Executive Summary

Contributor

1. Introduction

1.1 Overview
1.2 Bilateral investment rules
1.3 Multilateral investment rules

2. The Investor-State Dispute Settlement (ISDS) System

2.1 Recent trends in ISDS cases
2.2 Reform issues in ISDS

3. Main Features of the EU’s Investment Court System

3.1 Key aspects of the ICS
3.2 ICS in the CETA

4. Potentiality and Constraints of Establishing a Multilateral Investment Dispute Settlement Mechanism

4.1 Opportunities and obstacles
4.2 The Mauritius Convention on Transparency as a benchmarkfor a possible multilateral investment tribunal

5. Conclusion

References 

The EU’s proposal to establish a new Investment Court System during the TTIP negotiations has well represented the cumulative resentment of the public, governments, civil societies as well as academics in regard to the existing ISDS mechanism. Such issues as the lack of legitimacy, transparency, consistency, the absence of a review mechanism, and the high burden to public finance in the existing system have been criticized as undermining the sovereignty of the State and its right to regulate for legitimate policy objectives such as the environment, health, and safety. Despite the merits of the existing ISDS mechanism, the increasing demand for improved safeguards against abusive claims and discretionary power of private adjudicators should be adequately addressed in consideration of the democratic principles and the objectives of sustainable development goals. It is also noteworthy that the function of the traditional ISDS system, devised as a preferential instrument for foreign investors, has evolved over time as the distinction between capital-exporting and capital-importing countries became blurred and more attention is focused on the equality and balance of power among domestic and foreign businesses as well as between investors and the host States.
In this vein, the establishment of a permanent tribunal and the public appointment of tribunal members with a fixed-term, as proposed by the EU in the new ICS, are indicative of the shifting paradigm in the discourse of treaty-based investor to State arbitration systems. Despite the fact that the system of ICS can hardly solve all of the problems, it may possibly improve the level of legitimacy by incorporating public features of the procedure. At the same time, it is noteworthy that the objective of improving the legitimacy and consistency of the dispute settlement system cannot be achieved without the prospect of establishing a multilateral dispute settlement mechanism with consolidated and harmonized standards of investment rules. Considering the difficulties of reaching a multilateral agreement on investment as witnessed in the past decades, the approach of the Mauritius Convention, which adopted an opt-in mechanism, would be useful as it reduces the risk of failure in negotiations while building a consensus among participants and allowing them to decide when to ratify the Convention in consideration of their domestic circumstances.
Considering the extensive network of trade and investment agreements that Korea has concluded in the past decade, it is more than necessary for the Korean government to pay close attention to the recent development in this process and actively participate in discussions on the possibility of establishing a multilateral investment court and the key principles of investment protection and facilitation in international fora.

JEL Classification: F13, K33
Keywords: investor-State dispute settlement (ISDS), investment court system (ICS), multilateral investment court, TTIP, CETA, UNCITRAL Transparency Rules, Mauritius Convention 

  Since the turn of the 21st century, the growing interdependence and interconnectedness of the global economies intensified the need for individual economies to engage in regional economic cooperation and integration. Recent statistics indicate that the number of regional trade agreements notified to the WTO by APEC economies has reached 265 cases, making it the most prolific period in APEC history. Given this upsurge, the significance of policy coordination and cooperation within the framework of APEC’s Regional Economic Integration activities ― inter alia, discussion on implementing “Free Trade Area of the Asia-Pacific (FTAAP)” ― has attracted considerable attention from Korean policy makers and stakeholders.
  APEC’s vision to create a single economic community was designed not only to reduce obstacles of trade in goods and services but also to adopt more advanced trade- and investment-related rules and measures to increase the transparency and efficiency of the economic system. Successful regulatory reforms and conformity to the international rules and standards embodied in the FTAAP framework, therefore, would help accelerate the regional economic restructuring and opening of the Asia-Pacific economy. These will eventually provide the Korean economy with increased participation in global value chains (GVCs), the export and investment markets, and strengthen political and economic ties among members. In this context, the opportunity cost of being excluded from the general trend of economic integration has become a tangible threat.
  At the critical juncture of reinvigorating the Regional Economic Integration (REI) agenda, 21 APEC economic leaders will convene in Hanoi in November 2017. The main objective of their 25th annual meeting is to stimulate both individual and collective economic reform and keep up the momentum of ensuring the formation of an Asia Pacific Economic Community. Against this backdrop, this paper attempts to draw the following policy implications and suggest concrete areas and ways in which Korea can contribute to the progress of APEC REI activities, then share the benefit of integration with members.
  First of all, as a mid- to long-term policy initiative, Korea may consider to design a new integration model building on its existing FTA networks with major powers. For example, the sequence and combination of this scheme may take the following patterns: ① Korea, USA, Japan (KUJ) + NAFTA (5 countries) or ② Australia, New Zealand (7 countries) + APEC ASEAN Member States (13). Australia, Canada, China, New Zealand, Singapore, USA, and Vietnam are already signatories to Korea’s existing bilateral FTAs and have been promoting market-driven trade and investment policy measures as their growth engine. At the same time, Korea’s strengthening its economic cooperation scheme with the ASEAN and Pacific Alliance market has attracted considerable attention. The relevance of its continuous market openings and comprehensive reform agenda supported by strong political commitment from the new government is another important factor that underpins Korea’s potential to be a new leader of regional economic integration.
  The idea of open regionalism has evolved into the realm of behind the border issues, service, labor, climates and environment cooperation, which are the main components of the 21st century regional integration model. As a short term strategy, development of the “APEC Regulation Principle of Service Sector” will contribute to the fostering of the 4th industrial revolution with the growth of communication, IT and professional service sectors in member economies.
  One of the biggest constraints on progress towards structural adjustment and cooperative arrangements to move APEC’s integration agenda is largely the issue of sharing information, experience, expertise and knowledge. This kind of cooperation is in line with the comparative advantage of Korea in its capacity as an early adapter of an outward- oriented policy strategy. In particular, considering the challenges lying ahead, Korea could make tailored policy suggestions in the area of human resource development, and the number of instruments, measures and initiatives most likely to make a positive contribution to the integration process. In the process, this will ensure growing confidence in strengthening collaboration with APEC members as a means of propelling a growth engine that is inclusive and sustainable. In practice, such an outward- looking policy forces the market to minimize the negative impact of trade diversion and make the regional market more competitive.
  A strategy for the REI process needs to be consistent with the strategic context and purpose of members’ unilateral, bilateral, regional and multilateral commitments. It needs to take advantage of experience in developed APEC members. Therefore, if APEC’s REI agenda could be linked to the Korean-initiated Capacity Building Needs Initiative program, the developing member economies may be able to enjoy significant economic gains from economic integration without having to pay extra policy cost. To retain the relevance of this agenda, it is recommended to assess which potential areas are likely to make a positive contribution to the REI process. 

   The aim of the research is to suggest policy implications for Korean companies that want to expand their business in the Middle Eastern electricity industry, examining industrial policies in the generation, transmission, distribution, and energy efficiency sectors.
   Chapter 2 touches upon supply and demand of electricity in the region and their characteristics, deriving some policy trends such as diversification of power sources, improvement of the efficiency of electricity consumption and supply, and more involvement of the private sector in electricity businesses. The Middle Eastern countries, which are yet highly dependent on fossil fuel energy, have been recently concentrating on developing renewable energy as an alternative in order to prepare for the post-oil era. In particular, it is generally assumed that the proportion of solar and wind power will increase due to environmental circumstances favorable to their development and the decreasing cost of generation. Energy efficiency programs and smart grids have been also adopted to respond to the rapidly increasing demand for electricity as well as relatively high rate of electricity losses in the transmission and distribution sectors. Moreover, Middle Eastern governments have been promoting the private sector’s participation in the electricity industry to mitigate the financial burdens caused by lower oil prices.
   Chapters 3 and 4 deal with sectoral policies in the cases of Saudi Arabia, UAE and Egypt. Policies in the generation sector have been examined in Chapter 3. The three Middle Eastern countries have been expanding their power infrastructure, implementing policies to diversify their energy mix. Although thermal power plants using oil and gas are prevalent in these nations, accounting for more than 90% of total generation, those countries are trying to increase the share of alternative energy power plants including renewable and nuclear energy. Moreover, decreasing costs associated with solar and wind power generation have led these countries to be more active in expanding renewable power generation. Egypt, on the other hand, is promoting coal-fired power plants to compensate for its diminishing supply of natural gas. With the economic slowdown and fiscal aggravation in those countries since the drop in oil prices in the second half of 2014, heavier reliance on private investment is expected, eventually leading to the expansion of IPP (Independent Power Producer) and IWPP (Independent Water and Power Producer) projects in the region. With priority being placed on investment to the power sector, Korean companies will have more opportunities to enter into the Middle East power market. With the share of IPP and IWPP projects growing in the power sector, in particular, Korean companies need to transform their role into that of a developer in charge of overall operation of projects, including financing.
   The three countries are pushing ahead with policies to modernize transmission and distribution lines, introduce smart grid technology and improve the efficiency of energy consumption shown in Chapter 4. In the transmission and distribution sector, GCC countries such as Saudi Arabia and UAE are working to connect each country with a power grid that applies a 400 kV HVDC (High Voltage Direct Current) transmission scheme to improve the efficiency of electric supply. It is expected that the GCC countries will introduce a sophisticated power trading system and expand this grid to Egypt, Jordan and other Middle Eastern countries. Egypt is also concentrating on modernizing its local transmission and distribution lines. In the smart grid sector, most policies and business projects are focused on AMI (Advanced Metering Infrastructure) test projects or the introduction of smart meters. In particular, UAE is carrying forward smart grid projects that combine renewable energy and ESS (Energy Storage System). In the area of improving energy consumption efficiency, policies to grade and regulate energy efficiency standards, or to improve public awareness on energy savings are being promoted. For the efficient management of energy consumption, Middle Eastern countries are introducing BEMS (Building Energy Management Services) with Saudi Arabia and UAE showing higher growth in the field. It will be necessary to develop high value-added products to advance into the market for electric power equipment in these countries. This is because local companies in Saudi Arabia and UAE are producing general electric equipment and their governments are encouraging construction companies to use local products to nurture the domestic industry. In addition, Korean companies should consider joint ventures with local power companies, and conduct OJT (On the Job Training) programs and technology transfer with local companies to establish favorable business conditions for their advance into the region.
   Chapter 5 suggests government policies that help Korean companies expand their market in the Middle Eastern electricity industry. First, financial support policies are necessary to assist their project-developing costs including feasibility study. More financial incentives could be also provided as more Korean contents are used in the projects. Korean companies’ financial burden arising out of higher borrowing rate of interest could be relieved with the help of a longer tenor for Korean financial institutions. Second, more support should be considered for small and medium sized enterprises that cannot go into the Middle Eastern market by themselves because of lack of financial resources and track record in the region. Cooperative relations between large companies and SMEs are necessary for SMEs to expand exports of equipment and materials used in the power plant projects. The sharing of information on the projects among large companies and SMEs could be helpful in strengthening their cooperation. Joint ventures between SMEs and local companies need to be supported with policy loans. Third, new business with ICT in the electricity industry such as smart grids, AMI (Advanced Metering Infrastructure), ESS (Energy Storage System) should be systematically developed in the region. Initially, consulting business should be promoted with government officials including master plan for smart grid establishment, energy efficiency improvement programs. Then test-bed programs should be followed to examine the feasibility of the masterplan. Korean consortium between large companies and the SMEs could be awarded orders based on consulting and test-bed results. Fourth, a control tower should be set up in order to coordinate differing interests among companies, banks, supporting institutions. It can also work as a platform to build a strategy to win government contracts. In addition, corporate cooperation system should be established to share information on various projects, financial sources, success and failure cases of winning orders, and so on. This would be helpful to expand cooperation among Korean companies and financial institutions, exploring new business opportunities in the Middle East. 

Preface

Executive Summary

Acknowledgements

GDI: Research Team and Advisors

Chapter 1. Project Introduction and Purpose

Chapter 2. The Nature of Scenario Analyses and Its Use

Why Scenario Analysis?
The Methodology Underlying Scenario Analysis
Use of Scenario Analysis in This Report

Chapter 3. The Gamut of Economic Risks Facing Korea Today

The Idea of a Risk Profile
Korea’s Risk Profile in Brief
Medium Term Risks Facing the Korean Economy
Conclusions

Chapter 4. Mega-trends Influencing Medium-Term Scenarios

An Overview
Mega-trend 1: The Trend Towards De-globalization
Introduction
The global trade slowdown
Corporate retrenchment away from the Global Production Model
Globalization failures magnified by policy myopia
Conclusion
Mega-trend 2: Disruptive Technologies and Impacts
An overview
Disruptive technologies
The impact of disruptive technologies on jobs
Impact of disruptive technologies on trade
Impact of disruptive technologies on global value chains
Conclusions
Mega-trend 3: Persistent Global Uncertainty
An overview
Post crisis trends that prompt greater uncertainty
Does uncertainty drag down growth?
Uncertainty and the economy
Black swans
Concluding observations

Chapter 5. A Trade War Scenario

Introduction
A Historical Perspective
Why a U.S. Trade War with China?
Starting a Trade War is Easy, Controlling it Less So
The Impact on Korea

Chapter 6. A Troubled China Scenario

Introduction to the Current Baseline Scenario
The Troubled China Scenario
The Case of a China Slowdown
The Case of a Financial Crisis
The Case of Dramatic Rebalancing
Combined Troubled China scenario and its Implications

Chapter 7. A Global Meltdown Scenario

Introduction
A Global Meltdown Scenario
The Major Economies
The Trade Story Dominates
Financial Stagnation and Protectionism
Global Inaction Increases Risks

Chapter 8. Risk Assessment and Analysis: Vulnerabilities and Resilience

Introduction
The Chinese Challenge
Rapid Development of Technological Capability
Competition in Exports
Ambitious innovation plans
Managing Risks
Improving Efficiency and Flexibility in the Economy
Overall competitiveness and the institutional and market regime
Labor market efficiency
Financial market development
Social protection systems
Strengthening Innovation Capacity
Innovation capacity indicators
Skills of the labor force
Entrepreneurial skills and entrepreneurial ecosystem
Conclusions on strengthening innovation
Increasing Trade Diversification
The Asian Region and RCEP
Potential for increasing trade with India
Conclusions and Key Recommendations
Improving Efficiency and Flexibility of the Economy
Strengthening Innovation
Increasing Trade Diversification
Final Thoughts

Annex

Background Notes
A. The Economic Relationship between China and the U.S.
B. U.S. Trade Policy toward China
C. Implications of Disruptive Technology for Korea
D. The Economic Relationship between Korea and the U.S.
E. Levels of Economic Integration between Korea and China

References 

  This paper aims to examine some plausible external shocks that can significantly affect Korea’s economic future. It does so by analyzing game-changing scenarios that emanate from a candid assessment of the risks inherent in the global economy. It is based on the premise that it is extremely useful to plan for the less likely events, especially if those events are associated with significantly altered outcomes. These “Black Swan” occurrences are not as far-fetched as one may think, particularly for a country as vulnerable as South Korea.
  It is for this reason that the report examines scenarios that might materially alter the policy choices facing Korean authorities in the medium term (2017-2022). These scenarios are analyzed in the context of relations between Korea and China, China and the United States and Korea and the United States.
  The approach of the Report is to first examine major “mega-trends” of de-globalization, disruptive technologies, and greater global uncertainty, and in this context of “shifting sands” to build three game- changing scenarios that can substantially affect Korea.
  There are three scenarios: A Trade War, initially between China and the United States but with global ramifications; a Troubled China, with significantly lower growth and trade implications; and a Global Meltdown, reminiscent of 2008-2009. We believe there are few countries for which this kind of analysis is more germane than for Korea. The Report aims to hasten further deliberation on the topics of risk and resilience in the Korean policy community to increase preparedness for events that could cause significant disruption to the Korean economy in the medium term. 

   This study reports a summary of non-tariff measure database of Korea built upon the MAST non-tariff classification and analyzes the quantitative and qualitative characteristics of Korea’s non-tariff measures governing ten largest imported products (HS 2-digit). Study finds that ten largest imported products are concentrated in manufactured industries and hence Technical Barriers to Trade (TBT) are most identified non-tariff measures. Among them, the single most-identified non-tariff measure in Korea’s regulatory system is labeling requirements followed by product quality or performance requirement and testing requirement. A simple statistical illustration shows that the correlation between the volume of trade and the number of related measures tends to be higher than the correlation between the volume of imports and the number of related measures. Such correlations are believed to indicate that the measures and regulations stands accordingly to the size and to the extent of development of an industry, not for protectionist intentions. 

Executive Summary

1. Introduction

2. Inter-Sector Labor Movement and Productivity Growth

3. Within-Sector Labor Movement and Productivity Growth

4. Conclusion and Discussions

References 

Productivity is considered one of the most important factors for economic growth. Total productivity grows through technological progress or reallocation of resources. This paper analyses their contribution to economic growth for total economy and by sectors. The main finding is that economy-wide increases but this is mainly due to internal technological improvements. On the one hand, inter-sector reallocation of labor negatively contributes to economic growth as employment moves to service sectors with low productivity. Further, when looking at the sectoral-level productivity growth, both internal and external restructuring make positive contributions to aggregate economic growth. However, internal technological progress and reallocation of employment appear to similarly contribute to the sectoral-level economic growth in the manufacturing sector, whereas internal restructuring makes a larger contribution to economic growth in the service sector. This suggests that there is more room for reallocation of resources to contribute to the productivity growth in service sectors. Therefore, the productivity growth of the service sector would foster economy-wide productivity and it can be achieved by the mitigation of misallocation of resources in service sectors.

Keywords: Productivity, Employment, Labor reallocation
JEL Classification: E01, E20, E22, E23, E24 

  The Yanbian Autonomous Prefecture (“Yanbian”) of China’s Jilin Province is a border area between the northeastern part of the Korean Peninsula and China and is often referred to as the Tumen River region. Yanbian is a major residential area for ​​Korean ethnic groups and uses both Chinese and Korean as official languages. It is a place which retains the history of the independence movement of the nation, and Baekdu Mountain is located in this region as well. As such, the region shares a deep emotional bond with the Korean Peninsula.
  However, from a geo-economic point of view, Korea needs to try a new approach to Yanbian. Yanbian can act as an important test bed and bridgehead in the process of actively responding to the changing Chinese economy in the era of “new normal,” and in the process of establishing new strategies for Korea to advance into China. In addition, Yanbian is an important hub for Northeast Asia and an important gateway to China and Eurasia. Located adjacent to North Korea, the region will be able to induce the opening of North Korea by serving as a space to establish and execute a creative strategy of engagement with North Korea.
  Therefore, this study sought to identify more concrete cooperation plans in the short and medium term, based on the necessity of economic cooperation for Korea in the Yanbian area. For this purpose, we analyze the process and status of the economic development of Yanbian and analyze the economic cooperation process and obstacles between Korea and Yanbian. In addition, we conducted a more in-depth analysis through joint research with the Consulate General of the Republic of Korea in Shenyang and the researchers of the Economic Research Institute of the Korean Peninsula Research Institute of Yanbian University.
  Throughout the history of China, the Northeast region has been a key industrial base for chemical manufacturing. While Yanbian is located in the Northeast, however, it is in a remote region and its economy remained relatively undeveloped for a long time. Then, following the reform and opening of the nation, the region achieved a 9.5% annual growth rate in GDP from 1991 to present. While not on par with the eastern coastal area of China, the region has seen significant growth in recent years. In particular, after South Korea and China established diplomatic ties in 1992, Korean tours to Baekdu Mountain began, and economic development centered on the service industry took place. This service-led development has been influenced by external factors such as the 1997 Asian financial crisis and the global financial crisis in 2008. However, the tourism and restaurant business in Yanbian has been undergoing development as a whole. In addition, China’s own unique approaches to economic development, such as various trade, investment measures, and financial expenditure by the Yanbian state government to construct infrastructure, contributed to the economic development of Yanbian as well. Interestingly, the economic development of Yanbian benefited considerably from overseas remittances by ethnic Koreans who migrated to Korea, serving as the background to Yanji becoming a top-tier Chinese city in terms of consumption. Currently, Yanbian is striving to maintain the momentum of development by appropriately pursuing new plans and strategies such as the 13th Five-Year Plan of Yanbian, the Chang-Ji-Tu Project, the Yan-Long-Tu project, and the Belt and Road Initiative.
  Yanbian’s economic cooperation with Korea has also contributed greatly to the region’s economic development. As free exchange with Korea gradually expanded, the economic crisis and process of Korea overcoming this crisis became directly and indirectly linked to the Yanbian economy, which continued to develop throughout the events. In particular, it has become the cornerstone of economic development in various fields such as trade with Korea, investment from Korea, remittance from family members in Korea, and acquiring of advanced business culture from Korea. With the Korea-China FTA officially taking effect in 2015, the economic cooperation between Korea and Yanbian is expected to expand further in the mid- to long-term. However, the contribution of Korea to the economic development of Yanbian has been decreasing compared to the past, meaning Korea needs a new approach to Yanbian.
  Therefore, in order to investigate this, our study evaluates the accomplishments and obstacles to economic cooperation experienced by Korean entrepreneurs engaged in business with Yanbian, while also evaluating the demand for Korean cooperation. Many Korean companies that have advanced into Yanbian report that the business conditions in the region have deteriorated as the benefits or preference for Korea have become lower than in the past. In addition, Korean-Chinese business partnerships based on ethnic homogeneity are suffering from weaker trust relations, casting doubt on business performance in the region. Nevertheless, if the South-North Korea problem is resolved in the mid- to long term, it will be evaluated as a region with great potential in the future.
  On the other hand, in the case of Yanbian organizations and local enterprises, Korea is considered an important economic cooperation partner, and it was expected that economic cooperation with Korea will continue to expand in the future. In particular, they still hope to attract Korea’s advanced technology and culture, and emphasize the need for large-scale investments centering on large corporations. In addition, they hope that economic cooperation with Korea will be achieved in accordance with the various plans and policies currently being pursued by Yanbian.
  Our research has attempted to divide the development strategies of Korea and Yanbian into macro strategies and detailed policies. In terms of macroeconomic strategy, first, Korea and Yanbian should strengthen economic exchange and cooperation in a gradual and comprehensive manner. Second, Yanbian can be used as a bridgehead for economic cooperation between China and Northeast Asia and the Eurasian continent. Third, Yanbian could be used as a location to carry out creative North Korean engagement strategies.
  Based on these three strategies, six detailed policy directions were presented. First of all, Korea should support the upgrading of Yanbian’s major industries such as agriculture and fisheries and the service industry. The second policy direction is to establish a joint research center in Yanbian and build a joint human resources training system. Yanbian, where both the Chinese and Korean languages are used jointly, is a fascinating place to cultivate talented people to monitor and engage the dynamic Chinese market. The third and fourth policy directions can be considered as the role of Korea in supporting the gradual development of Yanbian into a Northeast Asia Free Trade Zone and the establishment of international cooperation governance in the Tumen River region.
  Fifth and sixth, policies will be needed to provide a basis for sustainable economic cooperation through step-by-step financial cooperation and strengthening of social and cultural communication.
  The year 2017 marks the 25th anniversary of diplomatic relations between China and Korea, and should be considered an opportune time for South Korea to devise a new approach to the developed Chinese economy. In this context, Yanbian is a great location for Korea to develop new approaches not only for China but also into Northeast Asia and Eurasia, and toward the opening of North Korea in the future. In addition, as the Korean government designs a new economic map for the Korean Peninsula, Yanbian will play a role as a bridgehead into the mainland of Northeast Asia and the Chinese and Eurasian continents.  

  Established in January 2015, the Eurasian Economic Union (EAEU) set a grand vision to create a “Eurasian Union” resembling the European Union by 2025 through a multi-stage integration plan. The EAEU consists of five countries — Russia, Kazakhstan, Belarus, Kyrgyz Republic and Armenia — with 180 million people and a combined GDP of 1.48 trillion dollars. Currently, free movement of goods, services, capital and labor is guaranteed within the region. The members of the EAEU are planning to integrate the drugs and medical market by 2017, the electric power market by 2019, and the oil and gas market by 2025. EAEU membership is expected to expand, namely with the accession of Tajikistan, and the scope of partnership is also likely to extend out toward the APEC region.
  In the meanwhile, Korea is facing a number of challenges under escalating economic uncertainty around the world. Protectionism in trade is spreading worldwide with the launch of the Trump administration, and China has engaged in economic retaliation against the deployment of a THAAD missile system in Korea. Also, Korea has to escape from the geographical isolation imposed by the division of the Korean Peninsula. Responding to these developments, Korea will need to diversify its partnerships with emerging economies and reduce its economic dependence on the Chinese market. Strengthening cooperation with the northern Eurasian countries, and securing new economic growth engines to replace old ones, will be a way for Korea to overcome the current challenges. Indeed, the EAEU can be an attractive partner as a window of new economic cooperation in developing future-oriented relations between Korea and the northern Eurasian countries.
  Korea has a high potential to develop sustainable and mutually beneficial relations with northern Eurasian nations because both sides share characteristics in economic cooperation that are complementary to each other. Korea needs to construct a third route, a “northern economic cooperation route,” in addition to the maritime route which connects Korea with the U.S. and Japan and the China route. It will also be necessary to pioneer such a “northern economic growth space” through strategically enhancing economic cooperation with the EAEU member states. Recognizing these considerations, the Moon Jae-in administration inaugurated in May 2017 has presented a “Responsible Northeast Asia Plus Community Initiative” as one of its major national policy agendas, where the new northern policy stands as an important pillar. Accordingly, promoting economic cooperation with the EAEU has become an issue of great priority. It is timely and desirable for us to study the investment climate of the EAEU, and to devise feasible strategies to enter the EAEU and expand into the northern Eurasian region.
  This study provides an in-depth analysis on the investment climate in the EAEU and sophisticated entry strategies for Korea. This study emphasizes the necessity to establish an FTA between Korea and the EAEU, the largest market Korea has yet to conclude an FTA with. The EAEU’s growing presence within the world’s political and economic spheres hints at the emergence of the EAEU as a significant partner for Korea to diversify its international economic cooperation and generate new growth engines. The results of this study will be useful to prepare negotiations for a Korea-EAEU FTA and come up with mutually beneficial economic cooperation programs. We carried out comprehensive analyses of the literature and pertinent statistics, and conducted a survey of Korean businesses that have entered or are planning to enter the EAEU market. To supplement the results of this survey, in-depth interviews with Korean companies were conducted as well.
  There are five chapters in this study. Following the introduction, a brief explanation of the integration process of the EAEU and its strategic value are presented in chapter two. In this chapter we also analyze the major features of the economic conditions and markets of EAEU member countries. In chapter three, the economic cooperation between Korea and the EAEU is examined and evaluated, after which we make forecasts for future relations. Chapter four introduces the overall investment policies and major programs of the EAEU, and analyzes the investment environment and responsiveness of Korean businesses to internal and external factors, based on the survey results. Lastly, chapter five provides a SWOT table with combined market entry strategies, and suggests various policies to promote investment and penetrate into promising sectors within the EAEU. The investment climate of the EAEU is evaluated across four different categories: marketability, growth potential, stability and other comprehensive indexes. First, Russia is the biggest market in the region followed by Kazakhstan, Belarus, Kyrgyz Republic and Armenia. Since Russia and Kazakhstan have low levels of trade openness and they are actively implementing import substitution policies, it will be more adequate for Korea to roll out investment promotion measures rather than trade expansion policies to vitalize economic cooperation with these countries. Second, Kazakhstan has the highest growth potential, followed by Kyrgyz Republic, Russia, Belarus and Armenia. Kazakhstan shows relatively high population growth, quality human resources and favorable logistics infrastructure. Third, Armenia is the most stable economy, followed by Russia, Kyrgyz Republic, Kazakhstan, Belarus. According to the global competitiveness index, Russia is the most competitive, and Kazakhstan, Armenia, Kyrgyz Republic follow, in that order.
  Trade between Korea and the EAEU peaked in 2014, then decreased until 2016. Korea’s annual investment in the EAEU recorded 8,000~10,000 million USD up to 2010 but plunged to 2,000~3,000 million USD recently. In short, economic cooperation between Korea and the EAEU falls far behind the economic size and potential of these two entities. Even that cooperation currently in progress is concentrated in Russia and Kazakhstan. Korea’s cooperation with Belarus, Kyrgyz Republic, Armenia remains weak. The economic recovery of the EAEU and the growing share of APEC countries in trade with the EAEU makes it likely for trade between Korea and the EAEU to increase.
  Regarding the investment climate of the EAEU, a survey on Korean companies who have entered or are planning to enter the EAEU market was conducted from the period of May to August of 2016. A total of 56 Korean businesses participated in the survey. In order to heighten objectivity and feasibility of the study, we held in-depth interviews with Korean enterprises in Kazakhstan and Kyrgyz Republic in May 2016. Companies situated within the Gumi and Guro industrial complexes in Korea were interviewed as well.
  Among external factors, “Economic/industrial development and investment promotion policies of the EAEU” was the most important opportunity factor in entering the market. On the other hand, the factor of “Administrative barriers such as corruption, bureaucracy and so forth” was the most risky among these factors. The respondents perceived the market as an opportunity rather than risk. The companies showed an average level of Responsiveness. Among internal factors, the biggest strength factor is “Competitiveness in the innovation and high-end technologies, such as IT.” The most critical weakness factor is “Insufficient information on the EAEU.” When it comes to penetrating the EAEU market, the strengths of Korean companies are slightly overshadowed by their weaknesses. That is, the respondents perceived themselves as not significantly competitive enough to enter the EAEU market.
  Based on these analyses of the external and internal investment environments, combined strategies are presented in this study. The government most likely needs to make efforts to specify and realize the proposed strategies. Meanwhile, the study suggests to lay the foundation for economic cooperation and expand industrial cooperation. The following four measures are the keys to create an institutional base for economic cooperation.
  First, it will be critical to conclude a Korea-EAEU FTA. Such an FTA would provide a new concept for strategic cooperation in the so-called “Eurasian value-chain system,” as well as in the new Eurasian growth space. It will be a window of opportunity for the Eurasian region to establish significant links with Korea, and to bring the APEC region closer to Russia.
  Second, utilizing the Korea-Russia investment platform when entering the EAEU market is an important element. The Korea-Russia investment platform created in 2013 has not been utilized at all up to now. Through discussion with Russia, it will be necessary to adjust the investment destinations, industries, methods, and scope of cooperation to employ the platform. In this way, the platform can be expanded and become more useful and effective.
  Third, designing investment package support programs for SMEs is another significant measure. Overseas investment by SMEs will be important in building a foundation for cooperation with the EAEU when considering the economic complementarity of the two sides. Such collaboration is possible due to the EAEU’s demand for modernization in its manufacturing sector. Job creation and competitiveness improvement could be realized through the sophistication and internationalization of Korean SMEs.
  Fourth, it will be necessary to establish a “graduate school for Eurasian policy.” When the agenda of strengthening cooperation with Russia and the northern countries is incorporated into Korea’s mid- and long-term international strategy, it will become an urgent task to build a human resources nurturing system. Thus the founding of such a graduate school should be seriously considered. Given Russia’s growing political and economic presence in the international community, it is necessary to train elite talent to deal with issues regarding the EAEU.
  In order to lay the institutional foundation, a close cooperation between the two sides is significant, perhaps by reorganizing or newly launching channels under the governments. Also necessary will be an organization that is mainly dedicated to Eurasian issues. Most importantly, embarking on negotiations for a Korea-EAEU FTA should come first to promote investment between Korea and the EAEU. Members of the EAEU think that the Korea–EAEU FTA has to extend beyond the scope of conventional FTAs. Bilateral industrial cooperation stimulated by Korea’s investment must be included and enhanced. To enable Korea-EAEU FTA negotiations to commence, an “investment promotion committee” should be formed and the needs of EAEU member states must be discussed. At the same time, it will be necessary to establish a “northern cooperation fund” which supports SMEs to enter the EAEU market under the Ministry of Strategy and Finance. The positive effects that a Korea-EAEU FTA would have on investment should be communicated through a number of regular investment forums. Constructing industrial zones and discovering the investment promising sectors in the EAEU will have to take place as well. In particular, industrial complexes jointly planned by the two sides will help Korean enterprises to enter the EAEU market. For this, additional studies on the conditions of possible industrial zones and specialized industries should be carried out. Investment promising sectors have to be detected through analysis on industrial competitiveness, policies and investment climate. 

  One Belt and One Road (B&R, 一带一路), China’s new Silk Road initiative, is largely divided into two parts: the Land Silk Road centered on China’s inland area and the Maritime Silk Road based in China’s coastal area. Most of the Land Silk Road area is located in the Midwest and the Northeast inland area of China, hitherto marginalized by the opening policy emphasizing the eastern coastal area. In order to expand future foreign exchanges, more emphasis has been placed on promoting infrastructure connection and trade facilitation. Local governments on the Maritime Silk Road are presenting the creation of maritime infrastructure connecting Asia-Europe-Africa and the strengthening of marine cooperation as the core of their B&R strategy. Therefore, each local government is emphasizing infrastructure connection centered on major ports and announcing concrete plans related to a comprehensive transportation network including aviation, harbor and road construction and logistics, communication, information networks making use of their geographical advantages. Meanwhile, despite the achievements made by the central and local governments through various regional participation plans, the B&R initiative is faced with several challenges ahead. Among B&R countries, there are many developing and poor countries that are unstable from a political and religious perspective.
  Also, the fact that major cooperation at the present stage is promoted mainly by infrastructure cooperation is likely to act as a financial burden to the Chinese government, and economic cooperation with countries where buying power is not high is not expected to be significant in the near term.
  This report scrutinized the Chinese researches assessing the progress of the B&R initiative, and analyzed the cooperation between China and the B&R countries in infrastructure, funding, and trade – issues which are closely related to the area of economic cooperation among the five areas (Wu Tong, 五通) specified within the B&R initiative.
  China has developed a framework connecting infrastructures with Central and Eastern Europe, CIS, Central Asia, South Asia and countries along the ASEAN-5 region joining the B&R initiative, and has promoted related cooperation projects. However, execution of such projects is still in the initial stage. This is because most infrastructure projects are long-term, large-scale projects. Therefore, it is difficult to make a concrete evaluation of infrastructure cooperation projects conducted in line with the B&R initiative at this stage. Until now, the infrastructure cooperation between Russia and Kazakhstan has been relatively active and there has been some progress in constructing the China-Pakistan Economic Corridor. Many other B&R countries have low economic development levels and their infrastructure facilities are under-developed, which means demands for infrastructure development cooperation with China are large, but there are also many potential risk factors and problems to solve in the development process. In order to strengthen the connectivity of infrastructures among B&R countries, it will be necessary to coordinate among relevant parties, promote transparency, and take strict and careful consideration of the environmental issues related to developing infrastructure projects.
  Meanwhile, the level of B&R initiative funding is not high, and there is a large gap between regional and national levels, thus making further progress difficult. These difficulties are caused by the many challenges to be overcome in cash flow for the B&R initiative. First of all, B&R countries that are still developing will first have to undergo considerable levels of development in their trade and finance sectors. In particular, it will be necessary to improve deficient financial systems and expand access to financial markets for all economic entities. Second, a stable atmosphere in the political, diplomatic and military arenas should be created and risks in these regards should be reduced. Third, while regional economic development and income growth are taking place, bankable projects within the region must increase. The area still has a small population, low income, and few projects to ensure proper profits. Therefore, funds in China are likely to prefer Belt & Road businesses rather than the Private-Public Partnership projects strongly promoted by the Chinese government, while international funds are likely to opt for projects promoted by banks with higher credit ratings such as the ADB or WB. Fourth, the Chinese economy, which is leading the Belt & Road strategy, must maintain stable growth. We must keep the economic growth rate at an appropriate level even in the 'New Normal' era and be wary of sudden sharp declines in financial markets such as the foreign exchange, stocks and bond markets.
  Following this, the financing process will proceed with the following characteristics. First of all, the gap between inter-region, inter-country, and intergovernmental funding will increase further. In countries and regions which conduct active trade and financial exchanges with China, the cash flow will accelerate, whereas locations where this is not true will likely become alienated. In terms of items, it will mainly be cooperation in areas that do not mandate specific requirements and thus represent a lower burden of participation, such as participation in the AIIB, that is conducted, but such levels of cooperation as the establishment of a currency clearing bank are not expected to be achieved any time soon, as such measures would require a large amount of trade and investment in China, and a stable and advanced financial system. Second, financial cooperation in line with the Belt & Road initiative is centered on China's leading financial institutions, state-owned commercial banks, and international financial institutions, and private participation in the pursuit of short-term profits is expected to be complementary and progressive. Third, a priority will be placed on sectors of financial cooperation needed to proceed with exchanges between Belt & Road countries and China. In other words, it will be necessary to begin with cooperation in areas such as infrastructure construction, facilitation of trade facilitation, and activation of investment, if the overall level of cooperation for funding is expected to improve.
  It was found that the level of institutional connectivity is higher than infrastructure connection and cash flow. In terms of sector, investment cooperation was more active than trade exchanges, while overall trade volume declined as a result of the recent global economic downturn. The increase in investment cooperation is likely due to the significant increase in the amount of direct investment in the Belt & Road countries by China. The level of institutional connectivity can be understood by the three aspects of facilitation of trade, convenience of investment, and establishment of a cooperative economic cooperation zone. First of all, 64 Belt & Road countries are classified into the six large areas of Southeast Asia, West and North Africa, South Asia, Eastern Europe, Northeast Asia, Central Asia, and through the analysis of TSI (trade specialization index) absolute values, the level of trade optimization was evaluated. However, due to the implementation of B&R strategies, there were no zones where the trade levels had improved visibly. This indicates the limitations present in evaluating the trade activation effect at a point of time when only three years have elapsed since the strategy was raised on the B&R initiative, and for areas with differing degrees of economic development and industries. However, at the individual country level, it was found that the absolute TSI of Vietnam, Thailand, Cambodia and Laos decreased and the trade imbalance improved. In these countries, China’s direct investment is relatively large. In other words, as Chinese companies expanded their local direct investment and exports increased for products manufactured in countries where production sites were relocated, it seems that they reached a balance in their trade with China. While such a phenomenon can be seen as a relocation of Chinese production networks, it can also be interpreted as a result of the implementation of B&R strategies that include relocation of B&R countries’ production facilities. Secondly, from the perspective of investment convenience, FDI increased 23.8 percent year-on-year to China in 2015, and the ODI also increased 18.2 percent year-on-year to countries along the line. This is a significant increase when considering the overall FDI in China increased by 6.4% over the same period while ODI increased by 14.7%. Also, as of December 2016, China has signed bilateral investment agreements with 104 countries, among which B&R countries accounted for 48 percent. Even in the case of the double taxation prevention agreement, China had signed such agreements with 102 countries by June 30, 2016, but 53 of these were B&R countries, similar to the bilateral investment agreement. By actively signing investment agreements and double taxation prevention agreements, it will become possible to construct a good investment environment by establishing a system to alleviate investment risks between the two countries, and to expect the benefits of investment convenience. Third, the joint economic cooperation zones, which are expected to serve as land and maritime hubs to facilitate trade among B&R countries, have been classified into border economic cooperation zones, cross-border economic cooperation zones, and overseas economic zones. China established a joint economic cooperation framework to strengthen bilateral trade and cooperation with B&R countries, and is looking forward to securing the overseas pivotal area for Chinese enterprises to advance, and reducing regional disparities in China by developing remote border areas. As the focus of China’s opening policy gradually moves from the Eastern coastal area to the West with the progress of the B&R initiative, the strategical status of zones surrounding China’s border has been elevated to the new pivotal area for opening policy. The Chinese government is planning to support joint economic cooperation zones in pivotal areas by rearranging their roles and functions, thus preventing reckless competition from breaking out among border areas and B&R countries. The joint economic cooperation zones are expected to serve as hubs for trade and investment expansion between China and B&R countries as the B&R initiative continues to progress.
  Based on the assessment of progress in China’s B&R initiative, this report presented several countermeasures for both companies and the government. At the corporate level, continuous monitoring of changes in B&R-related policies, utilization of changes in China’s production network and the effects of FTAs with B&R countries, participation in B&R financing projects by expanding participation in public-private MDB projects, and localization strategies for promoting a friendly image in B&R countries should be considered. Meanwhile, the government needs to support B&R finance cooperation initiatives at the government level by revitalizing the Korea-China Industrial Complex, taking preemptive measures toward the cross- border economic zone in the northern part of the Korean Peninsula, strengthening proactive and qualitative exchanges with China’s local governments, enhancing foreign infrastructure financing networks, and reorganizing foreign infrastructure investment organizations.
  Finally, as the conditions necessary to proceed with B&R-related projects, such as the economic development of B&R countries and countermeasures to geopolitical risks, are yet to be established, infrastructure construction, financing, trade and investment facilitation between China and B&R countries have been slow to develop. Therefore, at the current stage, it will be necessary to discover new business opportunities by monitoring changes in China with regard to the B&R initiative. According to B&R plans announced by local governments in China, they are pursuing economic development through cooperation in infrastructure construction, industrial development, and international economic cooperation, utilizing their own local characteristics. In conclusion, therefore, we need to create new cooperation opportunities by utilizing the B&R plans of each local government in China, make institutional efforts to vitalize bilateral mutual investment, and participate in the B&R initiative with a long-term vision. 

  Since the global economic crisis triggered in the United States in 2008, the East Asian economic region has received particular attention as it achieved relatively solid economic growth compared to developed countries, which struggled with recession. The discussion on economic cooperation and economic liberalization within East Asia has mainly focused on the RCEP, with this discussion being led by ASEAN as it calls for ASEAN centrality. ASEAN is currently the second-largest overseas investment destination and second-largest trading partner for South Korea, making it an important partner in economic cooperation for South Korea. Particularly, as China is openly implementing economic retaliatory measures against South Korea for the deployment of THAAD missiles in the nation, South Korea has become more interested in the ASEAN market as it strives to diversify its trade and investment portfolio. Under this background, this research examines the characteristics of ASEAN FDI by income level and doing business conditions, then conducts an empirical analysis of determination factors to draw policy implications for stronger economic cooperation with ASEAN.
  This report consists of five chapters in total. In Chapter 2 we examine FDI determination factors which have been discussed from a theoretical and empirical viewpoint in the field of international economics. In Chapter 3 we look into the current situation of ASEAN FDI and the characteristics of ASEAN FDI by income level, along with conditions for doing business in the region. In Chapter 4, we conduct an empirical analysis of the determination factors for ASEAN FDI inflow, utilizing a covariance structure analysis. Lastly, in Chapter 5, we suggest implications for the Korean government and enterprises to generate mutually beneficial economic growth momentum by promoting Korea’s FDI to ASEAN.
  More specifically, in Chapter 2 this paper examines the theoretical and empirical implications and limitations of Dunning’s eclectic model, which is a representative theoretical frame for FDI determination factors, along with the knowledge-capital model proposed by Markusen and Venables. Based on the eclectic model, Dunning categorizes FDI into market-seeking, resource-seeking and efficiency-seeking types, while the knowledge-capital model classifies major FDI determination factors into horizontal and vertical factors. Horizontal FDI refers to the type of FDI involved when pursuing market expansion between countries which are similar in terms of economic scale and factor retention level, which can be understood in line with Dunning’s resource-seeking type of FDI. As mentioned above, there have been various attempts to clarify FDI determination factors from a theoretical standpoint, but with the results of such research differing by researcher, there is still no comprehensive theoretical model to support empirical analysis. Recently, various efforts have been made to explain the difference in FDI determination factors between developed countries and developing countries through institutional variables such as regulation.
  In Chapter 3, the characteristics of ASEAN FDI inflow and doing business conditions are examined based on a classification of ASEAN countries into three country groups according to GDP per capita, with the aim of understanding the characteristics of ASEAN FDI inflow. The results of this analysis show that vertical FDI is predominant in FDI into ASEAN, with the characteristics of vertical FDI slowly becoming visible together with market-seeking FDI in high-income ASEAN countries such as Indonesia, Malaysia, and Thailand, which have a relatively large population and economic scale. These changes are expected to continue for the time being as ASEAN tries to unify the markets and production sites within the region and is expected to achieve economic growth. Meanwhile, in terms of the conditions of doing business in each ASEAN country, ASEAN countries where FDI was concentrated, such as Singapore, Malaysia, Indonesia, and Thailand, showed highly advantageous conditions compared to other countries, whereas countries with low FDI inflow such as Cambodia, Lao PDR, and Myanmar were found to lag behind the others. Among specific evaluation items, contract implement period, bond recovery rate and trade period showed a high correlation coefficient with FDI. Particularly, the business conditions of each ASEAN country showed a distinct positive linear relationship with FDI, indicating that better business conditions lead to a higher amount of FDI inflow.
  Accordingly, in Chapter 4, an empirical analysis of the determination factors of 10 ASEAN countries’ FDI inflow was performed for the years of 2003 to 2014, utilizing a covariance structure analysis. The results of a primary component analysis show that, among 20 institutional variables, primary variables such as the time required to open a business, time required for import and export procedures, bond recovery rate after insolvency, and secondary variables such as the time required for contract implementation, start-up procedures, trade openness and export openness, were the determination factors for extra-regional investment into ASEAN. On the other hand, the results of a regression analysis to see whether these two factors affect the determination of ASEAN intra-regional FDI indicate that the above factors are not significant. In other words, while market- seeking factors and regulations are determinant factors for extra- regional countries when deciding on investment in ASEAN, these factors are not significant for countries within the ASEAN region.
  Chapter 5 suggests strategies for Korean enterprises to enter the ASEAN market and trade policy implications for the Korean government. Regarding entry strategies for the ASEAN market, first it will be necessary to enhance production networks with ASEAN and utilize these networks strategically, as seen by the example of Japan; second, our report emphasizes the need to efficiently respond to the trade policies and institutional changes of each ASEAN country; and third, investment risk should be managed by establishing strategic partnerships with local enterprises. Regarding the Korean government’s trade policy toward ASEAN, first it will be necessary to actively participate in the RCEP negotiations, contributing to the formation of intra-regional value chains. Among the issues being negotiated, the harmonized rules of origin stand out as a particularly important issue. Second, our report proposes stronger institutional support for Korea-ASEAN economic cooperation and towards this, the conclusion and revision of BITs with ASEAN members. Third, our report recommends a strategy of selection and concentration when it comes to improving the business environment in ASEAN. More specifically, we propose for the government to provide consulting in ASEAN about the factors identified as Korea’s strengths and determinant factors for extra-regional investment into ASEAN, such as contract implementation, bond recovery rate and business start-ups, as well as expanding educational support for ASEAN government officials regarding these matters. Lastly, we suggest reinforcing the national and industrial support systems for Korean enterprises to promote investment in ASEAN.