Executive Summary

I. Introduction

II. Patterns Of Economic Integration In The APEC Region
1. Trends in Trade and FDI
2. Mapping Cross Border M&As in the APEC Region

III. Determinants of CBMAs in the APEC Region: the Role of Trade Cost
1. Theoretical Background
2. Empirical Methodology
3. Variable Construction and Data
4. Estimation Results

IV. Conclusion

References

This study attempted to map out the patterns of cross border M&As (CBMAs) in the APEC region, and empirically verify the determinants of CBMAs, focusing on the role of trade cost. Despite the increasing levels of CBMAs in the APEC region, its determinants and impacts in the region, especially in the less developed economies of the region, remain under-researched. This study hopes to contribute to filling this gap in the literature. The empirical analysis shows that cross border mergers increased with the size of the two countries involved, as expected. While multilateral trade cost in general had a positive effect on bilateral CBMA, indicating reduction of overall non-horizontal biddings from competing countries, the effect becomes negative as proportion of horizontal mergers increases. This implies that high trade cost encourages tariff-jumping, horizontal CBMA from other competing countries. In the case of bilateral trade cost, number of CBMA decreases as trade cost increases in general, reflecting the high degree of non-horizontal CBMA in the APEC region. However, this became positive, as proportion of horizontal CBMA increased.

Executive Summary
I. Introduction

II. Methodology

III. Data

IV. Empirical Analysis
1. Stock Return Volatility around Elections
2. Robustness Checks

V. Conclusion

References

This study investigates movements of the stock return volatility during election periods (from one-year before an election to one-year after the election) with the use of data from 16 countries. The main findings of this study are (1) stock return volatility declines over time as elections approach, (2) the level of the stock return volatility during election periods is lower than that during non-election periods, and (3) the stock return volatility rises quickly during election months and immediately after the elections. The first and second findings confirm conjectures made on the dynamic pattern of the volatility in previous studies such as Pantzalis et al. (2000) and Wisniewski (2009).

This policy paper analyzes the structure of Islamic finance based on recent literature. It focuses on Islamic banks, the most important financial institution and the sukuk, which are crucial instruments of the Islamic financial market.
Chapter 2 reviews the overall characteristics and structure of Islamic finance. It describes the basic principles of Islamic finance and analyzes the practice and structure of Islamic finance in accordance with Islamic principles. It examines the practice of Islamic contracts in terms of financial intermediation and discusses the features of Islamic banking.

The Islamic economic principles aim at just financial interaction which are realized by Islamic finance. Islam tries to establish a financial system that makes the parties to a transaction share the risks and information in order to achieve fairness between the parties. Islamic prohibition of riba(interest) and exclusion of gharar(uncertainty) represent the key principles of Islamic finance. Islam tries to support and regulate the structure and transactions of Islamic finance with Shari'ah(the Islamic law system) which intends to enhance public welfare. Based on Islamic principles, Islamic finance rejects debt financing and encourages equity financing.

The structure of Islamic banking and sukuk is founded upon practices related to Islamic contracts. The Islamic contracts can be categorized into (1) transactional contracts, (2) financing contracts, and (3) intermediation contracts. Transactional contracts are for facilitating transactions and form the core of economic relationships in real activities. Financing contracts are for creating and extending credits, accumulating capital, and facilitating financing. Intermediation contracts are for providing the means to implement and promote transactional contracts and financing contracts efficiently. Intermediation contracts includes intermediation through partnership, trust, and guarantee.

The murabahah contract is cost-plus for credit transaction. It is also a standout contract related to trade in terms of financing contract. While the istisna' and ijarah are both contracts for assets based on financing, the istisna' is for make-to-order and the ijarah concerns lease with respect to transactional contracts. The mudarabah and musharakah contracts started as financing contracts and have been developed as important intermediation contracts by which Islamic banks are established and operated. The mudarabah and musharakah contracts are similar in that they are operated like a partnership in terms of financing and intermediation contracts, yet are different as intermediation contracts in that the mudarabah is operated by trust and the musharakah by joint investment.
Islamic banking can be characterized as raising of funds through investment deposit based on the mudarabah contract, trust deposit based on the amanah contract, and agency base on the wikala contract, and invest funds into real sectors. Islamic banking by investment deposit, trust deposit, and agency implies that Islamic banks do not create money in the process of financial intermediation. Since Islamic banks are required to distribute capacity into management of real assets, they could experience difficulty in liquidity management. The three modes of Islamic banking imply that while an individual Islamic bank could face high variability of performance, the entire system of Islamic banks could achieve sustained stability.
Chapter 3 analyzes the structure of sukuk and discusses related issues. It reviews the general structure of sukuk and compares the characteristics of sukuk with those of direct investment instruments. It closely examines the more important types of sukuk used currently and widely. Finally, it discusses the issues of property ownership related to sukuk.

Sukuk are certificates representing ownership of properties on which their issuance is based. The principal-agent relationship between the originator and the special purpose vehicle (SPV) is established for all sukuk. In the process of securitization for sukuk creation, the originator is the principal who owns the underlying assets initially and the SPV is the agent who issues sukuk. The SPV takes the underlying assets from the originator and issues sukuk based on those assets. The SPV also plays the role of the agent for sukuk holders who own the right to share in underlying assets. As underlying assets are transferred from the originator to the SPV, the underlying assets are removed from the balance sheet of the originator who demands the funds and are recorded on the balance sheet of the SPV. Therefore, the underlying assets become bankruptcy remote, from the potential bankruptcy of the originator.

We then compare sukuk with bonds, equities and other asset-backed securities. Bonds are not issued based on underlying assets and represent liabilities guaranteeing payment of principal and interest; sukuk are linked to underlying assets and represent the right to share in those assets and earnings connected to their performance. Equities and sukuk have a common feature in that they are direct financing instruments. However, equities are shares of an entire corporation, whereas sukuk are shares of specific real assets for a specific project. Therefore, equities have no maturity while sukuk does. Sukuk have something in common with usual asset-backed securities in that both of them are securities structured by links to underlying assets. However, sukuk have different characteristics from usual asset-backed securities with respect to underlying assets and property ownership. While the ownership of underlying assets is a given with sukuk, usual asset-backed securities do not guarantee their ownership.
This paper also conducts a concrete and detailed examination of the structure of sukuk based on the Islamic contract practices. We are able to ascertain that the funds raised by issuing sukuk are not for general use but are used for specific purposes of a specified contract which is the basis of sukuk.

Recently the issues of property ownership related to sukuk have risen. As some sukuk failed recently due to the 2008 Global Financial Crisis, controversies emerged regarding the ownership of underlying assets for sukuk. To sukuk holders, the ownership of underlying assets related to sukuk is different depending on whether the sukuk is asset-backed or asset-based. When default of sukuk or the failure of a project for asset-based sukuk occurs, legal disputes are highly likely. Most sukuk currently issued are structured with purchase undertaking. Purchase undertaking is ultimately related to the ownership of underlying assets at the expiration date of the sukuk. That is, purchase undertaking is related to whether sukuk become similar to usual bonds.
Chapter 4 discusses policy directions for introduction of Islamic finance into Korea. First, we gauge the feasibility of Islamic banking in Korea. It is expected that employing Islamic banking would be difficult for both Korean banks and customers, considering the small size of the Islamic population and the features of Islamic banking based on real activities. If Korea adopts Islamic banking, the Korean government would face the difficult task of regulating and supervising Islamic banks in harmony with the Korean banking system. Therefore, at this juncture, the benefits of introducing Islamic banking into Korea are not many.

Then, it discusses taxation issues related to issuing sukuk in Korea. Issuing sukuk could help achieve financial stability of the Korean financial market by diversifying the foreign sources of financing. Since sukuk are beneficiary certificates linked to real assets and are also a form of foreign currency denominated securities, revision of the tax laws are required to introduce sukuk into Korea. Sukuk would not be attractive over bonds if taxes are levied on them according to current tax laws. Recognizing this situation, the Korean government tried to revise tax laws from 2009 to facilitate issuing sukuk in Korea. However, the issue has not been discussed actively and legislative work on tax revision has stopped.

Because sukuk are structured securities, the problems arise concerning the taxation of the transfer of real assets and income between the SPV and the transactional parties related to sukuk issuance. The core purpose of the tax law revisions that the Korean government has pursued is to exempt taxes on earnings from sukuk holdings as well as on the transfer of real assets related to sukuk issuance. This is done by defining earnings from sukuk holding as interest earnings of foreign currency denominated bonds, in a separate clause for sukuk in the 'Tax Reduction and Exemption Control Act'. The basic stance of the Korean government is appropriate, seeking tax neutrality between sukuk earnings and interest earnings of foreign currency denominated bonds by taxing them on an equal basis, while raising additional foreign funds with a new instrument.
From an economic point of view, it is appropriate that, for transactions occurring by issuing sukuk, to levy taxes on the income generating process and exempt taxes on simple transfer of assets generating no income. Therefore, it is resonable that taxes be exempt for the transfer of real assets between the SPV and the transaction parties; and be levied on income flows and capital gains related to issuing and trading sukuk. At the same time, sukuk income flows should be treated as neutral to interest income.
Considering the feature of sukuk as beneficiary certificates, it is appropriate that the Korean government pursue tax neutrality by legislating exemption of taxes on earnings of sukuk, effectively defining them as income from dividends and not as interest. It is desirable to allow the sukuk types to be applied comprehensively to various commodities and projects. In addition, it is necessary to reconsider the clause of the revised version of the 'Tax Reduction and Exemption Control Act' that states the SPV should be established as a foreign entity, since the placement of the SPV does not significantly matter.

Chapter 5 summarizes the contents and concludes the overall discussion. Islamic finance is developing fast, and is expected to continue to develop in the future. However, Islamic finance would not replace the traditional finance system, but become a part of overall financial structure coexisting with the traditional finance.

Introducing Islamic finance into Korea could diversify the source for financing and have a positive effect on the development of the Korean financial system. However, Korean institutions should approach Islamic finance with tempered expectations. Korean institutions need to apply sukuk to proper areas where they their strengths could be best utilized. For example, they could apply sukuk to projects from the MENA region, as sukuk’s advantages are in project financing.
We do understand Islamic finance in a limited scale, since Islamic finance has a short history and is developing rapidly. Therefore, we need to pursue research on Islamic finance deliberately and continuously in terms of philosophical foundations, structure, legal feature, bank regulation and supervision, and market trends. Since Islamic finance could be a complement in providing financial stability, Islamic finance should be sought out more actively.

Recently, the production processes from material procurement to marketing have been split up into many stages and the value added from the production was divided among various countries. In other words, the global value chain has deepened, thereby changing the trade in goods to trade in tasks.
Therefore, we need to approach the international trade in terms of value added rather than gross value. This study investigates the share of employment and value added of each industrial sector, utilizing the World Input-Output Tables and the Socio-Economic Accounts.

In the Korean case, notably, the employment share of the industrial sector has changed rapidly, compared to exports and the value added. When we analyze the correlation among export, employment, and value added, it turned out that manufacturing export and employment are correlated by -0.82 which is statistically significant. However, the correlation between export and value added is not statistically significant, while the statistical relationship between value added and employment is not supported by the data.

This study also analyzes the effects of final demands such as export, investment, and consumption on the value added, based on Meng et al.(2006), WTO and IDE-JETRO (2011), Stehrer (2012), Stehrer et al.(2012). The results indicate that the share of value added induced by export to the total value added has increased since 1996, while the value added inducement coefficient of export has decreased consistently.
When we investigate the effects of final demands such as export, investment, and consumption on employment, it yields similar results to the value added. It turned out that the share of employment induced by export to the total employment has increased steadily, while the employment inducement coefficient of exports tended to decrease during the period from 1996 to 2009.

Utilizing a plant-level panel dataset on Korean manufacturing, this study estimates the effects of exporting on the relative employment and wage of the skilled workers, as well as on the absolute levels of employment and wages of the skilled and unskilled workers. We find clear evidence that exporting increases the employment and wages of both skilled and unskilled workers, which implies labor reallocation from less productive, domestically-oriented producers to more productive exporters.

More importantly, we also find that exporting increases the relative demand for skilled workers. Specifically, exporting is found to increase both the relative employment and wage of the skilled workers, with the former effect more pronounced than the latter. The results found in this study are broadly consistent with the view that trade liberalization brings about not only benefits but also costs: the increased disparity between skilled and unskilled workers in the labor market outcomes.

This study also investigates the determinants of trade in value added, after analyzing the trade in value added of 40 countries and 35 industries contained in the World Input-Output Tables. Specifically, it incorporates the gravity model, the Heckscher-Ohlin model, and the Ricardian model to explain bilateral trade as a dependent variable. It applies the panel data methodologies including the least squares dummy variable, the unequally spaced panels with AR1 disturbances, the Heckman's two stage approach, and the Poisson Pseudo Maximum Likelihood.

The empirical results indicate that the test statistics have improved substantially when we take into consideration trade in value added as a dependent variable, compared to trade in gross value. It is because the gravity model was used to include the GDP into the right-hand side of equation as an explanatory variable. The net value such as the GDP can explain the value added better than gross value.

According to the results for Korean trade, the higher the share of high-skilled persons to the total employment is, the more the trade in value added tends to increase. In addition, the medium-skilled products turn out to occupy a greater portion of the current Korean trade than the high-skilled products, while the share of value added to trade tends to decrease steadily.

This study provides the following policy implications for the Korean economy. First, Korea needs to prepare employment policies that considers the fact that the effects of trade on employment may differ by the skill levels of labor. Second, Korean export strategies need to focus on the products with a high share of value added, strengthening the competitiveness of material and intermediate goods in case of the industries with a low value added inducement coefficient. Third, the globalization process in general strengthens the case for active labor market policies, such as re-training and re-education, in order to ease the adjustment burden of those who become unemployed. Fourth, it is also necessary to strengthen, and improve the effectiveness of, the social safety net in general. This approach is considered to be better than strengthening the trade adjustment assistance (TAA) program, which target only workers displaced by FTA-related increased import competition, and hence discriminates against those who become unemployed due to other causes. Finally, given the interdependence among exporting, innovation, skill upgrading, and the disparity between skilled and unskilled workers, the policies related to the employment and  technology development at the industry level, in particular, should be closely linked to the strategies aimed at upgrading the trade in value added.

Acknowledgement

Notes on the Contributors 

1. Practices of Korea’s Development Cooperation and Their References to China / Mao Xiaojing
Introduction 
An Overview of Korea’s ODA  
Management of Concessional Loans  
Training Program 
Aid Evaluation 
Conclusions 
References 

2. Beyond the Miracle of the Han River: Some Pro-Growth Philosophy in Korea’s Rural Development: The Saemaul Movement and Africa’s search for Agricultural Stimulation  / Ivor Agyeman-Duah
Introduction 
Korea: A Brief Historical Transition.  
Cultural Definition and Review Arguments. 
Agriculture in Korea, the Saemaul Movement and CulturalPhilosophy
Objectives of the Movement. 
Successes of the Movement 
Cultural or Philosophical Factors to Success 
Is the Movement Adoptable to Africa? 
Conclusion 
References 

3. Building Trans-Pacific Economic Partnerships: The Case for a Mexico-South Korea Free Trade Agreement / Juan J. Palacios
Introduction 
Trans-Pacific Trade Liberalisation: The Thrust of Binding Agreements 
Mexico’s and South Korea’s Trade Policies 
South Korea’s FTA Policy 
Economic Intercourse between Mexico and South Korea
Investment 
The Long Road toward a Mexico-South Korea FTA 
Assessing the Trade Potential between Mexico and South Korea 
The case for a Mexico-South Korea FTA 
References 
Appendix 

4. Trade and Investment Potential among BCIM Countries: Prospects for a Dynamic Growth Quadrangle / Mohammad Masudur Rahman
Introduction 
Rationale of the Study 
Current Status of Trade and Investment Flows among the Member Countries 
BCIM Trade Potential - A Gravity Analysis 
Challenges Facing the BCIM Countries 
Conclusion 
References 

5. 21st Century Global Economic Governance: Evolving Architecture, Emerging Issues, and Asia’s Role / Srinivasa Madhur
Introduction 
Evolving Institutional Architecture
Emerging Issues  
Asia’s Potential Role  
Converting Asia’s Potential into Reality: The Challenges Ahead 
Conclusion  
References 

6. Strategic Materials, Scarcity, Conflicts: A Geopolitical Approach / Stefania Paladini
Introduction: Scarcity and Conflict in XXI Century 
A Geopolitical Approach to Resources Management  
Conclusion 
References 

7. European Development Policies at the Crossroads / Wolfgang PAPE
Introduction  
Individual EU Member States’ Policies 
European Commission 
Conclusions 

8. Economic Integration of Russia, Belarus, and Kazakhstan and Tax Harmonization / Olga Shuleiko
Introduction 
Regional Integration as a Framework for Tax Harmonization 
Customs Union of EuRasES: What Changed? 
Tax Policy Issues in the Context of Common Economic Space 
Conclusions
References 

9. Egypt’s International Competitiveness: A Product Level Analysis / Hossam Younes
Introduction 
Market Shares of Egyptian Exports and Constant Market share Analysis Methodology 
Conclusions 
References 

10. The Influence and Countermeasures of Population Aging on the Economic and Social Development: Based on the Comparison between South Korea and China / Tan Yongsheng
Introduction 
Body 
Conclusions 
Reference 

11. Value Premium and Institutional Ownership in Chinese Stock / Jiyoun An, Kin-Yip Ho, and Lanyue Zhou
Introduction 
Background 
Hypothesis Development 
Methodology and Data  
Estimation Results 
Discussion and Conclusion 
References 

12. Influence of Transportation Corridors Across Yellow and Bohai Sea on the Economic Cooperation and Development in NAIR / Xiang Aibing

The Korea Institute for International Economic Policy (KIEP) was founded in 1989 as a government-funded economic research institute. It is a leading institute focusing on international regional studies with strong cooperative relationship with the world’s leading research institutes. The Center for Emerging Economies Research (CEER) has been enforcing visiting fellows program since 2008 in an effort to vitalize exchange among internal and external institutions and enrich competence in regional studies. This program cultivates close network and promotes cooperation through sharing of research outcomes and information among eminent scholars and experts of regional studies. ‘KIEP Visiting Scholars’ Paper Series’ is an accomplishment of this program that enabled higher understanding of international regional studies.

This study reviews Mexico’s economic performance under NAFTA, focusing on the changes in major economic indicators, and particularly, employment and income before and after the inception of NAFTA. There have been a significant improvement in inflation, budget deficits, and exports and FDI, but not as successful as in the expansion of economic activity and employment during the post-NAFTA era. We find a source of Mexico’s economic problems today in a lack of its appropriate domestic development policy. We also draw some implications for Korea’s future trade policy from the experience of Mexico under NAFTA.

Executive Summary

I. Introduction

II. Overview of Triadic Sanctions

III. A model of triadic sanctions
1. A Stage Game
2. An infinitely repeated sanction game

IV. US-Iran Sanction
1. Evolution of the US-Iran Sanction
2. Insights from the game theoretic Analysis

V. Conclusion

Reference

This paper presents a work-horse model to analyze the mechanism of triadic sanctions, where the receiver of the sanction is not the actual target. With a motivating example of the US sanctions against Iran and a simple game theoretic framework, we show that the threat of such sanction is not credible in situations where the game ends after single stage, or when the entities are not concerned with future transactions amongst each other. In a repeated game setting, on the other hand, the threats become credible, but the level of enforcement would differ across firms/countries depending on the economic interdependency and how the parties perceive the probability that the games would continue to the next period.

About the Editors/Contributors  
Foreword  
Message / Wook Chae  
Message  / Woosang Kim  
Opening Remarks / Joong-Keun Kim  
Opening Remarks / Skand R. Tayal  
Speech / Sung-Joo Han  
Speech / Chulsu Kim  

Preface  

Introduction  

Section I  Recent Economic Trends
1.  Korean Economy in Transition Toward an Advanced Economy:  Prospects and Challenges / Choong Yong Ahn and Kyttack Hong  
2.  The Indian Economy: Recent Trends and Prospects / D.K. Srivastava  

Section II  Trade Prospects and Non-Tariff Measures
3.  India-Korea Trade and Non-Tariff Barriers / Nisha Taneja, Pallavi Kalita, and Swati Saluja  
4.  Two Years In: Achievements and Challenges in the Trade Sector of the Korea-India CEPA / Choongjae Cho  

Section III  Foreign Direct Investment
5.  Trends of FDI Flows into India and Korea / Chang-Ho Kwag  
6.  Investment in the Indo-Korea CEPA / Saon Ray and Neetika Kaushal  

Section IV  Services and Green Energy
 7.  Current Status of Indian Green Energy Industry and Cooperation between Korea and India / Hyun Jae Kim and Chankook Park  
 8.  The Role of Culture in Economic Activity and Exchange Parthasarathi Shome  

Section V  Global Security Issues
 9.  Rising Powers and Asia’s Stability: Strategic Convergence between India and South Korea / W. Lawrence S. Prabhakar 
10.  India’s Changing Relations with the United States and China / Sanjana Joshi  
11.  Four-Layered Security Cooperation between South Korea and India / Cheol Hee Park  

This volume edited by Parthasarathi Shome and Choong Yong Ahn brings together papers and speeches presented at the 10th dialogue. It analyses the Indo-Korea CEPA in terms of the flow of goods, services and investment as well as discussions for collaboration on other sectors that are under consideration between these two economies. It also identifies the possibility to improve the relationship between the two countries through a revision of a number of existing tariffs, non-tariff barriers related to trade and investment linked policies. We hope that this volume will enrich our understanding of Indo-Korea relations and contribute to more significant relations between the two countries.

This volume is a collection of presentations made at the KIEP international seminar, “Economic development strategy of China’s Eastern Coastal Region during the transition period” in November, 2011. The first part entitled, 'Industrial restructuring and sophistication', analyzed today's shifting industrial structure and concomitant problems in Liaoning, Jiangsu, and Zhejiang provinces. The second part entitled, ‘New growth engines by Regions,’ elaborates on regional economic development strategies and strategic industries in Guangdong, Shandong, and Greater Capital Economic Zone that includes Beijing, Tianjin and Hebei province. 

This latest volume contains analysis of economic development and current issues involving Chinas coastal regions, along with appropriate response measures for business people, researchers, and policy makers. It is expected that this collection will enhance our understanding and eventually promote greater cooperation with China.