and wind plants, respectively. In this analysis, the treatment effect on housing prices is defined as the effect of the ‘aggregate capacities within a 2km of each house at the time of its transaction.’ The unique housing transaction dataset, covering the period 2006-2019, is used, as well as the size and location of renewable plants in operation during the period. To minimize possible interference from other energy sources, the regional scope for the estimation was narrowed to area where each type of plants is concentrated: Jeollabuk-do, Jeollanam-do, and Gwangju-si for solar farms, and Gangwon-do, Gyeongsangbuk-do, and Ulsan-si for wind farms. Key analysis findings confirmed that both solar and wind capacities produced negative externalities in the vicinity. In addition, the effective radius and size of the externalities were found to vary from each other.

Chapter 4 outlines the typical process of large-scale renewable energy projects, including licensing/permits. As a new attempt, a survival analysis was carried out based on the information on the duration of the project preparation―the time period taken to start operations after being permitted. In doing so, explanatory variables reflecting the determinants of local acceptance are set where, in particular, based on the analysis results of Chapter 3, explanatory variables for the environmental impacts are included. The analysis utilized the data on project details and related regional characteristics of 390 solar and wind projects of which installed capacities are over 3MW and for which business permits are obtained during 2004-March 2020. According to the analysis higher capacities entail more delays, and this pattern can be observed in both solar and wind projects. In the case of large-scale solar energy projects (e.g., capacities exceeding 50MW), it was confirmed that the preparation period takes significantly longer when there are more housing within the 2-5km radius which has little relevance to direct externality.

The policy implications are summarized in Chapter 5. Factors that have a major impact on the local acceptance of renewable energy projects can be largely divided into i) ‘negative externalities that occur disproportionately according to proximity’ and ii) ‘fairness in procedures related to community participation,’ where the latter is associated with broader geographic proximity. To substantially improve local acceptance, a dual strategy can be useful. It entails government supports that compensate environmental effects for local residents who are directly exposed to the externalities, in collaboration with benefit-sharing schemes that induce participations of local residents with a wider geographical area. More specific policy suggestions are two-fold: i) support programs for neighboring areas under the Act on Assistance to Electric Power Plants-neighboring Areas need to provide concentrated assistance to a narrower scope of targets than the current 5km. In the case of the benefit-sharing approaches, participation should be facilitated by sharing necessary information on the revenue generation mechanism and by broadening the spatial scope eligible for participation.

Summary

Policy Study KOR A Study on Agglomeration and Urban Growth: Market Access Approach to Urban Growth

This paper studies population and employment growth of Korean cities in the period of 1975-2015. I document that urban growth patterns in the first 20 years of 1975-1995 are different from those in the recent 20 years of 1995- 2015. First, Zipf’s law did not hold in the first period while the distribution of city sizes have become linear lately. Second, the population growth looks independent from city sizes in the second period. In 1975-1995, on the other hands, Gibrat’s law does not hold as an inverse U pattern appears. In sum, the growth patterns in the second period support random growth theory.

Then, I focus on the period of 1995-2015 to examine market access effects on urban growth. The market access is a measure of economic advantages of urban geography. Cities have a high level of market access when they are located near a big metropolitan area. The market access, an geographical advantage, has a significant influence on employment growth. This effect is higher in Seoul metropolitan area than in the rest of South Korea. The market access effect is stronger on the employment growth of manufacturing industry than on that of service industry. This result is robust with various checks of, e.g., different definition of urban areas and different values of elasticity of transport costs. The policy makers in South Korea should consider geographical characteristics when they make policy decisions with respect to regional development.

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 A Study on the Improvement of Under-developedness Index

Recently, various policies have been implemented to attain balanced regional growth including distributing population and resources to outside of Seoul metropolitan area. In particular, relative developedness is considered when prioritizing investments to large-scaled public investment projects. Preliminary feasibility studies, for example, adopt and reflect ‘under-developedness index (UDI)’ to consider balanced regional growth when making final conclusion for whether to enforce or not.

This study seeks a more systematic and objective way to calculate a new UDI. Using statistical methods, it calculates a new UDI and compares it to existing UDI to validate a new UDI’s power to reflect reality, i.e., what experts recognize through their research and work experience. Also, it attempts to find policy implications with regard to balanced regional growth by interregional comparisons of results obtained as a byproduct of analyses. The outcome of these comparisons is expected to be an empirical evidence of which aspects should be considered and/or emphasized when making distributional policies for balanced regional growth.

To fulfill its purpose, this study uses factor analysis to screen appropriate indicators that explains developedness of different regions well after collecting various indicators that have been adopted in past similar indices, and to extract factors that constitutes developedness (or under-developedness) of each region. As a result, three independent factors named ‘regional vitality,’ ‘degree of urbanization,’ and ‘economic power of residents’ are extracted, which effectively explain screened indicators. Subsequently, a　survey methodology on experts are introduced to obtain relative importance of those three factors, and a new UDI is calculated using the factor scores and relative weights on them.

To validate the superiority of new UDI to old one, the exploded logit model is applied on survey data from experts in regional economics and policy. Results confirm the new UDI meets reality more than old UDI both at the level of bigger administrative districts (metropolitan cities and provinces) and smaller ones (cities and counties.) Also, a sensitivity analysis on weights of new UDI confirms new UDI's robustness.

Additionally, the aspect of ‘regional vitality’ explains the variation of indicators most as well as turns out most uneven over regions. It conjectures the objective of balanced regional growth would be attained when the unbalance in this aspect is resolved. More in-depth research on this conjecture is remained as a future research task.

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