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

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

Policy Study KOR National Champions and Industrial Policy: An Examination of the Effectiveness of Picking Winners Strategy in Industrial Policy

Amidst evolving industrial environments characterized by intensified technological supremacy competition and the transition to carbon neutrality, targeted industrial policies are re-emerging as a significant tool for major countries. This study focuses on the national champion policy, a key instrument of targeted industrial policy. Specifically, it analyzes the effectiveness of South Korea's 'World Class 300' project. In addition, it draws implications from international policy cases for creating national champions. The aim of this study is to propose improvement measures for designing effective targeted industrial policies.

Chapter 2 examines the status and role of targeted industrial policies within the conceptual framework of industrial policy and introduces the current policies in Korea. It also discusses the effectiveness of targeted industrial policies. Chapter 3 reviews Korea’s industrial growth trajectories over the past decade by analyzing corporate activities and productivity patterns by industry and firm size. Chapter 4 assesses the effectiveness of national champion policy, focusing on the World Class 300 project as a representative case. It provides an overview of the implementation processes and analyzes the project's effectiveness. Finally, Chapter 5 discusses implications from similar international policy cases and proposes improvement measures for targeted industrial policies.

Summary

Policy Study KOR Analyzing the Productivity Spillovers of Foreign Direct Investment (FDI) Considering the Characteristics of Industrial Complexes

Using large-scale panel data at the business unit level in South Korea, this study analyzes how the presence of FDI firms in industrial complexes impacts the productivity of domestic firms through vertical spillovers. Due to industrial agglomeration, FDI firms in industrial complexes are expected to engage more in vertical interactions with local firms and to procure a higher proportion of inputs locally compared to those outside the complexes. Therefore, the backward linkage effects of FDI firms in industrial complexes on domestic firms are anticipated to be more significant than FDI firms not operating in these complexes. To test this hypothesis, it constructs an indicator for the backward linkage effects of FDI and analyzes its relationship with the total factor productivity (TFP) of Korean manufacturing establishments.

This study finds that FDI firms located in industrial complexes exhibit significant positive backward linkage effects on the productivity of domestic firms. In contrast, the backward linkage effects of FDI firms outside the complexes are significantly lower and sometimes negative when domestic firm productivity is measured by value added per employee. These results support the hypothesis that, at least from 2010 to 2019, clustering into industrial complexes positively affects the productivity of domestic firms through the backward linkage effects of FDI firms.

Summary

KDI FOCUS South Korea Needs More Big Company Jobs

South Korea stands out among OECD countries for its lowest proportion of jobs in large enterprises. Good jobs, often synonymous with employment opportunities in large enterprises, are in short supply. This shortage prompts various societal issues: the overheating of college admission competition, a decline in social mobility, decreased birth rates, stagnating employment rates for women, and increased concentration in the capital area. There is a pressing need to identify and address policy barriers to company scale-up.

- Despite the stronger employment preference among young adults in large enterprises, the majority of available job opportunities are actually in smaller businesses.

- Larger establishments tend to offer higher wages and better working conditions.

- The marked wage gap between graduates of top and bottom universities intensifies competition for admission to top-ranking schools.

- The scarcity of good jobs results in both low utilization of maternity protection programs and female underemployment.

- Even at the city and province levels, larger establishments are observed to have higher labor productivity.

- Identifying and addressing policy barriers that impede company scaleup through targeted policy improvements is a necessary course of action.

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

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

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

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

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

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

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

Summary

Policy Study KOR Foreign-invested Firms in the Korean Service Industry: Current Status and Economic Effects

Despite the emergence of low productivity as a critical issue in the Korean service industry, there is still a lack of a clear solution. Accordingly, this study examines how firms that have entered the domestic service market via FDIs have affected the performance of their domestic counterparts and overall industrial productivity to present the implications of policies that attract foreign investment to bolster growth in service productivity.

Existing literature suggests that the impact of foreign-invested firms on the domestic economy can vary. For example, if a highly productive firm were to enter the market, it could either seize the market shares of local competitors (negative effect), or spillover technology and management know-how (positive effect). To answer which effect is dominant in Korea, the registry of foreign-invested firms was merged with the economic census for two critical service industries: IT and business services. Both services create relatively high value-added and have a strong complementarity with manufacturing, yet they suffer from persistent low productivity. Subsequently, an analysis was conducted on how foreign entry in these two markets affects employment, sales, and exit of domestic incumbents as well as the entry of new domestic firms. The entry-driven changes in industrial productivity are also investigated.

This study finds that the entry of foreign-invested firms has, on average, driven down the productivity, sales and wage growth of domestic firms. However, some highly productive firms have shown improvements in all three categories, indicating that foreign entry has a heterogeneous effect on local businesses. Other important findings include the fact that employment adjustment was relatively less responsive to foreign entry, and also that the exit of domestic firms was not significantly affected. In sum, the entry of foreign-invested firms did not contribute to improving the aggregate productivity of local industries as it failed to facilitate the market entry and exit of domestic firms who play a major role in the reallocation of labor.

The findings contradict perhaps the conventional view that policymakers should pursue to actively lower barriers and attract more foreign investments to boost the domestic service industry. A more accurate interpretation is that neither easing restrictions on foreign investment nor reinforcing incentives to attract foreign investors necessarily leads to strengthening competitiveness across the industry, and the effect may be heterogeneous depending on the nature of the firm or market. It is suggested that, despite the need to secure opportunities and time for local firms to respond to the opening of the service market at least, institutional reforms are implemented to lower entry and exit barriers and to make the labor market more flexible for easier reallocation.

Summary

Research Monograph KOR Korea’s Road to an Innovation Economy: Enhancing Productivity through Structural Transformation and Institutional Reform

This study starts with two premises: first, business enterprises are at the center of the innovation economy and second, entrepreneurial activities are most effective within a well-functioning innovation ecosystem. Accordingly, the analyses are comprised of certain aspects of the innovation activities of business enterprises as well as the systemic aspects of the Korean innovation system (KIS). Policy implications are also presented for Korea’s innovation-driven growth strategy including enhancing the innovative capacities of business enterprises and upgrading the support systems surrounding them.

The first, analytical part of the study deals with some of the key aspects of business enterprises’ innovation activities, such as the patterns of business innovation, the relationship between industrial organizations and business innovation and that between M&A activities and business performance. The section also introduces the results of a management survey, which is the first one of its kind in Korea. The second, systemic part contains two chapters on Korea’s innovation system: one on the distinctive nature of the KIS and the other on its evolutionary process. Additionally, in regards to the importance of human resources as a permanent and ultimate source of innovation, one of the following chapters makes a cross-country comparison between adults’ skills and another deals with Korea’s re-training system.

Despite the necessity of the government’s involvement in building an effective innovation ecosystem, government intervention is not straightforward. Governments face the same uncertainties as the market― although often with much more intensity―caused by the rapid changing nature of techno-economic paradigms. In this regard, the fourth industrial revolution presents a prime example. Policies will be most effective when business enterprises respond to the government’s initiatives with their own investments. The list of such policies includes: creating open, competitive market environments; pursuing a two-thronged labor policy of strengthening labor competence and enhancing flexibility in the labor market and; redirecting science and technology policies in a way that enhances the linkage between innovation actors such as business enterprises, universities, and government-funded research institutes. The government should also strive to improve system efficiency with consistency over longer-terms.

Summary

KDI FOCUS Diminishing Role of Young Manufacturing Plants as Drivers of Growth

□ Korea’s aggregate productivity growth in the manufacturing industry is on the decline, considerably influenced by the slowing productivity growth of young plants. A particularly sharp decline has been observed in the high-tech industry over the past three years. As such, government support programs need to aim at promoting growth and driving innovation and the numerous targets for support programs should be streamlined towards young innovative firms. The criteria for such firms should involve private sector investment in order to enhance the effectiveness of the programs.

- Advanced countries are making renewed efforts to enhance innovation and competitiveness in manufacturing while concerns are growing in Korea over the industry’s waning competitiveness.

- This study analyzed the changes in the productivity growth of young manufacturing plants and proposed measures to improve the government’s entrepreneurship support policy.

- Young firms serve as a driving force for job creation and economic growth.

- The share of young plants in the manufacturing industry has continued to decline, pointing to a weakening of Korea’s economic dynamism.

- The manufacturing industry’s aggregate productivity growth has declined, particularly over the past three years.

- Young plants account for nearly half of the aggregate productivity growth on average in manufacturing while their value-added share is only 13%.

- The productivity growth of young plants has decreased over the past decade, diminishing its role as a growth engine.

- The stagnating growth of young plants is a bigger factor to their declining productivity growth than the falling number of new entries.

- The productivity growth of young plants in the high-tech industry, which has the highest R&D intensity, posted sharp decreases.

- Industries with high R&D intensity have been the driving force behind the productivity growth of the manufacturing industry for two decades. But, the last three years have seen a steep decline in the productivity growth of the high-tech industry.

- Although the average productivity of young plants is high, their contribution to aggregate productivity growth has declined due to their shrinking share of the industry.

- While streamling the targets for the support programs towards innovative firms, the government should refrain from selecting and supporting firms directly and reform regulations that hinder entrepreneurship and the growth of innovative firms.

- The government’s verification process should be abolished and innovative firms should be defined as young venture capital firms or R&D firms.

- Restructuring government programs should be based on objective project evaluations.

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