The study examines methodologies for quantitatively analyzing the impact of global supply chain fragmentation and applies these approaches to scenarios involving critical minerals. It identifies two primary analytical approaches: microeconomic and macroeconomic.

Microeconomic methods provide detailed insights at the item or firm level but face challenges due to limited access to specific supply chain data. Macroeconomic methods, while suitable for industry- or national-level analysis, often rely on unrealistic assumptions when applied to item-level fragmentation. Despite the significant macroeconomic effects of disruptions in critical supply chains, existing item-level analysis techniques struggle to capture these impacts accurately. For instance, efforts to link item-level analysis with GDP using linear programming or inoperability input-output analysis often encounter limitations due to rigid assumptions about input-output structures. High-tech items, in particular, pose challenges due to their complex supply chain interdependencies and their significant influence on final production.

To address these issues, the study proposes an integrated methodology combining machine learning techniques for microeconomic analysis with the OECD METRO model for macroeconomic evaluation. This approach considers key issues and transmission channels identified in previous research. The study also reviews critical mineral management policies in major economies such as the United States, European Union, China, and Korea. The United States identifies critical minerals essential for economic and national security through legislative measures like the 2020 Energy Act and has implemented strategies to strengthen North American supply chain resilience. The European Union has updated its critical raw materials list every three years since 2008 and enacted the Critical Raw Materials Act in 2024 to expand production capacity and enhance international cooperation. China, despite lacking a clear legal definition of critical minerals, strengthens its resource management through export controls and cooperation with resource-rich countries. Korea designated 33 minerals as critical through its 2023 Critical Minerals Securing Strategy, prioritizing 10 strategic minerals essential for industries like electric vehicles and semiconductors. However, Korea’s reliance on imports for most critical minerals highlights its vulnerability.

The study conducts a vulnerability analysis of Korea’s critical mineral supply chains using indicators such as the Trade Specialization Index (TSI) and Herfindahl-Hirschman Index (HHI). It identifies high global supply chain concentration in minerals like cobalt, lithium, and neodymium, which are crucial for secondary batteries and electric vehicles. To assess geopolitical risks, it examines import trends from China across seven countries from 2017 to 2023. Sharp declines in imports of gallium, graphite, and rare earth elements suggest potential disruptions due to trade conflicts or export controls.

The study employs a Dual-Stage Attention-Based Recurrent Neural Network (DA-RNN) model to predict the impact of critical mineral fragmentation on Korea’s exports of key items like batteries and semiconductors under three scenarios involving germanium, graphite, and rare earth elements. The results show significant decreases in export values across all scenarios. For example, restrictions on germanium imports led to a 3.9% decline in battery exports, while rare earth element shortages caused a 10.8% drop.

Using the OECD METRO model, the study evaluates the macroeconomic impact of critical mineral fragmentation under two approaches: direct analysis of import disruptions (Approach 1) and integration of microeconomic results into macroeconomic simulations (Approach 2). The findings indicate that germanium fragmentation could reduce Korea’s real GDP by 0.15%, while graphite and rare earth element disruptions could lead to decreases of 0.14% and 0.89%, respectively.

Based on these findings, the study recommends strengthening supply chain monitoring systems by integrating fragmented platforms across government agencies and establishing a centralized control tower. It also suggests diversifying procurement strategies, promoting R&D for substitute materials, and supporting SMEs through digital-based supply chain management platforms. Additionally, it emphasizes harmonizing policies with major economies to prevent over-securitization and redundant investments while expanding international cooperation for joint mineral exploration and development projects.

Executive Summary

1. Introduction

2. Descriptive Facts

3. Gravity Models of International Migration

4. Empirical Analysis

5. Robustness Checks

6. Conclusion References

In recent decades, European Union (EU) enlargement has substantially altered the continent’s economic and political landscape by lowering barriers to trade, labor mobility, and capital flows. Migration emerges as a central factor in this transformation, especially following the accession of Central and Eastern European countries. This enlargement has intensified interest among policymakers and researchers in the factors driving intra-European migration and its economic and social implications.

This study specifically investigates the interplay between EU enlargement, the Freedom of Movement (FOM) agreements, and Brexit on labor mobility. Although EU enlargement has generally been associated with deeper economic and political integration, its most profound impact may lie in facilitating international migration. By distinguishing between the timing and impact of EU membership and the Freedom of Movement (FOM) agreements—often introduced at different times— the analysis provides a nuanced view of their respective roles.

Employing a gravity model framework with Poisson Pseudo-Maximum Likelihood (PPML) estimation and a heterogeneity-robust difference-in-differences (DiD) approach, this study examines bilateral migration flows across 224 origin-destination country pairs. The results reveal that EU membership significantly increases migration flows, particularly from newer to older member states, indicating a pronounced east-to-west asymmetry. This effect remains robust after accounting for FOM implementation, and further robustness checks confirm the consistency of the findings under different policy timelines and the inclusion of external mobility agreements.

Additionally, the study explores the impact of Brexit on return migration, uncovering a substantial rise in flows from the UK to EU member countries—especially those that joined after 2000—following the 2016 referendum. These patterns highlight the heterogeneous and asymmetric effects of different EU migration policies and suggest that Brexit exerts a stronger influence on return migration than FOM.

Consequently, the findings highlight the importance of policy-specific analysis in capturing the complexities of migration responses to institutional changes within the EU.

As the competition for technological hegemony intensifies between the U.S. and China, major advanced countries around the world, including the U.S., are increasingly strengthening their strategies to protect and foster their technologies and industries in core science and technology fields. The governments of individual countries are expanding R&D investment, reorganizing legal and institutional foundations for technology protection and fostering, and aiming to strengthen national security and industrial ecosystems as well as securing technological competitiveness.

Major advanced economies, such as the U.S., the UK, and the EU, are formulating sophisticated policy frameworks aimed at promoting the growth of core science and technology fields. These frameworks involve easing unnecessary regulations while introducing new measures to safeguard critical technologies. Accordingly, it is essential to conduct a comparative analysis of these countries’ strategies for science and technology development, their approaches to fostering innovation ecosystems, and their industrial policy directions by examining the legal, institutional, and policy innovation strategies in major advanced countries.

Amid intensifying competition for technological hegemony between advanced countries, each country is focusing on securing technological independence and sustainability. The U.S. is intensively fostering high-tech industries such as semiconductors, AI, quantum technology, and biotechnology through its “America First” strategy, and is also restricting foreign investment and controlling technology transfer. The UK is strengthening its strategic choices to overcome the problem of low economic growth following Brexit and improve the UK’s global competitiveness in core technologies, while pursuing R&D investment and regulatory reform in fields such as AI and quantum technology. The EU is working to convert its technological innovation policy, which used to be centered on individual member states, into a more common strategy at the EU level, and is carrying out large-scale R&D investment and regulatory reform to secure the EU’s global competitiveness.

In addition, China has made science and technology independence its top priority in the face of U.S. countermeasures and is accelerating its own technology development in fields such as semiconductors, space-technology, biotechnology, and high-tech manufacturing. As such, major advanced countries are implementing strategic policies to strengthen their technological sovereignty and secure leadership in the global technology competition, underscoring the need for Korea to respond quickly and systematically. Korea also needs a strategic approach to respond to the intensifying global competition in technology, particularly by overcoming the limitations of existing systems and by innovating regulatory reforms tailored to the evolving technological landscape. There is a growing demand for the need to remove institutional barriers that hinder the development of science and technology and to establish a flexible regulatory framework that can accommodate new emerging technologies. In particular, as the perception that regulatory innovation is directly connected to national competitiveness spreads, now is the time for Korea to take active policy measures in response.

In the fields of science and technology, changes in the R&D, production, delivery, and transaction methods of new technologies are leading to conflicts with existing laws and systems, as well as the emergence of new regulatory issues. The phenomenon of “regulatory delay”—caused by the absence of appropriate laws or regulatory gaps—is becoming increasingly severe, posing obstacles to the commercialization of new technologies by companies and research institutions. To address this, major advanced countries are making continuous and focused efforts to promote regulatory innovation. Analyzing these strategies can help us better understand how regulatory innovation is being implemented in the fields of science and technology in major advanced countries.

By investigating and analyzing the implications, promotion strategies, detailed focus areas, and key characteristics of regulatory innovation strategies pursued by major advanced countries to achieve global technological leadership and foster innovative growth in related industries, this study aims to present effective response strategies for Korea to prepare the rapidly evolving future regulatory environment in the fields of science and technology, through a multifaceted analysis of regulatory innovation strategies by areas—that has not been fully addressed in existing research areas.

The first step in investigating and analyzing regulatory innovation strategies in the fields of science and technology in major advanced countries is to select three advanced countries to be studied. The U.S. was selected for its leadership in science, technology, and industrial ecosystems, as well as its global influence on national regulatory innovation strategies. The UK was chosen for its pioneering role in regulatory innovation strategies in the fields of science and technology, and the EU was selected for its role in driving innovative demand in new industrial sectors. These three entities were identified as the major advanced economies to be included in the study.

The next step is to select some fields to be investigated among the various fields of science and technology. In 2024, the Ministry of Science and ICT announced three major game changer technologies (AI-semiconductor, advanced bio, quantum), on the basis of which a total of four science and technology fields were selected: semiconductors, advanced biotechnology, AI, and quantum technology.

The final step is to categorize various areas—such as institutions, governance, standards and certification, ethics, international cooperation, subsidies and tax incentives, experimental testing and scientific-technological capabilities, hostile response policies and strategies, and public/private protection (safety and security)—into three major groups; ① system and governance, ② Fostering and advancing the science and technology ecosystem and ③ technology security. Based on this classification, the study systematically analyzes the regulatory innovation strategies of major advanced countries in the fields of semiconductors, advanced biotechnology, AI, and quantum technology the perspective of these three categories.

Subsequently, the findings of major studies that have investigated and analyzed regulatory innovation strategies in core science and technology fields - such as semiconductors, advanced biotechnology, AI, and quantum technology in the U.S., UK, and EU are summarized as follows.

In the field of semiconductor, the three major advanced economies are working to promote semiconductor production and innovation within their borders, execute export control regulations, and respond to a supply-crisis caused by semiconductor shortages in order to protect their respective technological advantages. Each country is promoting innovative policies that include subsidies, tax incentives, and R&D policy funds in its innovative regulatory framework. The UK is strengthening its strategic choices to maintain and expand its strategic advantage in this sector based on its strengths in semiconductor design and intellectual property, compound semiconductors, and the world’s best research and innovation systems, with a relatively smaller amount of support than the U.S. and EU. In Korea, the so-called “K Chips Act” (amended by the Restriction of Special Taxation Act) was passed at the National Assembly plenary session in February 2025 to strengthen tax incentives for investment, such as the expansion of semiconductor companies’ factories. In addition, special laws for strengthening the competitiveness of the semiconductor industry and innovative growth are being discussed by the relevant committees of the National Assembly.

In the field of advanced biotechnology, the U.S. has been continuously implementing innovation policies to improve the regulatory environment through the Coordinated Framework for the Regulation, the federal government’s basic guidelines for regulating biotechnology products. The UK is pushing for the government’s smart regulatory program to remove regulatory barriers and prepare for the future of regulatory frameworks by explaining regulatory issues related to engineering biology through RHC(Regulatory Horizons Council). In addition, the regulatory sandbox for engineering biology is being promoted through the EBRN. The EU is focusing on simplifying regulatory pathways through a series of measures to promote biotechnology and bio manufacturing in the EU, and is implementing measures to further promote the establishment of regulatory sandboxes to quickly launch them in the market. Korea has enacted and is currently implementing the Biotechnology Promotion Act, which aims to efficiently foster and develop biotechnology by establishing a solid research foundation and promoting the industrialization of biotechnological advancements. In January 2025, the National Bio Commission was launched, and the government unveiled the “Korea Bio Great Transformation National Strategy,” which aims to position Korea among the world’s top five biotechnology leaders by 2035 through sweeping transformations in infrastructure, R&D, and the bioindustry.

In the field of AI, although the US has long led the world in AI technology and scientific advancement, its AI regulatory framework only began to take full shape in 2024. That year, President Joe Biden issued a new executive order titled the “AI Executive Order on Safe AI.” This executive order establishes new standards for the safety and security of AI, protects privacy, promotes civil rights, fosters innovation, and introduces stronger regulations to prevent the misuse of AI.

The UK, through its National AI Strategy, has proposed short-, medium-, and long-term measures aimed at achieving three core priorities: investment in the AI ecosystem, ensuring that the benefits of AI are distributed across all sectors and regions, and establishing effective AI governance. Furthermore, to lead responsible innovation in artificial intelligence (AI) and maintain public trust in the technology, the UK became the first country in the world to publish an AI regulatory white paper titled A Pro-Innovation Approach to AI Regulation, which provides guidance on the use of AI. The UK government subsequently published a Government Response that compiled and addressed questions from various relevant institutions regarding the white paper, thereby presenting a foundational regulatory framework for AI. In addition, the UK is building its AI governance structure by establishing the world’s first government- supported AI Safety Institute and forming a Regulator Ecosystem composed of multiple regulatory bodies. The EU finally approved the “AI Act,” the world’s first comprehensive AI technology regulation, on May 21, 2024. The EU AI governance system has been established as a separate AI Board consisting of the EU Commission, its AI Office, and delegations from EU member states.

Recently, Korea became the second country in the world, following the European Union, to enact an “AI Basic Act,” which is scheduled to take effect in January 2026.

Korea’s AI Basic Act includes provisions for the establishment and implementation of a national AI master plan every three years, the formation of a national-level AI governance structure and support for the innovative development of the AI ecosystem through measures such as securing professional talent, designating AI industrial clusters, building AI testbeds, promoting AI data center policies, and facilitating international cooperation. The Act also addresses AI technology standardization, the establishment of ethical principles, the expansion of financial resources for AI industry promotion, and the prevention of AI-related risks, including administrative fines. It defines “high-impact AI” as a target for regulation and outlines obligations for transparency, safety assurance, and provider responsibility. However, generative AI is largely exempt from the major regulatory provisions.

The US has adopted a strategic and agile approach to AI governance by issuing sector-specific guidelines and recommendations, executive orders, and fostering collaboration with companies and research institutions. This allows for a rapid and flexible response to the fast-evolving AI landscape. Similarly, the UK is pursuing a pro-innovation and flexible regulatory approach, introducing measures to address the misuse of AI and establishing regulations tailored to specific AI use cases. In contrast, the European Union has implemented a risk-based regulatory framework that classifies AI systems into categories such as “unacceptable risk/high risk/limited risk/minimal risk.” It imposes explicit regulatory obligations on AI systems falling under the “unacceptable/high-risk” categories, and includes provisions for general-purpose AI models. Korea, for its part, defines “high-impact AI” and outlines obligations related to transparency, safety, and provider responsibility. However, generative AI remains largely outside the scope of major regulatory provisions.

In the field of quantum technology, the U.S. has developed a comprehensive and broad-based regulatory framework to maintain and develop global leadership. In particular, the U.S. seeks to enhance national security and economic competitiveness through a strategic regulatory framework for quantum research, development, and science and technology. The UK has outlined 13 Priority Actions under its National Quantum Strategy and established the Office for Quantum within the Department for Science, Innovation and Technology (DSIT), which regularly reports to the National Science and Technology Council chaired by the Prime Minister.

In February 2024, DSIT’s RHC released a report recommending a regulatory policy for nurturing the UK’s innovation-friendly quantum ecosystem. The report is based on four core principles—proportionality, adaptability, accountability, and balance—and was prompted by the growing need for proactive discussions on the timing, scope, and form of regulations to ensure stable investment and development in quantum technology. The RHC made 14 recommendations emphasizing the need to establish strong governance, including the development of a quantum technology regulatory framework and the need for a regulatory framework based on standards, guidelines, and responsible innovation practices. DSIT is working on ways to identify regulatory requirements in the future, such as conducting horizon scanning for future regulatory requirements and adjusting proportional regulatory initiatives.

The EU launched its Quantum Technology Flagship in 2018, following the issuance of its Quantum Manifesto in May 2016. This flagship initiative brings together research institutions, industry players, and public funding bodies to consolidate and expand Europe’s scientific leadership and excellence in quantum technologies.

In the Strategic Research and Industry Agenda (SRIA) 2030 roadmap, the EU emphasizes the need to develop independent capabilities in quantum technology development and production to secure global leadership, protect strategic interests, ensure autonomy, and strengthen security—while avoiding dependence on third countries. The EU aims to establish the world’s leading ecosystem that translates lab-scale research into mass production across various scientific and industrial applications. Moreover, the EU highlights the importance of leveraging the economic and societal potential of quantum technologies to strengthen its position as a global player in this transformative field, ultimately positioning Europe as the world’s “Quantum Valley.” Korea’s Quantum Technology Industry Act, along with the National Quantum Strategy and various quantum initiatives, represents a set of innovative policy measures aimed at establishing a research foundation for quantum’s science-technology and systematically fostering the quantum industry. These efforts reflect the pursuit of multi-faceted innovation strategies across the key domains identified in this study. However, concrete strategic initiatives focused on identifying regulatory challenges in the quantum science and technology sector and anticipating future regulatory environments remain limited.

As a strategic response to such regulatory innovation policies in advanced major countries, the following approaches can be considered.

First, it is necessary to establish governance that support innovation across the broader economy while providing recommendations on the prioritization of regulatory reform in alignment with the regulatory environment in the fields of science and technology. Next, it is essential to proactively establish systems and strategies for scanning anticipatively regulatory environments and requirements in the fields of science and technology, and to strengthen integrated regulatory approaches starting from the R&D stage. Next, it is important to establish robust regulatory frameworks for core fields of science and technology and to advance innovation strategies—such as large-scale financial support—in order to secure technological leadership and foster a resilient and competitive ecosystem.

Furthermore, there is an increasing need to enhance global cooperation strategies aimed at ensuring alignment and harmonization with international regulations, grounded in active participation in the development of global technical standards and regulatory frameworks. Additionally, enhancing regulatory sandbox systems in core fields of science and technology will be essential for promoting timely and flexible responses to technological innovation.

As a final consideration, the rapid advancement of technology is increasing the need to redesign anticipative regulatory innovation roadmaps in established fields, and the cycle of these rolling plans is expected to become shorter. It is also a time to initiate discussions on setting the cycle of these rolling plans, establishing clear procedures, and defining the legal basis for their implementation.

Since the onset of the U.S.-China trade dispute, economic tensions between the two countries have persisted, with the Biden administration maintaining a hardline stance on China. With the recent return of the Trump administration, a large-scale tariff war is once again anticipated, making thorough analysis and policy responses increasingly critical. This study examines the impact of the tariff war triggered by the U.S.-China trade dispute on the Korean economy, and derives policy implications based on the findings.

First, the U.S. tariff increases on Chinese goods have led to a decline in Korea’s exports to the U.S. and a reduction in imports from China, thereby reshaping trade flows. However, the strengthening of U.S. non-tariff barriers has increased Korea’s exports to the U.S., particularly in consumer goods, suggesting that Korea can play a crucial role as an alternative supplier. Consequently, the Korean government and businesses must diversify their markets beyond key trading partners by expanding into emerging markets such as Southeast Asia and Latin America to mitigate trade risks. To achieve this, the government and research institutions should systematically collect and analyze data on the economic, political, legal, and consumer trends of these emerging markets and provide relevant insights to businesses.

Furthermore, to diversify its export industries, Korea must enhance its manufacturing competitiveness and foster high-value-added industries. Given the complementary nature of Korea’s exports of industrial goods to the U.S. with those of China, an increase in U.S. tariffs on Chinese goods could potentially lead to a decline in Korea’s exports to the U.S. Therefore, Korea should diversify its export portfolio to include not only industrial goods such as semiconductors and machinery but also consumer goods, thereby mitigating the negative impact of trade disputes. To achieve this, Korea should continuously invest in research and development (R&D) to advance products and services while enhancing industrial processes through expanded investments in Fourth Industrial Revolution technologies and R&D. Additionally, policies should be implemented to support small and medium-sized enterprises (SMEs) by promoting technological innovation and providing tax incentives to strengthen overall industrial competitiveness.

Additionally, a systematic response to non-tariff barriers is required. Amid ongoing trade disputes and rising protectionism, non-tariff barriers have been reinforced alongside tariffs, often offsetting the effects of tariff policies. Thus, focusing solely on countering the negative effects of tariff measures may introduce unnecessary uncertainty, underscoring the need for a comprehensive response that also addresses non-tariff barriers. Accordingly, response strategies should take into account the simultaneous impact of systematic trade policies, including tariff and non-tariff measures. Moreover, a preemptive monitoring and early warning system should be established to continuously track trends in non-tariff barriers and enable swift policy responses.

Next, adjustments to foreign direct investment (FDI) strategies are necessary. Following U.S. tariff increases on Chinese goods, Korean multinational corporations (MNCs) have shown a tendency to increase their FDI in the U.S., a trend particularly evident among large enterprises. Meanwhile, although the number of subsidiaries of Korean MNCs operating in China has been declining—particularly among firms with higher import shares and heavily dependent on the global value chain—, the overall scale of FDI to China has not significantly decreased. This suggests that firms are reallocating their investments in China more efficiently. In particular, U.S. tariff measures on Chinese goods have created opportunities for Korean firms to expand their investments into third countries such as ASEAN, leading to increased FDI in this region. This trend reflects ASEAN’s advantages, including low production costs and strengthened connectivity with both the U.S. and Chinese markets, positioning it as an attractive alternative investment destination for Korean firms. Therefore, the Korean government should formulate policies to support the FDI strategies of Korean businesses while also considering measures to prevent the hollowing out of domestic industries.

Finally, ensuring flexible macroeconomic stability policies, including foreign exchange market and monetary policies, is crucial. Analyzing past U.S. trade policy shifts reveals that as U.S.-China trade conflicts intensified, trade policy uncertainty increased before tariff adjustments. This led to a depreciation of the Korean won against the U.S. dollar and heightened exchange rate volatility. The impact of trade policy uncertainty did not have a statistically significant effect on Korea’s key macroeconomic variables, as its influence on exports and imports was offset by the depreciation of the Korean won. However, U.S. tariff increases negatively affected Korea’s total production and dollar-denominated exports, partially explained by changes in the won-dollar exchange rate and price levels. Therefore, it is essential to ensure that Korea’s macroeconomic policies can respond more swiftly and flexibly. Coordination between monetary, fiscal, and foreign exchange policies should be strengthened to maintain economic stability.

In summary, changes in U.S.-China trade policy have significantly increased trade costs between the two countries, leading to reduced trade volumes and rising import costs, with substantial structural impacts on third-country economies, including Korea. Consequently, the Korean government and businesses must develop strategies to adapt flexibly to the evolving trade environment, followed by further research and policy discussions should continue. In particular, to minimize the negative impact of the prolonged U.S.-China trade dispute on Korea’s trade environment, more sophisticated trade policies should be formulated, and measures should be implemented to support Korean firms’ FDI strategies amid growing protectionist trends.

Additionally, policy support should be strengthened to enable Korean firms to respond flexibly to the restructuring of global value chains. Furthermore, institutional improvements are needed to enhance the speed and flexibility of macroeconomic policies, allowing for effective responses to exchange rate volatility amid increasing uncertainty in U.S. trade policy. Through these measures, Korea must establish a comprehensive strategy to ensure continued economic growth and competitiveness despite the U.S.-China trade conflict and shifts in U.S. trade policy with other countries.

In December 2023, the Houthi rebels in Yemen launched attacks on commercial vessels in the Red Sea, escalating the Israel-Hamas conflict into a broader geopolitical risk encompassing the Red Sea region. This development disrupted the logistics supply chain between Asia and Europe, which had previously relied heavily on the Suez Canal. As maritime routes shifted from the Suez Canal to the Cape of Good Hope, countries worldwide, including South Korea, faced increased shipping and insurance costs. This situation posed the dual challenges of weakened export competitiveness and rising inflation.Simultaneously, the Red Sea crisis underscored the need for alternative land and maritime logistics networks to ensure supply chain stability. This led to heightened international interest in establishing new logistics hubs. Notably, discussions surrounding the Indo-Middle East-Europe Economic Corridor (IMEC), announced at the 2023 G20 Summit, and the Development Road project, actively promoted by Turkiye and Iraq, gained traction following the Red Sea crisis. For South Korea, an export-driven economy, the continued geopolitical uncertainty around the Red Sea presents significant threats. Rising logistics costs and decreased reliability in maritime shipping could undermine export competitiveness. Consequently, there is an urgent need to explore alternatives beyond the Cape of Good Hope, including expanding overland logistics via China’s transcontinental high-speed rail.

This study aims to address two key questions: (1) What impact has the Red Sea crisis had on South Korea’s logistics network and trade? (2) What implications do the economic corridors, actively pursued by Western countries, India, the Middle East, and Turkiye, hold for South Korea in terms of supply chain connectivity and logistics hub development?

Chapter 2 focuses on the background of the Red Sea crisis and its impact on maritime logistics. The crisis began after the Houthi rebels declared solidarity with Hamas, launching attacks on key commercial vessels using a range of weapons. In response, major shipping companies diverted routes from the Suez Canal to the Cape of Good Hope, leading to increased transit times and costs. This shift has expected to contribute to global inflationary pressures. The crisis significantly reduced vessel traffic and cargo volumes through the Suez Canal and Bab-el-Mandeb Strait. Notably, shipping companies continue to prefer the Cape of Good Hope route, raising concerns that maritime trade through these chokepoints may not recover in the mid-to-long term. Major global ports also experienced temporary declines in vessel traffic and cargo volumes, with reductions lasting up to six months compared to the same period in the previous year. Focusing on South Korea’s external trade, the volume of trade with Europe declined from January to September 2024 compared to the previous year. In contrast, trade volumes with the U.S. remained relatively stable, indicating that the Red Sea crisis negatively impacted Korea-Europe trade beyond mere logistical delays. Key export items, including automobiles, electronics, chemicals, steel, and mineral fuels, all showed declines in the European market. Conversely, exports to North America and Asia increased, suggesting that South Korean companies may have diversified their export markets, considering the U.S., Oceania, and Asia as alternative destinations. While overall exports to the Middle East decreased, imports of mineral fuels, such as petroleum, rose, leading to an increase in trade volume. Considering the impact of the crisis on ports beyond Jeddah, such as Jebel Ali and Salalah near the Strait of Hormuz, the decline in exports to the Middle East appears to result more from changes in maritime logistics networks than from risk- averse corporate behavior.

Chapter 3 explores South Korea’s potential for logistics diversification, focusing on the Development Road and IMEC as alternative routes. Both corridors aim to reduce dependency on the Suez Canal. The Development Road project focuses on connecting Al-Faw Port in southern Iraq to Europe via Turkiye through highways and railways, driven primarily by the geopolitical interests of Iraq and Turkiye. In contrast, IMEC consists of an eastern corridor linking India with Gulf countries and a northern corridor connecting the Gulf with Europe. IMEC reflects broader global objectives, including countering China, maintaining the Arab-Israeli detente momentum, and facilitating the energy transition. A SWOT analysis of both corridors reveals that weaknesses and threats outweigh strengths and opportunities, suggesting low feasibility in the short term. External factors, such as interference from China, Iran, and ISIS, pose significant risks to both projects. Despite limited immediate incentives for South Korean participation, it is advisable for the government and businesses to actively consider engagement in these corridors. Diversifying logistics routes is crucial for managing geopolitical risks, especially given the potential for escalating instability in the Middle East. Furthermore, with the inauguration of a second Trump administration in the U.S., there may be increased pressure for South Korea to expand into new markets such as India and the Middle East. Participating in emerging economic corridors in the Middle East could also deepen Korea-Middle East economic relations by extending cooperation into manufacturing and logistics sectors.

Chapter 4 summarizes the research findings and proposes short- and long-term policy recommendations to enhance the resilience of South Korea’s maritime logistics industry. In the short term, the government should: (1) Develop public-private partnerships (PPP) and investment-driven projects for port construction and operations, and (2) Establish logistics cost support funds for small and medium-sized shippers to build new logistics networks and manage crises effectively. In the long term, participation strategies should differ based on each corridor’s characteristics. For IMEC, cooperation should focus on PPP models based on existing intergovernmental MOUs. In contrast, South Korea should pursue multinational consortiums and Official Development Assistance (ODA) initiatives for the Development Road project.

This study analyzed the impact of the Red Sea crisis on the global economy, South Korea’s maritime logistics, and trade from December 2023 to October 2024. The analysis primarily covered broad categories of goods and regions, lacking detailed assessments. Additionally, as the Development Road and IMEC are still in preliminary stages, their specific impacts on global and domestic logistics systems remain unassessed. Future in-depth studies are needed to address these limitations.

The acquisition of advanced artificial intelligence (AI) technologies has emerged as a critical determinant of national competitiveness in economic and military domains. Indicators of AI technological development at the national level reveal that the United States is currently leading the field, followed by China in second place. AI technological competitiveness between these two nations and other countries highlights a significant gap, underscoring the reality that global AI competition is predominantly centered on the U.S. and China.

As with other advanced technological fields, the competition between the U.S. and China in AI is driven by aspirations for global hegemony. Consequently, the policies of both nations aimed at fostering AI innovation and advancement are characterized by dual objectives: enhancing domestic industrial competitiveness and maximizing their influence in the international arena. In this context, it is crucial for latecomers countries in AI technology to examine how these two leading nations counterbalance each other and collaborate with emerging players on the global stage.

This study explores the strategic competition between the United States and China in developing and utilizing artificial intelligence (AI) technologies and seeks to identify policy directions in response. It focuses on three key areas where the two nations exert significant influence on the international stage: norms and governance, research collaboration, and technological standards. By analyzing how this strategic rivalry unfolds globally, the study aims to provide valuable insights to guide effective policy-making.

Chapters 2 and 3 analyze the AI strategies of the United States and China across three dimensions: domestic policy, international collaboration, and trade policy (export controls), along with their respective responses. The U.S. AI policy began in 2016 under the Obama administration with the establishment of the Subcommittee on Machine Learning and Artificial Intelligence under the National Science and Technology Council. Subsequent administrations -Trump and Biden- expanded AI-related policies across various government departments and agencies. These policies can be summarized as support for research and development, fostering a skilled workforce, adopting AI technologies in government operations, and ensuring the safety and reliability of AI systems.

On the international stage, the U.S. has worked to establish norms and governance frameworks for AI through multilateral cooperation, emphasizing trust, safety, human rights, democratic values, and ethics. Notably, its focus on human rights and democracy contrasts sharply with China’s approach to AI norms and governance discussions.

In the race to secure AI technological supremacy, the U.S.’s containment of China is most evident in its trade policies. Since the Trump administration, Chinese companies have been added to the export control entity list, and under the Biden administration, export controls on semiconductors essential for AI development have been implemented and intensified. These restrictions have progressively expanded to include chips, manufacturing equipment, production software, and high-bandwidth memory. Further measures, such as outbound investment regulations, are anticipated to strengthen these controls even more.

China’s AI development policies were first incorporated into the “13th Five-Year Plan” (2016~2020) and further articulated in the “Next Generation AI Development Plan” of 2017. Under these initiatives, China aims to become a global leader in all aspects of AI theory, technology, and application by 2030. To achieve this goal, policies have been implemented to nurture AI specialists (e.g., the “University AI Innovation Action Plan”) and establish pilot zones for AI technology demonstration and policy experimentation (e.g., “Next Generation AI Innovation Development Pilot Zones”). As the rivalry with the United States intensified, the “14th Five-Year Plan” (2021~2025) identified AI as a critical national technology. This plan supports next-generation AI research ("Science and Technology Innovation 2030 Project"), expands industrial applications (“AI Plus Action Plan”), strengthens data standardization and infrastructure (“Eastern Data, Western Computing Project”), and develops AI technical standards (“National AI Industry Comprehensive Standardization System Construction Guide”).

China’s regulatory approach to AI is characterized by strong data-driven controls, including broad authority for national security agencies over data, restrictions on cross-border data transfers, and limitations on the external transmission of personal information. However, recent challenges in the foreign investment and business environment have prompted adjustments toward easing some regulatory measures.

Amid escalating AI competition with the U.S., China has also sought to strengthen its domestic legal and ethical regulatory frameworks to secure leadership in AI governance. Like the U.S., China endeavors to shape global AI norms and governance agendas. Its strategic posture emphasizes concerns about advanced or small-group-led governance frameworks while advocating for cooperation to enhance the AI capabilities of developing countries and bridge the gap for mitigating global inequalities. Notably, at the “Belt and Road Forum for International Cooperation” in October 2023, China introduced the “Global AI Governance Initiative.” This initiative underscores the priority of national sovereignty when providing AI products and services to other countries and opposes monopolization of AI technology and fragmentation of global AI supply chains, reflecting a divergence from the U.S. approach to global AI governance.

Finally, China’s responses to U.S. export control measures are twofold: reciprocal actions and technological independence. Reciprocal actions include export controls on semiconductor materials such as gallium and germanium, while efforts for techonological independence focus on domestic production of frontier AI semiconductor, led by Huawei, and the establishment of semiconductor investment funds.

Chapters 4, 5, and 6 delve into key aspects of the U.S.-China AI rivalry on the global stage, including global discussions on norms and governance, research network, and competition over technology standardization.

Chapter 4 examines current discussions on AI norms and governance through various channels - multilateral discussions, bilateral and plurilateral negotiations, voluntary rules-setting by industy, and academic developments. Four key insights are derived as follows. First, as previously mentioned, the United States emphasizes freedom and human rights while strengthening its collaboration with the European Union as part of a strategy to counterbalance China. This approach is exemplified by the adoption in 2024 of the “Fundamental Agreement on AI, Human Rights, Democracy, and the Rule of Law,” the first binding multilateral treaty in the AI domain, led jointly by the U.S. and the EU.

Second, there are notable differences between the U.S. and the EU’s approaches regarding the level of AI norms and transparency requirements. These disparities create compliance challenges for U.S. AI companies with respect to EU regulations and pose potential friction in U.S.-EU bilateral cooperation.

Third, the establishment of international institutions for standard development and AI system monitoring, as suggested by the UN High-Level Advisory Body on AI, is unlikely to materialize, as such bodies may not adequately represent the national interests of the U.S. and China. However, major countries, including the EU, could act as intermediaries to influence policy changes from these AI superpowers.

Fourth, while the input of industry stakeholders and corporations is essential for setting global standards regarding AI risk assessment and accountability, the participation of academic experts is even more critical. Academic involvement ensures neutrality and objectivity in the process of establishing global AI norms and accountability standards.

Chapter 5 utilizes data from the Country Activity Tracker (CAT) published by the Center for Security and Emerging Technology (CSET) to analyze changes in research networks and centrality among major countries from 2013 to 2023. This analysis is based on metrics such as the number of AI research papers, citation counts, and co-authored papers across nations.

The findings reveal a significant decoupling in AI research between the United States and China starting in 2020, a trend that intensified following the U.S. export control policies. While the U.S. has reduced collaboration with China to maintain its dominance in AI technology, China has strengthened partnerships with other countries, including the United Kingdom, Australia, and Canada. Among these, the U.K. continues to collaborate with China, citing the latter’s strong research output and qualitative edge in AI publications. By 2023, countries such as the U.K., Australia, and Japan had more co-authored AI papers with China than with the U.S., whereas Canada and India produced more joint AI papers with the U.S. than with China. South Korea ranked seventh in the number of AI research papers but showed relatively low international collaboration and research network centrality. While Korea has a significant number of co-authored papers with both the U.S. and China, it lacks robust collaboration with like-minded countries such as the U.K., Germany, and Canada. This highlights the need for South Korea to strengthen multi-tiered international partnerships to enhance its position in global research networks.

Chapter 6 analyzes the strategic competition between the United States and China over AI technology standards using a theoretical model that depicts the standard selection process of third-country governments. This model, built on the characteristics of AI technologies that improve performance through data, yielded the following three key insights.

First, it has been found that standards based on the technology of companies with superior foundation AI models are more likely to be adopted as the standards of third countries. Second, as the gap between U.S. and Chinese AI technology standards widens, competition over standard-setting intensifies, making non-economic factors such as the political and security considerations of third countries critical in standard selection. Third, the higher the share of profits captured by digital platforms mediating AI services, the more likely it is that the standards of the country with a technological advantage will be adopted. For example, if U.S. Big Tech companies dominate digital platforms in a third country and serve as intermediaries for AI services, the government of that country is highly likely to implement standardization policies based on the technology of U.S. AI companies.

Chapter 7 concludes with four policy recommendations based on the findings discussed in the previous chapters. In the context of growing strategic competition over AI and the increasing importance of semiconductor supply chains, South Korea should leverage its HBM technology and global partnerships to solidify its leadership in the semiconductor sector while preventing the outflow of talent and critical technologies as well as promoting the semiconductor mega- cluster. At the same time, given the contrasting approaches of the U.S. and the EU —where the U.S. emphasizes a voluntary, safety-focused approach and the EU prioritizes high transparency and strict preemptive regulations, posing challenges for U.S. companies entering the EU market— South Korea has the opportunity to act as a mediator by proposing an alternative model for AI norms that balances the values of human rights protection and industrial application. To achieve this, South Korea should enact and implement its own AI laws, continuously improve its regulatory framework, and enhance its standing in the international community. Additionally, with strengthened security cooperation with the U.S. potentially disrupting research networks with China, South Korea should actively negotiate for enhanced AI technology collaboration with the U.S. to bolster domestic research capabilities while strategically collaborating with highly productive AI research hubs such as the U.K., Germany, and India to increase the centrality of its research networks. Fourth, South Korean manufacturing companies should develop strategies for AI technology standardization by leveraging product lines such as smartphones, home appliances, and connected cars, which can serve as platforms for AI services. At the same time, the government should ease regulations on data utilization and transfer to enhance the efficiency of collaborative AI service development and partnerships between domestic companies and leading global AI firms.

The global economy is currently undergoing unprecedented uncertainty due to a series of complex and diverse external shocks and risk factors. The COVID-19 pandemic that began in 2019 caused the most severe economic crisis since the Great Depression, leading to a sharp contraction in global economic activity. In response to this crisis, governments around the world implemented fiscal and monetary policies on an unprecedented scale. While these measures helped stabilize markets in the short term, they also triggered side effects such as soaring asset prices and rising levels of public and private debt.

The war between Russia and Ukraine, which broke out in 2022, dealt a major blow to the global supply of energy and raw materials, further intensifying inflationary pressures worldwide. In response, central banks shifted from accommodative to tightening monetary stances, which in turn contributed to a slowdown in global growth. The Israel–Hamas conflict in 2023 deepened instability in the Middle East, adding yet another layer of uncertainty. Although inflation has begun to stabilize since mid-2024, geopolitical risks and asset price volatility remain key threats to global economic stability. At the same time, the intensifying strategic rivalry between the United States and China is accelerating the fragmentation of the global economy. Their competition for technological dominance is reinforcing protectionist measures in advanced sectors and triggering a restructuring of global supply chains.

This study seeks to analyze the relationships between economic fragmentation, global business cycles, and key macroeconomic flows such as trade and foreign direct investment, with particular attention to the evolving dynamics shaped by recent global disruptions. Excluding the introduction and conclusion, the study is composed of four main chapters. Chapter 2 examines the degree of real GDP synchronization among 45 major economies using a Bayesian Dynamic Factor Model. The findings show that global factors had a significant influence on national economies prior to the pandemic, but their importance diminished in the post-pandemic period, with regional factors playing a more prominent role. Differences in recovery speeds and synchronization patterns became more pronounced across regions—namely Europe, North America, and Asia. Europe experienced a slower recovery due to overlapping pressures from the energy crisis and inflation. North America, by contrast, achieved a rapid recovery through aggressive fiscal and monetary stimulus but faced mounting inflationary burdens. In Asia, recovery speeds varied widely across countries, influenced by China’s growth slowdown and divergent policy responses. These differences are interpreted as being driven by variations in national economic structures and policy choices, indicating a strengthening of country-specific dynamics. In particular, factors such as fiscal capacity, industrial structure, and labor market flexibility played critical roles in shaping each country’s crisis response and recovery path.

Chapter 3 assesses the impact of energy price shocks on the Korean economy using a small open-economy New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. This model is distinguished by incorporating features such as household heterogeneity, capital-investment decision-making, climate-related economic structure, energy consumption as part of household utility, and the role of fiscal authorities. The analysis finds that rising energy prices significantly increase consumer inflation and reduce real household income, leading to contractions in both consumption and investment, and ultimately weakening production and employment. These effects are especially severe among low-income households, given their higher share of energy expenditures. In terms of monetary policy response, interest rate hikes based on the Taylor rule are effective in curbing inflation but risk further suppressing aggregate demand and overall economic activity. By contrast, the Ramsey optimal monetary policy supports economic activity by stimulating consumption and investment through interest rate reductions. Additionally, reductions in fuel taxes help to ease inflation, alleviate consumption declines among constrained households, and reduce the upward pressure on interest rates, thereby helping to prevent a broader economic contraction.

In Chapter 4, the study evaluates the impact of the U.S.–China trade conflict using a general equilibrium model that includes multiple industrial sectors. The analysis assesses the effects of increased U.S. tariffs on imports from China and explores the resulting changes in trade balances under a comprehensive trade war scenario. The findings indicate that U.S. tariff hikes meaningfully altered Korea’s trade patterns with both China and the United States. Based on the assumption of balanced trade, the U.S. attempt to restructure global supply chains resulted in welfare losses across many countries, including the U.S. itself. Korea’s welfare loss was relatively smaller than those of China and the U.S., but still significant. Moreover, the impacts of the tariff war varied across industries. While the petroleum sector was projected to contract, sectors such as machinery, medical and office equipment, electronics and telecommunications equipment, and automobiles were expected to demonstrate relative resilience. These outcomes are attributable to differences in global value chain integration, substitutability, and technological sophistication across sectors.

Chapter 5 analyzes trends in foreign direct investment (FDI) and the role of geopolitical distance from 2013 to 2023. The analysis shows that greater geopolitical distance—measured using ideal point distances from political science—was associated with reduced FDI flows, and that this negative relationship has grown stronger over time. Coefficients were estimated using the Pseudo Poisson Maximum Likelihood (PPML) method. The effect of geopolitical distance was found to be statistically significant for the U.S. and its Western allies. However, in the case of Korea, China, and Japan, the significance was lower, or even reversed in some cases. These results reflect the high degree of economic interdependence and the complex geopolitical relationships in East Asia, suggesting that the influence of geopolitical distance on FDI can vary significantly depending on the region or industry. Accordingly, there is a need to formulate FDI policies that take into account sector-specific characteristics.

Based on these findings, the study presents the following policy implications. First, with global factors weakening and regional influences strengthening, it is important to enhance economic cooperation within the Asia region and promote the stabilization of regional supply chains. At the same time, maintaining policy flexibility is crucial for rapid and effective responses to future economic crises. Second, in the face of rising energy prices, coordinated use of monetary policy to ensure price stability and fiscal policy to support economic activity is required. Special emphasis should be placed on supporting low-income households and advancing energy efficiency initiatives. Third, in response to U.S.–China tensions, it is necessary to adopt customized industrial strategies that reflect heterogeneous impacts across sectors, while strengthening competitiveness and technological protection in industries where comparative advantages exist. Lastly, regarding FDI, long-term strategies should include the management of geopolitical risks, diversification of investment destinations to emerging markets, and enhanced global cooperation in advanced technology sectors. In particular, it is urgent for Korea to establish an FDI strategy that reflects its unique geopolitical position and ensures competitiveness in strategic and high-tech industries.

Until the mid-20th century, tangible assets were the primary drivers of economic growth. However, with the rise of digital transformation and the Fourth Industrial Revolution, the role of intangible assets has grown significantly in the 21st century. Traditional forms of intangible assets—such as software, R&D, branding, intellectual property rights, design, and organizational capital—have become central to enhancing firm-level and macroeconomic competitiveness. More recently, advanced technologies such as artificial intelligence (AI), big data, and cloud computing are emerging as new forms of intangible capital that contribute to innovation, productivity, and growth. Against this backdrop, this report analyzes the role of intangible asset investment in both major economies and Korea, and provides policy insights by examining its relationship with key economic indicators such as growth, productivity, and firm performance.

This study is composed of four chapters, excluding the introduction and conclusion. Chapter 2 investigates the relationship between intangible asset investment and economic growth using EKIP data. The analysis confirms a positive correlation between intangible investment and productivity growth, although the strength of this relationship varies considerably across countries and industries. Growth accounting results show that while the contribution of tangible assets to growth is declining, the contribution of intangible assets is on the rise—particularly for those included in national accounts. A regression analysis further reveals that economies with higher concentration of intangible asset investment tend to experience stronger medium-term growth. Additionally, the impact of intangible investment appears to vary depending on the economic size of each country group.

Chapter 3 employs a macroeconomic model with optimal intangible asset investment by agents, calibrated separately to Korean and U.S. data. The results show that the distribution of intangible assets is less dispersed in Korea than in the U.S. Model simulations suggest that increasing intangible asset investment—driven by supportive policy—can lead Korea toward a pattern seen in the U.S., where larger firms expand employment and productivity rises. However, this transformation is also accompanied by a deterioration in income distribution, highlighting the trade-offs involved.

Chapter 4 analyzes the relationship between intangible assets and firm performance using data from the Korean Survey of Business Activities between 2006 and 2021. While the proportion of firms holding intangible assets and their total value have increased steadily, the ratio of intangible to total assets has declined since the mid-2010s. Regression results show that greater intangible asset holdings are associated with improvements in sales, labor productivity, and export performance, both in the short term (1 year) and medium to long term (5 years). The positive effects on sales and productivity are particularly persistent. While the impact on export value weakens over time, intangible assets consistently enhance a firm's likelihood of participating in export activities.

Chapter 5 examines the short-term effects of AI exposure on industries in Korea and the U.S. based on data from 2019 to 2022—prior to the widespread adoption of generative AI. In Korea, AI exposure is positively correlated with some employment indicators, but these correlations are not statistically significant once labor productivity is controlled for. Moreover, AI exposure shows a negative relationship with per capita sales and labor share, indicating that technology adoption does not affect all outcomes equally. In contrast, in the U.S., AI exposure is significantly and positively associated with employment, hourly wages, and labor compensation, suggesting that AI adoption may enhance employment and earnings even in the absence of direct productivity gains.

Based on these findings, the report presents several policy implications. First, given the increasing economic contribution of intangible assets, governments should strengthen tax incentives and public support for R&D, software development, and organizational capital—especially in manufacturing and ICT industries—while promoting digitalization in the financial sector. Second, to address the gap in intangible asset accumulation between large firms and SMEs, policies such as easing credit constraints, expanding tax benefits, and providing innovation vouchers for SMEs are needed. At the same time, expanded investment in intangible assets calls for stronger policies on worker retraining to mitigate income polarization. Third, given the demonstrated benefits of intangible assets for firm performance, it is essential to improve access to finance for SMEs through the development of intangible asset–backed lending and to establish policy frameworks for valuing new types of assets such as AI- and big data–driven technologies. Lastly, since the employment and wage effects of AI adoption differ across countries, Korea should focus on strengthening AI-related job training for existing workers, supporting the adoption of AI by SMEs and traditional industries, and implementing labor protection policies for AI-affected sectors.

As Korea’s Official Development Assistance (ODA) continues to grow, so does the need for a more coherent research ecosystem to support effective policymaking. This reference study aims to inform policy discussions on the development of Korea’s international development research infrastructure by exploring the roles, functions, and contributions of leading research institutes in the field. Focusing on their institutional characteristics, operational models, and relevance to Korea’s policy environment, the study provides foundational insights for building a more strategic and integrated research system.

Chapter 2 provides a comprehensive review of research trends in Korea and abroad. In Korea, while academic research on development cooperation has declined over the past five years, policy- and project-oriented studies commissioned by ODA implementing agencies have increased significantly. This reflects growing policy demand, but also highlights several limitations: many of these studies are short-term, conducted on an ad hoc basis, narrowly focused on immediate issues, and often lack coherence, making it difficult to ensure continuity or generate long-term strategic value. The fragmented nature of Korea’s ODA system—where multiple ministries and agencies not only implement projects but also commission research independently—further hampers efforts to build a coherent knowledge base, foster collaboration, and strengthen long-term research capacity.

While Korea currently lacks a dedicated research institute for development cooperation, some leading international cases demonstrate more integrated and multifaceted approaches. Given the multidisciplinary and practice-oriented nature of development cooperation, specialized research institutions are expected to perform a range of functions that go beyond traditional knowledge production. These include policy advisory, monitoring and evaluation, capacity building, knowledge dissemination, global networking, discourse shaping, and responsiveness to emerging global issues.

Chapter 3 examines ten major international research institutes engaged in development cooperation, focusing on their operational models, roles, and core functions. These institutes conduct both academic and policy-oriented research, respond to emerging and priority development issues, and actively contribute to global discourse. They also disseminate knowledge through a variety of platforms and channels.

Common thematic areas include sustainable economic and social development, climate change, peace, and governance—often approached from the perspective of global public goods. Many institutes also take the lead in advancing research on topics they have strategically prioritized, such as human security, social and economic justice, and digital transformation, while conducting country- and region-specific studies in parallel. Increasingly, they are placing emphasis on evidence-based evaluations of development effectiveness and impact.

These institutions play a key role in shaping international discourse by identifying timely research agendas and spotlighting emerging issues. Their ability to offer relevant, policy-oriented insights enhances both their strategic value and practical influence. In addition, they actively promote outreach, collaboration, and global partnerships, reflecting the inherently international and problem-solving nature of development cooperation.

From an institutional standpoint, many of these research institutes operate with flexible staffing structures and conduct multi-year research projects, often in collaboration with external experts and networks. Given the complexity and multidimensionality of development challenges, such long-term engagement—supported by sustained data collection and rigorous analysis—is essential for generating credible findings. In Korea, where government budget cycles tend to constrain multi-year research, establishing a dedicated research institute with a continuous mandate could help ensure coherence and overcome the inefficiencies of fragmented, one-off studies.

Based on this analysis, the study identifies key roles and functions for establishing a specialized research institute in Korea. These include conducting regular foundational and reference studies on critical development issues, building robust knowledge repositories, facilitating knowledge sharing and dissemination, and supporting timely policy responses to international development challenges. A dedicated institute could enhance the quality, continuity, and responsiveness of research efforts, while also strengthening Korea’s engagement in global development discourse.

In the short term, it is essential to articulate a clear vision and operational framework for such an institute, and to lay the groundwork—both in terms of institutional infrastructure and government support systems—for a continuous research ecosystem. Over the longer term, efforts should focus on building institutional capacity through stable staffing, sustainable funding, deepening expertise, and strong networks. Ultimately, the institute could serve as a national knowledge hub for development cooperation research.

Executive Summary

Chapter Ⅰ. Introduction
1.1 Background
1.2 Literature Review
1.3 Data
1.4 Structure of the Report

Chapter II. Consumer Behavior in India
2.1 Consumption patterns in India
2.2 Household Financial Portfolio in India

Chapter III. Optimism and Consumer Behavior
3.1 Introduction
3.2 Estimation Strategy
3.3 Household Consumption and Saving in India in Relation to the Direction of Forecasting Error
3.4 Category 2 Consumption Expenditures Relative to Income
3.5 Food Subcategories
3.6 Saving Rate
3.7 Household Financial Portfolio
3.8 Conclusion of Chapter 3

Chapter IV. Conclusion
4.1 Summary of the Research
4.2 Discussion

References

Appendix Tables: Household consumption by region and gender

This study examines Indian household consumption and financial behaviors using data from the Consumer Pyramids Household Survey (CPHS), focusing on how spending patterns and financial strategies evolve in response to economic conditions, demographic factors, and forecasting errors.

Chapter 2 analyzes household consumption patterns, revealing that food accounts for nearly half of total expenditures, emphasizing its critical role in household budgets and food security. Non-food consumption is more dynamic, with significant shifts during the COVID-19 pandemic. Spending on non-essential categories like entertainment and dining declined, while healthcare saw a modest increase. Education and healthcare remain smaller components of spending, reflecting budgetary constraints, particularly among lower-income households where post-pandemic financial pressures further limited these expenditures.

The chapter also highlights regional and demographic disparities. Rural households allocate a larger share of their budgets to food, reflecting subsistence needs, while urban households spend more on non-food items due to higher incomes and market access. Female-dominated households allocate slightly more to health and education, suggesting a prioritization of family welfare and human capital investment influenced by socio-cultural factors. These findings underscore the need for targeted policies to address disparities in essential spending areas like health and education.

Chapter 3 explores how forecasting errors—discrepancies between expected and actual financial outcomes—shape household financial decisions, including consumption, savings, and borrowing. Households with optimistic errors increase non-food consumption while reducing savings, particularly in liquid assets like fixed deposits, favoring immediate consumption. Conversely, pessimistic households reduce spending on non-essential services while increasing savings across all asset types as a precaution against economic uncertainty.

Urban households with optimistic errors show stronger tendencies to reduce formal savings and increase spending on food and services. Rural households with pessimistic errors prioritize informal savings mechanisms but reduce food expenditure more significantly. Post-COVID trends reveal that pessimistic households intensified precautionary savings across all asset types while reducing debt exposure, reflecting heightened economic caution.

Borrowing behavior also varies with forecasting errors. Optimistic households favor informal borrowing channels like shop-based credit, especially among low-income groups with limited access to formal financial institutions. Pessimistic households broadly reduce debt exposure across both formal and informal sources, with this effect being more pronounced in rural areas. Post-COVID analysis shows that the cautious approach tied to pessimistic errors has intensified, while the impact of optimistic errors on borrowing has diminished. Overall, this study highlights how Indian households adapt their financial strategies based on economic conditions and sentiment-driven forecasting errors. It underscores significant regional and demographic variations in these behaviors, emphasizing the need for targeted policy interventions to promote balanced growth in essential areas like health and education while enhancing financial resilience across household segments. These insights are critical for designing policies that address disparities and foster stability in the face of economic uncertainty.