Throughout the globe, many free trade agreements (FTAs) have been signed, negotiated or implemented. Amidst the increasing trend in FTAs, Korea has also been actively pursuing FTAs with many strategic trading partners. Recently, Korea has completed seven FTAs, including Korea-Chile FTA, Korea-Singapore FTA, Korea-EFTA FTA, Korea-ASEAN FTA, Korea-U.S. FTA, Korea-EU FTA, and Korea-India CEPA.
As for gains and losses of having multiple FTAs, the first thing that comes to attention is benefits of enhanced market access opportunities vs. costs of complexity created by rules of origin (ROOs). As existing studies have already pointed out, the positive economic effects from trade liberalization can be reduced due to the complexity of ROOs. With multiple FTAs, the operational complications stemming from different ROOs lead to higher compliance costs for local firms, which are likely to exceed benefits from FTA preferences. Therefore, firms may eventually give up on the use of FTA preferences.
Indeed, there have been growing concerns regarding the complexity and inconsistency imposed by the ROOs in Korea’s FTAs. Accordingly, there is a growing consensus that Korea needs to build its own position on the ROO and apply them to the remaining FTAs. Motivated by this necessity, this study attempts to propose possible suggestions for Korea’s FTA rules of origin.
After completing the FTA negotiations with the U.S. and EU, the remaining task for Korea’s FTA policy is to form FTAs with China and Japan. It should be noted here that in the case of Korea’s FTA with China and Japan, any kind of FTAs can be possible: a series of bilateral FTA with each country, a trilateral FTA, or a plurilateral FTA including ASEAN countries. In this regard, the scope of our discussion is expanded to include the issue of East Asian Integration, to cover all possibilities.
This study begins with a discussion of the dynamics of East Asian Economic Integration and the importance of adopting a unified ROO for this region. Then, it follows a detailed examination of ROOs in Korea’s existing FTAs as well as ASEAN+1 FTAs. The ROOs in the ASEAN+1 FTAs are relatively simple and consistent across agreements compared to the ones in Korean FTAs. In fact, the ASEAN+1 style would be a good starting point as an enabling model for the ROO in achieving East Asian Integration. Given the above, Korea’s position on ROOs in FTAs with East Asia countries should not be different from the ASEAN+1 FTAs.
Then it goes on to analyze the results of the survey conducted by Gallup Korea. In all, 1,500 firms participated in this survey and around 80 percent were SMEs. The main part of this survey asked for suitable rules of origin to receive FTA preferences. Noticeably, most of firms in the manufacturing sector chose ‘wholly obtained criteria’ as the suitable rules of origin to receive FTA preferences, which reduces the reliability of the overall survey results.
So far, five FTAs have entered into force in Korea, and the main focus of Korea’s FTA policy now is on implementation of the FTAs. However, it turns out that domestic firms still lack information about the ROOs, which is the basic concept they would need to know in order to use the FTAs. Collecting reliable information from firms is a prerequisite for a building a proper model of Korea’s own position on FTA rules of origin. Therefore, it is necessary to help domestic firms acquire correct and practical information about FTAs. Given the different level of expertise among firms; various seminars, training opportunities, or consulting should be provided frequently throughout the countries.
Finally, this study sets out guidelines for Korea’s own model of FTA rules of origin. In building Korea’s position on ROOs, emphasis is placed on the need to support the sophisticated production networks in East Asia, to maintain consistency vis-à-vis ROOs in the existing FTAs, and to improve the domestic regime related to the ROOs.
Knowing that the ROO is the result of the FTA negotiations, Korea seemed to put the least priority on the ROOs among the various FTA negotiation topics. It can be explained by the fact that Korea has not built a concrete position on ROOs. For the remaining FTAs, Korea should engage in efforts to adopt a simple, unified and consistent ROOs to reap the full benefits of the multiple FTAs.

 We analyze the asian bond markets, especially the effect of global financial crisis on the markets. We are going to focus on the coupling of the asian bond markets and foreign investments. In the chapter 2, we first summarize the bond markets' trends of Korea, Japan, China, Indonesia, Malaysia, Singapore, Philippine and Thailand. Before the financial crisis, the macro-economic status of them were not similar to each other, so the bond markets showed little similarities. The global financial crisis, as the common shock to all of asian countries, resulted the drops of GDP growth rates of all Asian countries and the expanding monetary policies with low policy rates. Even with low policy rates, the long term market interest rates stayed high due to the credit tightening of financial institutes, so the term spread has gotten wide. With recovery from crisis, the term spread has gotten narrower than that during financial crisis, but the financial institutes are smore risk averse than pre-crisis era.
In chapter 3, we analyze the coupling status changes due to the crisis of interest rates, CDS premium, CRS rates. We found more coupling relationships after the crisis. One of the reasons of increasing coupling relationships is the increasing the importance of China in Asian economy. We found less coupling relationships after crisis in CDS premiums due to deeping of credit differentiations during crisis. We found more coupling relationships after crisis in CRS rates which were affected by bond and foreign exchange markets.  
In Chapter 4, we analyze the deciding factors of foreign investments on Asian bond markets. We found that the credit ratings and interest arbitrage incentives were the significant explaining variables on foreign bond shares in Asian bond markets and the GDP and CDS premium were the signifiant explaining variables on foreign bond holding amount in Asian bond markets by using quarterly data from ADB. In Korean bond market, the interest arbitrage incentives were the significant explaining variables on foreing net buys by using daily data.
The relative fast recovery of Asian economies are attracting the global investors to Asian financial markets. We need to stabilize the investing incentives in order to stabilize the foreign investments. Our analysis indicates that the stable GDP growth, CDS premium and interest arbitrage incentives would stablize the foreign investments on bond markets. Therefore we need to sustain the GDP growth, good fiscal status and to stabilize the currency swap markets.

 The global economy has been suffering from financial collapse and economic recessions, triggered by the U.S. subprime mortgage crisis. As a consequence of international cooperation to overcome the current crisis, the Group of Twenty (G20) has emerged as the new global entity of a premier forum for international economic cooperation.
The East Asian financial crisis in 1997-98 highlighted the significance of financial risk coming from a premature financial market and its contagion to neighboring countries in the region. In the aftermath of the crisis, not only was there a heightened perception of East Asia's regional exposure to external economic shocks, but there was greater interest in attempting to develop a regional mechanism as self-help measures against the recurrence of similar future crisis.
From East Asian perspective, two tracks of post-crisis financial cooperation were established: the G20 process in a global sense and the Chiang Mai Initiative Multilateralization (CMIM) in a regional dimension. The Chiang Mai Initiative (CMI) was agreed to in May 2000 in Chiang Mai, Thailand, with the objective of establishing a network of bilateral swap arrangements among ASEAN+3 countries to address short-term liquidity difficulties in the region and to supplement existing international financial arrangements. The framework was basically a set of bilateral swap agreements between the central banks of the two countries involved in each swap arrangement.
ASEAN+3 countries have agreed to multilateralize the CMI in such a way that any member country can utilize liquidity support from the total fund of $120 billion under a single agreement. Members have agreed to a two-tier contribution scheme: 20 percent contribution by ASEAN countries and 80 percent by the Plus Three countries. The CMIM, which came into effect on March 24 in 2010, is basically a commitment to provide U.S. dollars to member countries in crisis. The CMIM, however, has several limitations: insufficient amount of swap facilities available under the CMIM, the IMF-linked portion of 80 percent, institution building of CMIM secretariat, IMF-CMIM linkage program and their cooperation, among others.
The Asian Bond Market Initiative (ABMI) aims to develop efficient and liquid local currency bond markets in Asia through investment of huge savings of Asian countries in the region. It is expected to mitigate the problem of both currency and maturity mismatches in East Asia. This came about because of an underdeveloped regional bond market, and heavy dependence on bank financing without issuing and trading local currency bonds. Thus, the aim of the ABMI is to create regional bond markets where bonds are denominated in regional currencies. One of the reasons for the lack of development of Asian bond market is that the reserves and capital in Asia have been largely invested in the U.S. and Europe, and then they are re-invested in Asia through international investment institutions and hedge funds.
This study reviews the evolution of East Asia's financial cooperation, including the CMIM and the ABMI, and suggests policy implications for more effective and forward-looking regional financial cooperation under post-crisis international economic order. Moreover, it analyzes the economic impact of Asian bond market by simulating a five-country DSGE model.

The exchange rate is one of the most important macro-economic issues in the Korean economy. South Korea had suffered from an extremely severe currency crisis in 1997. During this period, national wealth plummeted by 20~30%. Furthermore, the Korean economy nearly escaped encountering a second currency crisis due to the global financial crisis in the wake of the Lehman Brothers Bankruptcy in 2008. Korea’s foreign exchange (FX) market had been struggling to change its structure after Korea’s 1997 Currency Crisis. Opening financial markets and liberalization of capital movements progressed rapidly by adopting the floating exchange rate system. Increase in the volatility of the exchange rate increased, and keeping the exchange rate stable has become a top policy priority.
This study comprises of three key aspects. First is a relationship analysis between the characteristics of the Korean FX market and the exchange rate. The Korean FX market has been transformed by continuous liberalization from 1997 to the present, necessitating an analysis on how this change is related to the exchange rate. The second is the analysis of the effect on the exchange rate fluctuation caused by characteristics of supply and demand on foreign exchange. The exchange rate is determined by supply and demand because the currency of emerging economies such as Korean Won does not have international convertibility. Consequently, in case there is a threat to or no guarantees for the stable supply of foreign exchange, the exchange rate could be overshot, and the phenomena can become the seed of tragedy (currency crisis). Existing exchange rate theories have difficulties in reflecting the characteristics of exchange rate fluctuation in emerging economies. Thus, we should try to find policy responses appropriate for the current Korean market, based on accurate analysis and understanding. The third aspect involves the analysis on the determinants of foreign exchange rate. Policy directions are influenced by real and financial factors; and supply and demand factors simultaneously. Without accurate evaluation of these factors, policy effectiveness can become diminished. So it would be necessary to analyze them with respect to its factors to obtain basic references for policy.
Exchange rate fluctuation is becoming more frequent and increasing in duration in South Korea. It is because, after opening its capital market, capital movements became a dominant factor in determining exchange rates. The Korean economy is a small and open economy, and again, its domestic currency lacks international convertibility. Supply and demand of foreign currency, therefore, exercises unilateral influence in determining the Korean Won’s exchange rate. That is, foreign exchange has asymmetric power in relation to the Korean Won as a determinant of exchange rate. For this reason, the following should be noted when making exchange rate policy in South Korea.
First, it would be desirable to prepare for the eventuality that rapid fluctuation and instability of exchange rates might become routine. After opening its capital market, fluctuations in the Korean FX market tends to be caused more by capital market factors rather than economic fundamentals; as a result, being more easily exposed to frequent change and instability. This situation warrants an immediate solution. Second, it is required that portfolio investment and other capital account balance be managed simultaneously: both influence substantially the supply and demand of foreign exchange in South Korea. However, both of these balances are investment balances for the short-term, which means they are vulnerable to high volatility for the short term. It is important to find the way either to lower the proportion of these balances or to spread them out over a longer period of time. Third, if the exchange rate imbalance is unavoidable, the Korean Won exchange rate should be depreciated rather than be appreciated to facilitate its management, because it would be possible to control the rates using the domestic currency when depreciated.
According to the results from modeling related to the balance of payments, it is shown that the supply and demand of foreign exchange is determined by the balance of capital accounts in the short run, and by the current account balance in the long run. As capital investments consist mostly of short-term investments, it is impossible to completely overcome instability at a certain level, in determining the balance of capital accounts. In a longer period of time, however, when the balance of current account is a surplus, the capital inflows expecting exchange gain also increase and its amount become even greater with a bigger surplus; and it implies that economic fundamental still has an important role as well. The following are policy suggestions drawn from these characteristics of supply and demand of foreign exchange.
First of all, managing the balance of current account is a prerequisite for the stability of exchange rates. It would be especially desirable to maintain the balance of current account at a certain level of surplus; which helps to keep the supply of foreign exchange stable. During a crisis, the balance of current account tends to determine the direction of all balances comprising the balance of capital account. It is important, consequently, to maintain surplus on a consistent basis, even if the amount is small. Second, a buffer is needed to control volatility in the short term. Although fluctuation of the balance of capital account can be caused by domestic factors, it is not unusual that foreign factors such as the global financial crisis of 2008 to cause more serious fluctuations in certain instances. In this situation, retaining foreign reserves would be the first policy choice. Third, measures to prepare for the uncertainty of oil prices and price of raw materials in the supply side is also needed. Analysis of the accounts balance reveals that oil price is the most influential factor in determining the exchange rate of the Korean Won, followed by price of raw materials. Oil price is the most crucial factor determining the capital account balance as well, but happens to be a variable that Korea has no control over. The Korean economy is also highly dependent on foreign raw materials. For this reason, responses to the volatility derived from the shock of oil and raw materials prices must be formulated beforehand. Fourth, to manage the economic fundamental is the most important factor in the end. Composite Leading Indicators (CLIs), prospect of domestic economic growth rate, seem to be very important when it comes to early warning of the fluctuation in the balance of payments. CLIs are considered the most important index in capital movements as well. Strong economic fundamentals are likely to ensure high CLIs and maintain the balance of current account in a surplus. One of the indices determined directly by the fundamentals is direct investment. Hence, managing fundamentals could be the most critical solution for maintaining surplus and stability in the balance of payments.
‘Real demand’ is the primary macro-economic factor identified by the analysis of determinants in the fluctuation rates of the Korean Won. The demand related to exports is representative of demand in the Korean economy. Maintaining export demand requires possessing export competitiveness. On the other hand, the demand related to domestic consumption becomes more stable due to the increase of income level; albeit being limited in scale compared to other developed countries. Moreover, the demand-related government consumption is also limited, by budget constraints. Stabilization of demand related to investment can be achieved by preemptive macro-economic policy since it can be affected by economic forecasts. Yet even in this case, as investment is decided by the private sector, it can be only achieved by improving economic fundamentals.
Since Korea’s 1997 currency crisis, supply and nominal factors are becoming more likely to impact the exchange rate. In case of the supply factor, it seems to be caused by shocks from policy changes, bottleneck effect of raw materials, and technological progress in industries such as IT. In the future, it can be implied that stability of exchange rate requires constant technological improvement and appropriate supply of resources. In case of the nominal factor, it seems to be caused by policy changes and globalization of financial markets. Capital flows and volatility of exchange rate would be caused by changes in financial and monetary division, expectations of investors, or policy directions. It is, generally, difficult to control international capital movements and its fluctuation of exchange rate caused by economic shocks. Finally, although supply and nominal factors are necessary to the stability of exchange rates in the short run, the economic fundamentals would primarily influence the stability of exchange rates in the long run.

 In November 2010, the Leaders of APEC gathered in Yokohama under the 2010 theme of “Change and Action” to articulate their vision of further building and integrating the Asia-Pacific economic community in the 21st Century, and the paths to realize that vision. They endorsed the Report on “APEC’s 2010 Economies’ Progress Towards the Bogor Goals”, agreed the APEC Leaders’ Growth Strategy, and instructed to accelerate work to strengthen and deepen regional economic integration in the coming year. They reiterated their commitment to take concrete steps toward realization of a Free Trade Area of the Asia-Pacific (FTAAP).
In this regard, there is no doubt that the Korean government needs to set up relevant strategies for its participation in APEC’s ongoing REI activities. To this end, this paper first analyzes APEC’s 2010 Economic Progress Towards the Bogor Goals and reviews what was achieved by APEC activities for economic integration. In this paper, the achievement of APEC’s activities is empirically identified by quantitative analysis.
Chapter II examines, with various data set and analytical tools, the nature and structure and characteristics of APEC’s economic growth since the Bogor Declaration in 1994. The outcomes reveal that significant institutional and market-driven integration has progressed in the Asia-Pacific region, the world’s most dynamic economic region. The analysis of the economic environment indicates that APEC’s economic integration creates strong positive welfare effects. For starters, the Asia-Pacific region accounts for 40% of the world population as of 2009; APEC economy account for 54.5% of the world’s GDP and 34.1% of trade in goods as a percentage of GDP. FDI inflows to the APEC region reached US$440.4 billion or 40% of the world total, with FDI outflows from APEC economies growing to US$579.7 billion or 53% of the world total. Aside from the size of its economy, APEC has been exerting great influence in the world economy with a diverse array of activities for economic cooperation over the past 20 years. Although there were no remarkable changes in intra-regional dependency in trade and investment, the trend towards the expansion of RTAs/FTAs is distinct within APEC. The number of RTAs/FTAs implementd by APEC economies stands at 119 and intra-APEC RTAs/FTAs take up 50% (60 intra-APEC RTAs/RTAs). In general, the characteristics of APEC members’ RTAs/FTAs depend on geographical proximity. However, the recent FTAs/RTAs have tended toward diversifying their partners in terms of region. It can be interpreted as economic factors and geographical proximity being taken fully into consideration in selecting RTA/FTA partners. The quantitative and qualitative analysis is made to find out whether intra-APEC economic factors; including size of the economy, trade barriers, trade size, trade costs, industry structure, economic development, etc; can bring about strong positive welfare effects by trade and investment facilitation. The results of the analysis reveals that economy of scale from regional economic integration, growing efficiency from competitive and integrated intra-APEC market, and strengthened industrial competitiveness lead to increase in welfare. It can also be seen that development gap and mounting trade costs will not lead to much negative effect.
Chapter III provides the sectoral improvements and implications of APEC’s progress for the Bogor Goals based on fact sheets submitted by 13 economies, referred to as “2010 Economies”. The major findings are as follows. First, trade in goods by APEC economies was US$11.4 trillion in 2009 with 7.1% annual growth during the period 1994-2009, with US$2.4 trillion being traded in services. The annual growth of FDI inflows is 13%, and 12.7% for FDI outflows. Second, average of MFN applied tariffs decreased from 8.2% in 1996 to 5.4% in 2008, compared to a world average of 10.4% in 2008. This decrease in intra-APEC trade barriers is attributed to the spread of intra-APEC RTAs/FTAs and voluntary liberalization measures. Third, the agreed commitments in the RTAs/FTAs attained deeper liberalization on trade in services than the GATS commitments. Fourth, the number of bilateral investment treaties (BIT) providing most favored nation (MFN) treatment increased from 160 in 1996 to 340 in 2009. Fifth, such a tremendous improvement was made in trade facilitation through streamlining of customs procedures and their alignment with international standards. Between 2002 and 2006, Trade Facilitation Action Plan I met its target of 5% reduction in trade transaction costs for businesses regarding trade in the region. Nevertheless, progress in lowering and eliminating tariffs has not been uniform across sectors. Tariffs on clothing, agricultural products, and textiles remain higher than the APEC’s overall average tariff across all goods. As for services, there remain restrictions in sectors including financial, telecommunications, transportation and audiovisual services. With regard to investment, there are sectoral investment restrictions in the form of prohibition or capital ceilings. Additional sectoral efforts are needed.
We draw the following policy implications and tasks from the 2010 Bogor Assessment. First, APEC and individual APEC economies in pursuing free and open trade and investment have made visible progress toward sustainable growth. The efficient construction of mechanisms for regional economic integration requires more practical and systemic work including cost-benefit analysis and analysis on the impact of APEC’s activities on trade and growth, rather than providing mere policy directions. Second, the 2010 Bogor Assessment should have provided accurate diagnosis on achievement of the Goals and prescribes remedies to shore up the weaker sectors. In this respect, 2010 Bogor assessment needs to be differentiated by a Mid-term stocktake of progress towards the Bogor Goals in 2005 which presents a roadmap for achieving the Goals. The 2010 Bogor Assessment uses more flexible and objective assessment tools in taking a dynamic approach in light of changes in the economic environment and information technology development. Notwithstanding, there is a problem that the “Fact Sheet” submitted by 13 economies for final assessment has little distinct progress compared with the Matrix of a Mid-term stocktake, in terms of assessment composition and analysis systems. In addition, it focuses more on exploring best practices rather than evaluating the progress and drawbacks in a balanced manner. Third, the participation of 13 economies for the 2010 Bogor Assessment, which was supposed to be 5 economies originally, will create more favorable circumstances for APEC’s activities for regional economic integration. In light of consensus building, which is APEC’s primary principle in decision-making, the majority’s participation will be a catalyst for prompting regional economic integration in the form of peer pressure.
Chapter IV presents the extent of the increase in national income from trade creation that APEC activities contribute to, using the gravity model. The gravity model analysis is used to find out how much APEC activities contribute to trade, as well as to the growth of APEC and non-APEC economies. The estimate from fixed effects of Panel Data Analysis indicates a 34.4% increase in intra-APEC trade and an 11.6% increase in trade between APEC economies and non-APEC economies. It implies no trade diversion effects, which does not reduce trade with non-member economies for more intra-APEC trade. Using time-varying exporter and importer fixed effects model, the result reveals that the formation of APEC raises intra-APEC trade by 90% and APEC’s trade with non-APEC economies by up to 44.5%. For the past 25 years, previous studies show that trade between APEC and non-APEC economies create positive effects for economic growth.
Chapter V addresses ways to strengthen regional economic integration for the realization of the Asia-Pacific economic community and work that needs to be done, followed by policy and strategic implications for Korea. First, Korea should keep track with changes in economic circumstances of major member economies, as they relate to expansion and reinforcement of Korea’s FTA Roadmap, to develop strategies and to promote regional economic integration. Second, it is necessary to establish Korea’s position towards the formation of an FTAAP and the TPP (Trans-Pacific Strategic partnership Agreement). As Korea is not participating in the TPP negotiation at present, it is expected that the opportunity cost will be substantial if the TPP is successfully formed. As the objective of the TPP is to reduce all trade tariffs to zero by 2015, some developing economies, like Malaysia and Vietnam, are reluctant to jump into the TPP bandwagon. Furthermore, it is noteworthy that Australia and the United States lead the TPP negotiation although there are significant exceptions for sensitive sectors in the FTA between the two economies has. On the other hand, the participation of Korea, Japan, and China in the TPP will facilitate and accelerate the realization of an FTAAP. Taking all possibilities into account, it is suggested that Korea reinforce strategic ties with China, Japan and developing economies which are hesitant to join the TPP, to achieve the goal of liberalization without exception, and seek collective efforts for flexible adjustments to the objectives of TPP. Third, it is desirable to set up supplementary strategies to Korea’s FTA Roadmap by industry in consideration of possibilities of TPP formation in addition to ASEAN+3 and ASEAN+6. Accordingly, pushing forward discussions on a China-Japan-Korea FTA will lead to development of policy alternatives for ongoing regional undertakings such as ASEAN+3, ASEAN+6, and TPP; and a catalyst for early realization of an FTAAP. In particular, Korea should induce China’s active participation which can invigorate the progress towards East Asia economic integration, so as to enable Korea to highlight and strengthen its contribution and secure a position to influence reorganization of the world economy. Fourth, it is indispensable to formulate a standard model for FTAs with APEC and non-APEC economies in accordance with progress being made toward liberalization for APEC’s economic integration. Above all, it is of great importance to invest additional efforts for harmonization and simplification of Rules of Origin (ROO) and develop an optimal model for APEC ROO through various studies and analysis. Fifth, it is recommended that Korea express its continued support for APEC’s open regionalism and play a leading role in establishing optimal intra-APEC RTAs/FTAs to promote an FTAAP. This WTO-plus approach will provide an impetus for sustainability of regional economic integration even in case of successful negotiation of DDA (Doha Development Agenda), and contribute to stable operation of Korea’s international economic policy. Sixth, the successful establishment of an FTAAP requires capacity-building for negotiation skills of developing economies. The Survey on APEC’s REI (Regional Economic Integration) Capacity Building Needs conducted by Korea in 2010 shows that there is a need to develop a tailor-made capacity-building program to specific circumstances and sectors of member economies. It entails a wide range of experts and human resources in terms of developing and implementing the program. In this regard, it is necessary to provide incentives for stimulating trade and investment liberalization, promote CSR (Corporate Social Responsibility), offer financial support, and develop a program whose practical benefit would go to developing economies. It will enhance the brand value of participating companies and the international standing of the Korean government. Moreover, it will be a stepping stone for expanding business opportunities of Korean companies in developing economies. Lastly, some sectors are still in need of improvement regarding such areas as tariffs and non-tariff barriers; even though Korea shows above-average improvement on the whole in the 2010 Bogor Assessment and have made greater advancements in some sectors in terms of structural reform than the advanced economies. Nevertheless, redoubled efforts to upgrade its economic constitutions by harnessing reforms and open-door policy are essential for Korea to strengthen its competitiveness and gain greater access to foreign markets.

The value of investment by Korean multinationals dramatically rose from less than USD 100 million in 1985 to USD 19.4 billion in 2009, albeit decreasing somewhat in 2009 due to the worldwide economic downturn. Accordingly, the potential domestic impact of the rapid increase in overseas activities by Korean multinational enterprises has been a source of widespread public concern and a hotly debated issue. On one hand, FDI outflows generate fears that such investment displaces domestic employment and capital investment, resulting in reduced productivity－in other words, a hollowing-out effect. On the other hand, alternative perspectives suggest that growth in FDI abroad may increase levels of domestic activity by boosting productivity through offshoring of tasks losing competitiveness at home. Despite the economic and political debates on the effects of outward FDI, it is difficult to find rigorous empirical works of research that explore the performances of Korean multinationals in their overseas activities.
Motivated by this lack of evidence on domestic economic effects of Korean FDI abroad, this report aims to assess the performances of Korea’s outward FDI and draw policy implications. Using industry-level data from the NSO (National Statistical Offices), the effect of FDI by Korean MNEs on domestic productivity, trade and employment are examined. To better understand the mechanism behind the impact of FDI abroad on each economic indicator, we further estimate the size of the impact on production and employment by sector using the Korean Input-Output Table.
The main finding of this report suggests that a 1% increase in FDI abroad can raise industry productivity by 0.004~0.009%. The outflow of investment by Korean multinationals may negatively affect employment in the first year of investment, but this effect dissipates over time. The impact can differ across skill intensities. The employment of unskilled labor can decrease in the short term, but the statistical significance disappears in the long run. As for skilled labor, employment increases in the long run. An empirical study on FDI-trade nexus finds that foreign activities by Korean MNEs can increase both exports and imports. A 1% increase in outward FDI can raise exports by 0.07~0.08% and imports by 0.187~0.192% respectively. An analysis using input-output table further shows that the net effect of FDI on domestic production and employment can be significantly positive because the complementarity between FDI and trade outweighs the crowding out effects of FDI outflows on domestic capital.
The conclusion that can be drawn from the results of this report is that in the short run, outward FDI by Korean firms can lower production and employment through relocation of production sites. In the long run, however, structural adjustment via reduction in low value added work, specialization, and increase in trade volume can jointly contribute to facilitating productivity and expanding demand for skilled labor.
Based on the results, this report may allow firms to gain useful information in establishing strategic objectives regarding FDI outflows on one hand, and suggest important policy variables for policy makers to consider on the other.

This study aims to develop policy implications with focus on the development of the Korean green industry and its expansion into the Central America. In other words, it makes policy suggestions for improvement of the Korean green growth model and its application to Central America’s green industries. For more effective policy suggestions, this study brings out the valid concept of green industry based on a comparison of industrial categories in Korea and the Central America.
Considering the particulars of the Central American situation and its green industry development, the best concept of a ‘green industry’ categorized here (adopted with three industrial areas as a common denominator) are: environmental industry, renewable energy industry and energy efficiency industry. In addition, this study provides basic information on the general environment of the green industry in Central America; examines various environmental issues and environmental situations relating to water, air, land, forest and the ecosystem as a whole; and will also include environmental law, institution and programs at the level of the Central American Community (e.g. SICA) and each individual country. Based on these backgrounds, this study moves into earnest analysis of the actual situation inthe environmental industry, and its development in Central America and its 8 constituent countries. At the level of the regional community, the green industry in Central America has developed in water, basic sanitation, wastewater treatment and its management, which are urgently needed in individual countries as well.
In particular, many individual countries face problems with supply of drinking water, the lack of basic sanitation infrastructure, insufficient waste treatment facilities, recycling waste matter, air contamination, etc. even though the state has taken up many of the responsibilities of environmental industries except waste treatment and recycling. Many Central American countries have not provided proper environmental services given their small government budgets and intermittent economic instability. The distribution rate and the level of technology in such areas as sewage treatment and basic sanitation service are very low, that is the quality of service provided is poor and the system is not well-organized in its operation.
For example, Guatemala, Honduras and Nicaragua are very poor cases; particularly concerning basic environmental infrastructure. Thus more investment in this field is vitally necessary. Most Central American countries provide electricity with thermal power generation and use firewood in individual houses, thus emitting much CO2 into the atmosphere and contaminate the air. Due to much volcanic activity in this region, air contamination is increased further. It is expected that equipment or technology for air-pollution prevention is urgently necessary in this region. This makes it clear that Central American region has the highest potential for growth in the environmental industry and its markets. The case study of the renewable energy sector also shows great potential for cooperation.
Central America has a tropical climate, plenty of rainfall, abundant plant biomass, lots of sunshine and an active volcanic environment, which could give it another source of energy in the form of geothermal power. This region is also an ideal location for wind power generation, meaning the region has massive potential for development of renewable energy. Even though there is great abundance of natural resources, the rate of energy consumption in this region has increased an average 5.2% in the past decade and the region is experiencing power shortages. To resolve this problem, Central American summit meeting announced the 'Sustainable Central American Energy Strategy 2020' in 2007. This strategy aims to stabilize the system for producing energy through energy resource diversification, giving more consideration to the sustainable development model, involving a balance between the environment, economic growth and social equality. To achieve this aim, dependence on fossil fuel must be reduced and use of renewable energy increased, development of energy efficiency should be promoted, meaning energy saving is the most important strategy for this region.
In addition, power demand in the Central American region is expected to increase by about 5.1%-6.1%, keeping pace with the region's economic growth. Many individual countries in this region have considered renewable energy sources as well as alternative ones including hydroelectric generation, geothermal power, biomass, and wind power. Although the strategies and contents are different depending on the individual countries, most of them are strongly pushing forward strategies for renewable energy for supplying their power needs. Panama and Costa Rica and Guatemala have optimum conditions for future construction of hydroelectric power plants. El Salvador also has interest in developing hydroelectric power. Honduras and Nicaragua, on the other hand, have much interest in wind-power plants. In order to support these industries, many countries have institutionalized various economic incentives.
Central America has been characterized as underdeveloped in terms of its energy industry, thus they have great potential as an energy market, especially in the energy-efficiency sector. Confronted with high oil prices and problems related to climate change, the region has employed new energy strategies that attempted to do more than just react but actually increase the supply of renewable energy. Developing these sectors entails a high level of technology and much investment, but if other countries are willing to engage in cooperation, the focus on energy efficiency as a strategy for energy saving as appears to be the best option. For removal of political, financial and technological barriers, this region has come up with many measures by providing strategies and methods for rational energy usage, as embodied in the term ‘energy efficiency’.
The possibility of green industry in Korea and expansion toward this region depend on making active use of the current 'Central American Opportunity'. Cases of foreign advancement into the region, investigated throughout the last chapter, provide some good examples and increases Korea’s chance for entering the Central American green industry market. Though already researched deeply and extensively through SWOT analysis, policy suggestions and action plans for entering Central America and expanding Korea’s green industry into this region must consider many aspects including institutional, financial, technical and most of all the 'environmental', in its new agenda for international cooperation. Therefore, it must be handled in a gradual manner, towards real cooperation and business partnership.

The report focuses on how Korea should approach the ICT industry in Central America including Guatemala, Honduras, El Salvador, Belize, Nicaragua, Panama, Costa Rica, and the Dominican Republic, which are the members of the Central American Integration System (SICA). Central America's economic scale is relatively small relative to the world economy. However, it is a vital connecting point geographically between the North and South America. In the past, trade between Korea and the Central American countries were limited to the sewing industry and common trades. Today, trade relations in the ICT industry between Korea and the Central American countries have increased significantly.
Overall, various indices indicate that the scale of the digital economy in Central America is smaller than that of South America and other regions. Countries there have been moving toward digitization of their economies in order to compete, even though their indigenous ICT industry is in infancy and they are not yet ready to launch their own ICT development programs. Central American countries are trying to implement ICT in all sectors of the economy and society through cooperative projects with developed countries and international organizations.
Korean President Lee Myung-Bak, on his visit to Panama in July 2010, created additional opportunities for Korean companies and contributed to building a new paradigm for the cooperation between Korea and the Central American countries. Through bilateral talks with Central American leaders on cooperation in economy and trade, President Lee emphasized that investment from Korean companies in ICT and infrastructure will contribute to economic development in Central America. In addition, he proposed that Korea is willing to take part in the Central American Economic Integration Bank (CABEI) as an offshore observer and develop relationships with Central American countries as Germany and Japan did. Thus, plans for the next stage involve outlining levels and a wide range of cooperation and partnership as well as membership requirements, conditions of cooperation, followed by efforts to diversify that cooperation.
Currently, one of the biggest challenges that the Central American countries face is finding suitable approaches for implementing appropriate digital technologies in areas of education, health and hygiene, environment, tourism, agriculture, culture preservation, and small and medium businesses. In particular, implementing digital technologies in education is a challenge, but the above countries are fortunate in this respect, as illiteracy rates are low. Thus, the expansion of telecommunications infrastructure will be a top priority.
In spite of the economic crisis in 1987, Korea has grown successfully into one of the world's ICT powerhouses and the promotion of venture business was a key factor in its success. Especially, success stories in on-line education, health care service, green/environment, rural tourism, digital contents development, and supporting small and medium size companies can be utilized in setting of strategic goals by the Central American countries.
Recently, efforts to penetrate the ICT market in Central American countries by developed countries have increased. Korea, as one of the world’s ICT powerhouses, must find effective ways to magnify the benefits for both sides based on their respective policies for the ICT industry.
This report is divided into five chapters. Chapter 1 describes the background and the motivation behind the research and the research methodology employed. Chapter 2 explains a variety of ICT indices collected from various international organizations including those for H/W, S/W, communications, Internet, and information technology. The indices were used to measure the current status of the ICT industry of the Central American countries. Chapter 3 shows their strategies for implementing ICT: why telecommunications was selected as a primary target sector; impact on employment and the impact small/medium size companies have on the national digital economy. It also includes suggestions for Korea to increase the level of cooperation in the future by examining the characteristics of ICT policies of Central American countries. Chapter 4 compares the level of cooperation between Korea and international organizations in Central America's ICT industry. The level of cooperation between Korea and the Central American countries by sectors was closely scrutinized. Based on the study on both international organizations and Central American countries, it proposes directions for Korea on future cooperation. Finally, Chapter 5 is an assessment of proposed directions of Korea vis-à-vis Central American's ICT industry. In this section, three steps for cooperation were identified: development of cooperation plans based on ICT policy devices in Central America, cooperation mechanisms based on best practices or success stories from Korea, and creation of projects through international organizations to support the development of ICT in Central America.
Currently the Central American countries are moving toward a digital network economy. However, due to outstanding issues such as informatization of the government, unequal benefits of digitization, poor health and hygiene levels, unemployment, insignificant economic growth, low productivity, etc. the countries do not have sufficient resources to focus on digitization alone. In the past, the countries tried to implement ICT based on an understanding that there was no direct relationship between ICT and economic growth. Nowadays, the countries are preparing for the digital era by looking into the relationship of the two factors more closely than ever. They understood clearly that such transition will affect the economy and society of their countries in various ways - positive economic growth, poverty reduction, transparency in transactions; access to digital services, more competitive small and medium businesses, job creation, more robust cultural identity, and enhanced communication.
In order to achieve these goals, the critical challenges for the countries involved are: establishing cooperative systems between the private and public sector; providing integrated policies with respect to the government's vision, set up education programs and technical schools, measure the impact of ICT implementation on the economy; improvement of social acceptance of informatization; enforcement of government-driven policies; promoting spillover effect; introduce ICT to build up the competitiveness of small and medium companies which will be the basis of their economy. In connection with central government policies, the respective governments should gradually enforce adoption of the informatization strategy at the local government level
According to the indices, overall level of informatization of the Central American countries is low. The study shows no consistency in the data categories. Implementation by country, region, business size, and even annual income were particularly inconsistent. Therefore it is important for Korea to find appropriate weights for the categories when Korea decides to enter the ICT market and expand cooperation with the ICT industry in Central America.
Based on the study of ICT policies and strategies of Central American countries, the countries can potentially become good partners for Korea in ICT, and target areas that Korea might want to penetrate are as follows: e-Government; ICT in education, health and sanitation; rural informatization; IT industry clustering and informatization of provincial governments. Even though the e-Government index and other economic indicators show a lack of financial stability for independent establishment and operation of communications infrastructure and e-Governments, the countries are evidently quite willing to reach digital society through international loans or cooperation with foreign governments. Along with continued monitoring of their plans for informatization, Korea should select a strategy that focuses on e-Government projects, reducing the digital gaps between the private and public sectors, IT education and training, e-Learning, etc.
Korea must compete with countries such as the United States, Europe, India, and Malaysia who already have established prior presence in Central America. Under the circumstances, Korea is advised to develop creative partnerships that allow Koreans to apply their competitive experiences locally. In order to achieve this goal, it is necessary to establish and operate a cooperative system of ICT experts and regional specialists who understand the culture, history, and language of Central America. Because business entities should be principal actors, it is important for them to understand the processes of cooperative projects based on Green IT which have been organized by international organizations for development in Central America. Business entities should create an ICT market and demonstrate complete understanding of that market in Central America.

  The Central American region has not been blessed with a good economic environment: with inferior conditions, narrow territories, poor natural resources, underdeveloped economies, low income, and small consumption markets etc., compared to South America or Mexico. But, the region is not without some favorable conditions for promoting economic development by attracting foreign investment: a geo-economic location near the huge North American market, its position as a bridge between markets in North and South America, along with plentiful yet relatively low-wage labor forces. With these economic conditions, Central America has attracted some attention from foreign investors in the 1980s as a favorable processing base for re-export to North America and the EU.
Korea has maintained an interest in Central America since the Cold War era in order to secure diplomatic support of Central American countries in the UN, as Korea had to compete diplomatically with North Korea on matters pertaining to the Korean peninsula. But in the 1990s, a general transformation of socialist economies to capitalism market economy occurred in many parts of the world with the end of the Cold War and the fall of communism in the Eastern Europe and the USSR. Korea adjusted its focus on Central America from diplomatic to economic, as an overseas processing base to promote re-export for small and medium size enterprises which were losing their cost competitiveness owing to rapid rise of wage-levels in Korea. Central America maintained its value for Korea, but it was no longer political; the value now stemmed from their mutual economic partnership.
Central America, for its part, has maintained political stability with the exception of the coup d'etat in Honduras that occurred in June of 2008. Domestic economies in the region recovered from the economic recession and grew steadily based on increased export and overseas family remittances. The region also has strengthened economic relationships to promote an environment favorable to exports through the expansion of FTA agreements with other economic regions, concluding not only the CAFTA-DR with the United States but also with the EU.
These efforts to maintain stability both politically and economically contribute to improvements that lead to FDI attractiveness. But, according to a direct field survey on FDI environments, they have some terms and conditions that foreign investors (including Korean entrepreneurs) have to consider and examine cautiously as they plan to invest in the Central American region including the Dominican Republic.

 The Central American region has not been blessed with a good economic environment: with inferior conditions, narrow territories, poor natural resources, underdeveloped economies, low income, and small consumption markets etc., compared to South America or Mexico. But, the region is not without some favorable conditions for promoting economic development by attracting foreign investment: a geo-economic location near the huge North American market, its position as a bridge between markets in North and South America, along with plentiful yet relatively low-wage labor forces. With these economic conditions, Central America has attracted some attention from foreign investors in the 1980s as a favorable processing base for re-export to North America and the EU.
Korea has maintained an interest in Central America since the Cold War era in order to secure diplomatic support of Central American countries in the UN, as Korea had to compete diplomatically with North Korea on matters pertaining to the Korean peninsula. But in the 1990s, a general transformation of socialist economies to capitalism market economy occurred in many parts of the world with the end of the Cold War and the fall of communism in the Eastern Europe and the USSR. Korea adjusted its focus on Central America from diplomatic to economic, as an overseas processing base to promote re-export for small and medium size enterprises which were losing their cost competitiveness owing to rapid rise of wage-levels in Korea. Central America maintained its value for Korea, but it was no longer political; the value now stemmed from their mutual economic partnership.
Central America, for its part, has maintained political stability with the exception of the coup d'etat in Honduras that occurred in June of 2008. Domestic economies in the region recovered from the economic recession and grew steadily based on increased export and overseas family remittances. The region also has strengthened economic relationships to promote an environment favorable to exports through the expansion of FTA agreements with other economic regions, concluding not only the CAFTA-DR with the United States but also with the EU.
These efforts to maintain stability both politically and economically contribute to improvements that lead to FDI attractiveness. But, according to a direct field survey on FDI environments, they have some terms and conditions that foreign investors (including Korean entrepreneurs) have to consider and examine cautiously as they plan to invest in the Central American region including the Dominican Republic.