This research intends to suggest countermeasures and strategies in response to mega-FTAs, based on a comparative analysis of the Technical Barriers to Trade (TBT) chapters of Korea’s FTAs and the TPP Agreement. A particular focus is placed on the impact that mega-FTAs such as the TPP and RCEP would have on Korea in terms of technical policy and institutions, based on an analysis of the key articles of Korea’s existing FTA TBT agreements. We also examine what stance Korea should take, and what strategies the country should choose, if and when Korea joins mega-FTAs including the TPP.
  Among the 15 FTAs Korea has signed, 11 lay down TBT agreements in a separate chapter. This study compares and analyses the main articles of existing FTA TBT agreements, especially those on technical regulations, standards, conformity assessment procedures and transparency.
In the following chapter, based on the main features of Korea's existing TBT agreements, we take a look at the TBT chapter of the TPP, in which Korea may possibly participate. Overall, the TPP regulates TBT articles at a level similar to the WTO agreement or Korea's existing TBT agreements. However, some new regulations that were previously unseen are adopted in certain articles, including those on conformity assessment, transparency, grace period, cooperation and the Annex. In this respect, the TPP can be said to have the strictest regulations of all FTAs or RTAs concluded up until present.
  As the TPP is mostly based on the WTO Agreement, TPP accession is expected to have a limited affect on domestic industries. However, several articles related to specific products, as well as the WTO plus and TBT plus articles, require the improvement of the domestic system or the enactment and amendment of domestic law. It will be necessary for Korea to review agendas related to (1) the testing, inspection and certification industry, (2) improving the competitiveness of certain industries such as the medical device and pharmaceutical industries, and (3) the elimination of local presence requirements (adjustment of requirement levels).
  Based on the outcomes of the analyses conducted above, we suggest domestic and external policy directions, as well as negotiation strategies to be used for future mega-FTAs, with consideration to current technical regulation policies and systems. First, in terms of domestic policy, we propose (1) reviewing and activating domestic technical regulation policy, (2) monitoring the regulatory reform of other countries, (3) gathering the opinions of interested small and medium-sized businesses, (4) adopting and enforcing a TBT expert training system, and (5) actively participating in international conferences held by the WTO TBT Committee. Next, in terms of external policy, we make suggestions for future mega-FTA negotiations, including the TPP and RCEP, for example (1) introducing a policy on regulatory mitigation to expand market-opening, (2) promoting a single agreement for certain products, and (3) introducing, adopting and applying new regulations by improving the existing system.
 

 Small and medium-sized enterprises (SMEs) in Korea and Taiwan share very similar problems; both suffer from relatively small domestic markets and limited positions in the respective markets.
Therefore, the survival of SMEs in both Korea and Taiwan-which take up the largest portion in both economies-depends on their capacity for increased overseas expansion. In today’s world where the production cycle of companies is becoming increasingly internationalized, the SMEs’ overseas expansion through participation in the global value chains (GVCs) becomes all the more important.
 Due to the economic recession, the direct exports of SMEs in proportion to the total direct exports are decreasing in both economies. But the complex production cycle of companies indicates that this does not necessarily point to a decrease in SMEs’ overseas competitiveness. This research focused on the fact that actually, many SMEs engage in indirect exporting by participating in value chains of major companies, and compared the total exports(including both the direct and indirect exports) of SMEs in Korea and Taiwan. The results showed that while the proportion of indirect exports to total exports in Taiwan SMEs has greatly increased over time, that of Korean SMEs has shown little difference.
This has led the total exports of Taiwanese companies to increase while the total exports of Korean SMEs decreased. This phenomenon can be explained by two factors: the changes in the industry structures in the two countries and the changes in the participation rate of SMEs and major companies in GVCs. In the 2000s, the proportion of major companies in the Taiwanese economies grew rapidly, intensifying the relationship between major companies and SMEs, under which SMEs provided for the intermediate goods for exports to major companies. This practice increased indirect exports of Taiwanese SMEs. On the other hand, in Korea, major company-oriented export structure and vertical integration structure persisted, with no progress in the GVC relations between major companies and SMEs.
This meant that the increase in Korea’s total exports in the 2000s did not lead to an increase in the total exports of Korean SMEs.
 These characteristics are clearly visible in the two countries’ cellular phone industry. The GVC structure in Korea and Taiwan differs very much in that for Taiwan, SMEs are more directly involved in the GVC than Korea. For SMEs in Korea, where major companies mostly internalized the value chains and are involved directly in the final brand production process, it is not easy for SMEs to engage in GVCs, or participate in the global market or a high value-added industry.
 Looking into the cases of SMEs that have successfully integrated into GVC in both Taiwan and Korea, we can derive several implications.
First, although there exist multiple ways to enter GVCs such as supplying parts and components to a multinational company or procuring overseas contracts as OEM or ODM, in order for such trials to succeed, the SME in question must have a solid technological base. Long-term investment in R&D and research personnel are essential. Second, an active response to the demand is also integral for the company’s success. The SMEs who did succeed in entering overseas markets, actively respond to the foreign buyers’ needs.
Third, active overseas investment strategy is also essential. Another common trait that these SMEs shared was that they all actively sought to build production factories or sales networks in China or Southeast Asia, where they can enjoy multiple benefits including obtaining a new market and low-cost factors of production.
 Taiwanese cases of SMEs who have successfully integrated into GVCs show that the government’s role in the beginning stage of industrialization is to attract multinational companies by utilizing measures like FDI. Many Taiwanese SME personnel learned technology and garnered experience working at multinational companies, and by utilizing the international network formed during this initial stage, was able to continue the OEM, ODM relations with multinational companies. Also, Taiwan’s government organizations such as Department of Industrial Technology and Ministry of Economic Affairs, actively supported SMEs to develop and construct hightechnology production management systems, and supported companies to enhance R&D capacity and application technology by sharing the results of government-led research projects on basic science. For Korean SMEs, the factors for success also included continued R&D investment, an adequate prediction of the market demand and quick response to the changes, global networking, etc.
 The policy supports for SMEs’ overseas expansion in both Korea and Taiwan overlap in many areas: both include SME capacity development, operating SME export support center, support for building and utilizing overseas sales network, operating export incubation centers, overseas marketing, etc. But within this broad context of similarities, there are also some differences as well; we evaluated Taiwan’s policy supports as focusing more on nurturing SMEs’ self-sufficiency, when compared to that of Korea.
 First is regarding the operation of SME incubation centers. In Korea’s case, the government builds export incubators in major trading bases and provides financial support for their operation. On the other hand, the Taiwanese government operates domestic incubation centers, nurturing SMEs while at the same time designates a key industry each year to provide intensive consulting and mentoring service, financial support and even a chance to participate in a major company’s supply network. They especially focus on strengthening international cooperation with overseas counterparts by focusing on the connection with the overseas incubation network.
Second, the Taiwanese government is actively supporting the companies for entry into overseas markets. The MVP (the Project to Promote Most-Valued Products in Emerging Markets) program, a type of SME exports supports program, has been in operation for 17 years, much longer than Korea’s. Third, Taiwan provides a matching service with overseas companies to selected venture companies in order to derive more specific results. In Korea’s case, the country provides a matching service between major companies and SMEs, encouraging overseas expansion by supporting their collaboration.
But Taiwan has adopted a more direct approach that directly matches domestic SMEs with overseas companies. Fourth, in terms of creating SME industry clusters, Korea has constructed regional Center for Creative Economy and Innovation, encouraging collaboration between major companies and regional SMEs; while Taiwan has built industry clusters around regional SMEs, supporting collaboration among SMEs and creating synergy by encouraging common technology development, branding and global marketing.
 This research analyzed the Taiwanese government’s policy supports for Taiwanese SMEs, its successful cases of integration into GVCs, and challenges for the overseas expansion of Korean SMEs, proposing several measures to support their overseas expansion and integration into GVCs.
 The measures to support SMEs’ overseas expansion include: integrating departments related to supporting SMEs and increasing their accessibility, selective supports, providing information on the emerging markets and the importance of expanding supporting services, and providing suggestions on benchmarking Taiwan’s exports support programs that target the emerging market.
The measures to increase SMEs’ GVC participation include: creating SME clusters, encouraging SMEs’ participation in overseas production network through the FDI, utilizing business matching and global marketing.
 

About KIEP

Infographics

Highlight 2015

Bright 2015

Flight 2016

Appendix 

In 2015, the Korean economy was exposed to a range of variables that caused rapid global economic changes such as falling oil prices, interest rate hikes in the US, and the conclusion of the Trans-Pacific Partnership (TPP) Agreement. Amidst the whirlwind of drastic global economic change, Korea has successfully served its function as an axis of the global economy - as a member of the Organisation for Economic Co-operation and Development (OECD) and G20 - and has become a more influential donor as part of the OECD Development Assistance Committee.

The Korea Institute for International Economic Policy (KIEP) has conducted preemptive research and responded promptly to government agendas to help the country overcome the external challenge of a rapidly changing world economy. We selected key agendas for preemptive research, such as analysis of major global economic issues, including those for emerging countries, and the development of corresponding cooperation measures; analysis of bilateral and multilateral trade issues; capacity-building for economic partnerships, such as official development assistance; response to climate change, including greenhouse gas emission reduction; and practical preparation for reunification through capacity-building.

As a result of our strenuous efforts to swiftly analyze global economic shifts and present economic policy plans and mid？ to long-term strategies at a global level, KIEP ranked 33rd on the 2015 Global Go To Think Tank Index compiled by the Think Tanks and Civil Societies Program (TTCSP) at the University of Pennsylvania, and has been selected as the top domestic policy research institute for four consecutive years. As seen in such acknowledgements, KIEP continues to build its status as a world-class research institute.

This annual report is a compilation of the outcomes of specialized, in-depth studies and research we have conducted on a wide range of subjects over the course of 2015. The report contains an introduction to the institute, an overview of KIEP, outstanding research projects of 2015, research achievements of 2015, and settlement of accounts for 2015. In addition to outlining KIEP's key achievements and activities, this report includes research plans for 2016.

We will continue to exert our utmost efforts to become the world’s best globalized research institute, enhancing Korea’s standing and becoming a trusted partner of groups with policy demands as well as the public. We extend our heartfelt gratitude to all for the support and keen interest in KIEP’s growth and development.
 

Executive Summary

1. Introduction

2. Literature Review

3. The Structural Changes of the Chinese Economy

3-1. The Compositional Change in China’s GDP
3-2. China’s Import Intensity-Adjusted Demand
3-3. The Evolution of Korea？China Trade

4. Empirical Analysis: VAR Approach

4-1. Model Specification
4-2. Empirical Results
4-3. Export by Type of Goods

5. Conclusion and Implications

Referemces 

This paper examines the structural changes of the Chinese economy and how they have affected Korea’s exports to China. Focusing on the evolution of China’s role in the global value chain, we estimate the impact of China’s external demand and domestic demand. We also shed light on the effect of compositional changes in China’s GDP on Korea’s exports to China. The results of the VAR analysis suggest that external demand had a significant impact on Korea’s exports to China prior to 2008, while Chinese domestic demand became more important afterwards. Moreover, Chinese investment is the most important factor in determining Korea’s exports to China, and Chinese private consumption has recently been gaining relevance.
 

1. Introduction

2. Overview of the Conventional Productive Regression

3. Model Specification

3-1 Comparison with a Conventional Predictive Regression
3-2 Why Does the Predictive System Produce Better Forecasting Performance?

4. Estimation Procedure

4-1 A State-Space Representation
4-2 Forecasting Evaluation

5. Empirical Application

5-1 Data
5-2 The Predictability of the Export Growth Rate
5-3 The Predictability of the Import Growth Rate

6. Conclusion and Policy Implications

References 

The objective of this paper is to suggest a new predictive system for international trade, based on an unobserved component model. We employ the predictive system developed by Pastor and Stambaugh (2009), which is unlike other conventional predictive regression models. This paper derives an equivalent linear predictive regression from the predictive system, and explains why the proposed predictive system is able to achieve superior out-of-sample predictive power. When predictors are imperfect in an estimated equation, the equation fails to utilize all information from the predictors’ past history, and unexplained variations are captured by residuals in the estimated equation. With the use of the predictive system, we can more effectively deal with the dynamics of imperfect predictors.
For empirical illustration, we show that, in the case of Korea’s export and import growth rates, the predictive system has better out-of-sample predictive powers than the conventional regressions based on Root Mean Squares Error(RMSE). Results from an out-of-sample analysis show that, compared to the benchmark model, the predictive system improves forecast precision by 18.90% for the export growth rate, and by 7.95% for the import growth rate.
 

Executive Summary
1. Introduction
2. Theoretical Backgrounds
3. Empirical Strategy and Data
4. Results
5. Conclusion
References 

This paper examines the impact of labor market regulations on FDI and employment and production of the foreign firms using an index on employment protection along with a number of employees and establishments, and production of foreign affiliates provided by the OECD. The empirical results show that strict employment protection discourages initial entry of foreign firms as well as the employment and production of foreign firms. The result is robust to various specifications in which the strictness of the labor market is measured by the unionization rate and severance pay for redundancy dismissal. Therefore, the attention of policymakers should not be limited to tax incentives, cash grants, and relaxation of market regulations but extend also to labor market deregulation and non-wage cost, to attract more foreign firms into their countries.
 

Executive Summary

1. Introduction

2. Related Literature

3. Econometric Methodology

3-1. Data and Variables
3-2. Empirical Model Specification
3-3. Estimated Coefficients and Interpretation

4. Empirical Results

5. RobustnessTests

6. Conclusions

Reference 

One of the major changes in the current global business environment is that the global value chains (GVCs) of just a few multinational enterprises (MNEs) conduct most of the global business activities. These GVCs are structurally subdivided and regionally dispersed as a result of these MNEs’ new strategies, which are influenced by the globalization, liberalization and deregulation of nations and enterprises, the development of transportation and telecommunication technologies, and the growth of emerging market economies. The process of such globalization is further accelerated by the decreasing costs of coordinating international division of labor activities and simultaneously provides threats and opportunities not only for multinational enterprises, but also for small and medium enterprises (SMEs).
Small and medium enterprises (SMEs) can secure financial stability, increase productivity and enter the global market by participating in GVCs of the MNEs. However, SMEs require higher levels of financial and managerial resources and face more global competition to successfully participate in GVCs. Due to the many opportunities and threats to SMEs that come with participating in GVCs, appropriate government policies providing protection and support are needed for SMEs in developing, emerging, as well as developed markets (OECD 2007; UNCTAD 2010).
The purpose of this study is to examine the political and strategic implications of supporting the participation of Korean SMEs in GVCs through detailed analyses of the current global competitiveness and industrial revealed comparative advantages (RCAs) of Korean SMEs.
While previous studies on this topic exist, this study differentiates itself in three main ways. (1) This is the first time trade in value added (TiVA) is used to analyze Korean SMEs’ industrial competitiveness. (2) The methods of Korean SME participation in GVCs are classified by domestic and foreign production, of which competitiveness is measured by domestic value added and foreign direct investment, respectively. (3) This study proposes the linkage strategy between Korean MNEs and SMEs based on the evaluation of their industrial competitiveness. 

Executive Summary

I. Introduction

II. Literature Review

III. Access to Credit and the Educational System in Vietnam
1. Credit Market in Vietnam
2. Educational System in Vietnam

IV. Empirical Analysis
1. Data
2. Propensity Score Matching
3. Results

V. Concluding Remarks

References

Appendix 

This paper tries to determine the relationship between two of growth engines in Vietnam: access to credit and education. To avoid potential bias due to the endogeneity of access to credit variable, this paper utilizes the propensity score matching. This paper takes advantage of the Young Lives Survey of Vietnam that collected information on children of various ages to observe the effect of credit access in different stage of childhood. The result of propensity score matching analysis shows that the quality of education, measured by test scores, is impacted significantly by access to credit when the child is young and household income is low. However, when the child is older, most of the input to enhance the quality of education comes from outside of household resources, such as school, friends, and teachers, and the access to credit status of the household does not have significant effects on the quality of education.