KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

KDI FOCUS Path to National Champions: Transforming Support Policies for Small- and Medium-Sized Enterprises (SMEs)

South Korea’s ‘national champion policy,’ designed to foster global enterprises, has yet to deliver measurable outcomes in sales and productivity, suggesting inefficiencies in resource allocation linked to ‘the risk of picking winners.’ Accordingly, the incentive structure of growth policies for Small- and Medium-Sized Enterprises (SMEs) needs an operational shift, moving away from conventional subsidy assistance toward a bespoke model that integrates private investment, consulting, and networks to address their business challenges collaboratively. Furthermore, in order to enhance policy accountability and effectiveness, it is crucial to consolidate support details and performance outcomes while ensuring transparency through public disclosure.

- Amid intensifying competition for technological dominance, advanced countries are stepping up the reintroduction of targeted industrial policy to concentrate support in specific industries or firms.

- Korea provides substantial subsidies to firms through its national champion policy, but studies on its effectiveness remain limited.

- This study analyzes the effectiveness of Korea’s national champion policy and offers recommendations for improvement by comparing its operational approach with those of other countries.

- Korea’s flagship national champion policy program, World Class 300, provided targeted annual subsidies to 30~56 firms selected through a government-led process.

- The declining share of high-growth firms led to a large drop in the number of firms satisfying WC300’s sales growth criterion, making it harder to identify eligible firms.

- An analysis of WC300 outcomes reveals no significant impact on sales, value-added, or productivity, suggesting that resources may have been allocated to firms misaligned with the project’s objectives.

- Korea’s national champion policy aims to foster innovation and promote exports among SMEs to drive growth and job creation.

- However, concentrating resources on less competitive firms through selective support risks undermining economic efficiency and distorting market dynamics.

- Relational support is likely more effective than transactional support for high-potential firms.

- Effective business growth support requires tailored assistance that meets the diverse needs across the growth stages of individual firms rather than focusing on a single activity.

- The time has come for Korea to shift gears in its national champion

- To enhance the effectiveness of the national champion policy, its framework―including firm selection and support measures―should transition to a private-sector-led approach.

- Enhancing policy accountability and effectiveness requires centralized management of support details and performance data alongside transparent public disclosure.

- Given the low incentives for actively restructuring government support projects, institutionalizing independent evaluations is crucial for improving future outcomes.

- New policy initiatives should operate systematic pilot programs to enhance effectiveness.

Summary

KDI FOCUS Protecting Customer Funds for Emerging Financial Products

Emerging financial products driven by innovation, such as virtual assets and simplified payment services, introduce both new conveniences and in-transaction risks to customer funds. Despite regulations on segregating customer funds already in place, full compliance by businesses with these rules is unlikely, especially with insolvency on their horizon. This paper proposes a new protection framework that bolsters the safety of new financial products and reduces funding pressures for the compensation scheme.

- New financial products emerging through innovation offer novel benefits but may also expose customers to risks in managing their funds.

- A protection system for emerging financial products can lay a strong foundation, serving as a key safety net to support reliable financial innovation.

- Customer funds for new financial products include prepaid balances, virtual asset deposits,

- P2P lending deposits, and funeral service prepayments.

- The current volume of customer funds associated with new financial products is substantial, at about 18 trillion won, and is expected to grow further, driven by advancements in digital finance and population aging.

- There have been numerous cases where businesses misappropriated customer funds for new financial products and later went bankrupt.

- Although fund segregation regulations for customer funds are in place, firms on the verge of bankruptcy are highly likely to violate them, and several other limitations persist.

- While fund segregation regulations serve a preventive function, the best of such precautions cannot eliminate all incidents, necessitating a post-incident protection system.

- In the direct protection scheme, firms pay insurance premiums in advance, and KDIC protects customers in the event of business insolvency.

- However, the direct scheme applies uniform insurance rates regardless of fund segregation in contrast to the fundamental insurance principle of premiums proportional to risk.

- In the indirect framework, firms do not pay insurance premiums, and KDIC safeguards only the funds segregated in banks in the event of bank failure.

- The indirect approach only protects segregated funds, leaving customers unprotected from violations of segregation rules, resulting in reduced protection effectiveness.

- The proposed hybrid scheme indirectly protects customer funds segregated in banks while directly safeguarding all other customer funds.

- This hybrid protection system ensures high effectiveness by safeguarding all customer funds and keeps

- insurance premium burdens low for firms and customers, as firms are incentivized to deposit most customer funds in banks.

- The hybrid protection system addresses risk transfer, in which a bank’s failure can trigger a firm’s insolvency.

- Early detection of firms facing liquidity risks is enabled by the hybrid proposal.

- KDIC’s burden under the hybrid option is not expected to be substantial.

- While the indirect protection system is easy to implement, the hybrid option requires substantial changes to the existing framework, making immediate implementation challenging.

- Recently, major developed countries have expanded the coverage of deposit insurance institutions beyond traditional deposits to include a wide range of financial and quasifinancial services, aiming to responsibly foster financial innovation.

- This study builds on such global trends to propose protection measures for customer funds in new financial products.

- The proposed protection system, with its inclusive nature, can serve as a comprehensive framework to protect and foster future innovation by capturing new financial products within its regulatory scope.

Summary

KDI FOCUS Restructuring Platform Merger Review

Platform mergers differ significantly from traditional mergers. In platform mergers, foreclosure issues, which are crucial in traditional vertical mergers, carry less significance but may still arise indirectly. Platforms, moreover, can favor their own businesses potentially disadvantaging competitors, and leverage their market power to new businesses. Lastly, entry barriers could increase as a result of platforms’ multi-service provisions. Nevertheless, platforms can enhance consumer welfare, especially through product (service) bundling. Thus, we need to overhaul the merger review system to incorporate the aforementioned characteristics of platform mergers.

- Amidst the escalating debate on platform regulation, there has been a surge in platform mergers, leading to a corresponding increase in the need for platform merger reviews.

- There is a need for new guidelines for platform merger review to reflect the unique characteristics of such mergers. These guidelines should outline the review methodology and the assessment of potential competitive constraints.

- Indirect network externality plays a crucial role in locking in users to specific platforms.

- Platform firms provide a diverse range of services, offering multiple ancillary service platforms that revolve around a few core platforms or other businesses associated with the platforms.

- Platform firms often pursue mergers to expand into new revenue-creating areas or to strengthen their competitiveness in core services.

- One significant concern regarding anticompetitive practices in platform mergers is the potential for excluding competitors via selfpreferencing in the new markets.

- The addition of new ancillary services through a merger can potentially raise entry barriers in both the platform’s core service areas and the overall platform ecosystem.

- If a vertical merger leads to the foreclosure of purchasing or sales channels, it can seriously harm market competition.

- In mixed mergers, leveraging market power from one market to another can occur through tying.

- The determination of whether a merger is vertical or mixed is bound to be confusing when a platform, acting as an intermediary between consumers and small and medium-sized vendors, seeks to merge in order to add an auxiliary service for these vendors.

- Platform operators have the ability to foreclose competitors in other sectors but only indirectly, using accessibility to users.

- Without tying, platform operators can leverage market power from their core business area to ancillary service areas by raising rival’s costs.

- Platform mergers can raise barriers to entry not only in new markets but also in existing core service areas and the overall platform ecosystem. In some cases, the creation and reinforcement of entry barriers may be a deliberate objective of the merging parties.

Summary

Policy Study KOR Competitive Bottleneck Platform’s Strategies and Policy Intervention

This research studies a competitive bottleneck market. Reviewing the exiting literature, I try to enhance our understanding of the competitive bottleneck market, and discuss policy intervention tools based on the understanding. I also construct a theoretical model on the business coordination strategy between a platform and seller-side users, to investigate the effect on market competition, market structure, innovation activities, and user welfare. The business coordination, such as exclusive contracts and mergers, can resolve the competitive bottleneck situation, relieve the buyer-side competition, and harm single-homing buyer’s welfare. In the case of merger in which the platform acquires some of the multi-homing sellers, some of sellers can be single-homing. Or seller-side can disappear as the platform internalizes all seller-side users. Then, the (competitive bottleneck) market becomes two-sided single-homing market or the one-sided market. This study shows that the platform has an incentive to adopt the business coordination strategy, to remove the competitive bottleneck and increase the profits.

The policy suggestion in this work can be divided into three groups. The first is industrial policy, the second is regulation policy, and the last is consumer protection. For the industrial policy, I discuss the government assistance to secure users and the innovation support for the sellers, in the view of the long-term productivity improvement. For the regulation / consumer protection, I concentrate on the consumer welfare (or user welfare). When the seller-side users are consist of mid and small size businesses or self-employed businesses, the welfare of seller-side users becomes a policy maker’s concern, as well as the consumer welfare.

To discipline the abuse of market dominance by the competitive bottleneck platform, the large scale modification for the existing regulation tools is needed. In the competitive bottleneck market, the anti-competitive conducts can happen in the competitive side of the market, rather than in monopoly side of the market. Thus, we need new perspectives to regulate the anti-competitive conducts. For the cartel cases, we also need the significant modification in the regulation schemes. The restrained competition on one side can promote the competition on the other side. For the merger investigation, we need to study how the market structure, competition patterns, and user welfare change, as well as the possibility of foreclosing effects and exploitative conducts, which are examined currently.

Summary

Working Paper The Airbnb Effect on the Hotel Industry: Evidence from Korea

With rapidly increasing volume of sharing economy transactions, the existing business has shown growing concerns over how the market will be affected. This study examines the issue empirically in the context of accommodation sharing using the data directly obtained from Airbnb and the website data collected by AirDNA during 2010-2014 in Korea. We first examine how hotels' revenue and operations are affected by the introduction of Airbnb in Korea using a reduced-form analysis and find a negative impact on revenue and room rate, but not a significant effect on occupancy rate. We then estimate a structural model of the demand for accommodation and find that hotels become relatively less attractive with the increase of Airbnb supply. However, an additional analysis of hotel review ratings shows no significant change in the quality of hotel services with Airbnb growth, rebutting the argument that hotel accommodation quality may be lowered as a response to competitive pressure from cheap options available on Airbnb. Overall, we conclude that hotels have responded to Airbnb growth by lowering prices, resulting in the decrease in revenue, but they do not appear to have degraded their service quality.

Summary

Policy Study KOR Study on Franchise Contract and Franchise Market System

This paper analyzes how franchise contract conditions are influenced by market structure as well as how they affect producer surplus, utilizing the Korean franchisor’s Information Disclosure Data for 2014-2016.

The results reveal that franchise fees tend to increase in line with the increase in the number of direct stores or business period. This implies that it would be reasonable to check whether the franchise fee is excessive compared to the amount of reputation capital rather than the absolute level of franchise fee.

It was also found that the larger the royalty discount in the purchase contract, the higher the initial royalties. Outwardly, although it can seem to be a royalty discount, it can be a practice to induce a raw material purchase contract by initially setting a high royalty rate then lowering it after the purchase contract is signed.

For the effect on producer surplus, the results show that an increase in franchise fees and royalties negatively affect franchisee’s operating profits but positively affect that of the franchisor’s, leading to conflicts over the distribution of the economic value added.

Based on the findings, this paper proposes policy directions that include; reinforcing the contents in the information disclosure book; improving of royalties and raw material contracts and; strengthening the qualification requirements for franchise businesses.

Summary

KDI FOCUS Golden Era of PB: Who Reaped the Fruits of Growth?

□ The rise of the market for private-label brands (PB) has elevated the profits of corporate retailers but has not significantly affected, or in some cases reduced, those of subcontracting manufacturers. This is not only due to the significant cannibalization effect on national brands (NB) caused by the release of similar PBs, but also because the imbalance in the bargaining positions of retailers and manufacturers has caused operating profits to be set low while retail margins are set high. Accordingly, the time has come to prioritize the establishment of a fair trade order to promote the balanced development of the PB business. Violations of the ban on requesting management information on manufacturers must be closely examined and stronger punishment and penalties are needed for violations against the Act on Fair Transactions in Large Franchise and Retail Business. Additionally, manufacturers need to actively utilize government programs designed to support sales channels and to seek ways to advance into overseas markets.

- Private brands (PB) have exhibited a remarkable expansion based on product diversity and quality enhancement.

- This study analyzes the effect of increased PB sales on the growth of the retail and manufacturing industries and suggests policy directions for shared growth and fair market order.

- The PB market grew significantly from 3.6 trillion won in 2008 to 9.3 trillion won in 2013.

- Large discount stores gave rise to the PB market but convenience stores are currently leading the sales growth.

- Domestic retailers’ share of PB sales has grown to a similar level as global leaders and there is potential for future growth.

- The recent growth of general retail has been heavily dependent on the growth of corporate retailers.

- The increase in corporate retailers’ sales points to an increase in purchasing power.

- The increase in buyers’ power resulting from market concentration in general retail is a prerequisite to the release of PBs.

- The intensifying competition between retailers increases economic incentives to produce PBs.

- PBs are a profit-maximizing strategy created within the structure changes prompted by corporate retailer-centered market concentration and the intensifying competition between them.

- An increase in the PB sales share increases both sales and operating profit of retailer stores.

- 1,000 manufacturing suppliers to corporate retailers were interviewed and the economic effects of expanding the supply of PBs were analyzed.

- Large firms experienced a drop in total sales due to the cannibalization effect of their own products as the share of PB sales increased.

- Micro businesses experienced a weaker cannibalization effect, and PB supply helped them to secure sales channels and increase the capacity utilization rate, which increased sales.

- No significant increases in operating profit were observed in micro businesses.

- In supplying PBs, SMEs and micro businesses have a smaller operating profit ratio and larger retail margin ratio than in supplying NBs.

- The unfavorable profit sharing structure for SMEs and micro businesses is possibly incurred by the imbalance in bargaining position.

- Of 309 PB suppliers, 30 firms (9.7%) experienced unfair trade requests from retailers, and the most common is cutting the supply price (20 firms, 34%).

- The Fair Trade Commission should closely examine any violations of the ban on requesting information on production costs. And heavier punishment should be imposed on any violations of the Act on Fair Transactions in Large Franchise and Retail Business.

- SME manufacturers need to step beyond the narrow domestic market into larger PB markets abroad by actively utilizing government’s support programs.

Summary

Policy Study KOR The Economic Effects of Expanding Private Brand of Large Retail Chains

Large retailer’s private brands(PB) originally started out as Me-too commodity of manufacturer’s brands. In recent years, however, PB is pulling the growth of domestic retail market based on product diversification and quality improvement. This paper analyzes the growth trends and growth factors of PB market in Korea. Further, the paper constructs micro-level PB data and conducts surveys over a thousand manufacturers in order to estimate how the growth of PB market affects overall sales and profits of retailers and manufactures.

The results show that the growth of PB market has been driven by structural changes of retail industry, including a market dominance of large retailers and an increased competition among them. In addition, the study indicates that the growth momentum has shifted from large retail industry to convenience store industry since the late 2000s.

The regression analysis finds that an increase in PB sales tends to raise overall sales and profits of large retailers. This verifies the economic incentives of large retail store who have struggled for increasing PB sales. Regarding effects on the manufacturing industry, the increased PB sales is likely to enhance the overall sales of small business, without affecting their profits. This discrepancy between sales and profits is found to be driven by unfavorable division of profits, applied to small manufacturers.

Finally, the survey results reveal that high level of substitution between PB and NB can further reduce the opportunity for NB launches, and that manufacturers tend to respond passively to unfair trade practices, mainly due to their concerns about potential disadvantages they may receive from large retailers.

Summary

KDI FOCUS Korea’s E-Commerce Exports to China: Direction for Corporate Strategy and Government Policy

□ On the back of the emerging trend in global cross-border e-commerce, Chinese cross-border online shopping has exhibited extraordinary growth. This phenomenon provides Korean manufacturers and e-commerce platforms with invaluable opportunities to expand into a broader market via e-commerce exports. Accordingly, future strategies should focus on attracting new Chinese consumers, building a powerful brand image and improving product quality and post-purchase services, while taking full advantage of the popularity of the Korean Wave. Meanwhile, the government must step up policy efforts such as improving e-commerce export statistics, simplifying logistics and clearance procedures, and building Chinese consumers΄ trust.

- This study conducted a survey on Chinese cross border online shoppers’ experiences of buying Korean products to draw implications for corporate strategy and policy-making to boost e-commerce exports.

- B2C is expected to drive the future growth of China’s e-commerce.

- Chinese cross-border online shopping has expanded incredibly fast and is projected to record 200-400 trillion won in size by 2018.

- Korea Customs Service’s clearance records are not suitable to understand the current situation of Korea’s e-commerce exports.

- China is Korea’s largest e-commerce export market and e-commerce exports to China present valuable opportunities for Korean manufacturers to broaden their market.

- At present, there are no statistics available on e-commerce exports via Chinese platforms.

- A considerable portion of Chinese consumers’ online shopping of Korean products seems to be done via Chinese platforms.

- Main reasons for Chinese consumers to not buy Korean products online include limited knowledge of Korean brands and the lack of conasumer trust in post-purchase services, product quality and authenticity.

- Main reasons for Chinese consumers’ online purchases of Korean products include their preference for Korean brands and trust in product quality and authenticity.

- The Korean-Wave is found to actually affect Chinese consumers’ initial purchase of Korean products online.

- Almost 99% of Chinese consumers with online shopping experience of Korean products expressed their intent to repurchase.

- The Korean Wave, product quality and price, and information provision are factors affecting Chinese consumers’ repurchase intention.

- Given the fact that Chinese cross-border online shopping is at the incipient stage and consumers have expressed a strong

- intent to repurchase, customer conversion should take precedence.

- Statistics on e-commerce exports conducted through Chinese platforms should be provided.

- By simplifying logistics and clearance procedures, the Korean government can help domestic manufacturers strengthen their competitiveness with regards to the needs of Chinese consumers.

- Policy support is also necessary for the protection of Chinese consumers.

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