2015 marks t he 1 3th year s ince t he i mp lementation of t he ‘ July 1 st Economic Management Improvement Measure (2002~2003)’. Although the ‘July 1st Measure’ was the most radical reform package in the history of North Korea, it has been estimated that the North Korean regime sought to abolish the Measure during the reactionary anti-reform period (2006~2009). However, the North Korean regime revived the reform package beginning in the second half of 2010 following the establishment of the Kim Jong-un regime.
To understand the exact nature of the ‘New Measure for Improving Economic Management’ and predict its future direction, it is necessary to grasp the correlation between the strategic f ields (defense industry and core heavy industry) driven by the government plan and non-strategic fields (light industry and local industry) driven by the market. This research considers ‘Military-First Economic Policy’ as the determinant of this correlation. It reassesses the North Korea’s economic reforms of the 2000s by analyzing its achievements and limitations, and provides forecasts on the direction of economic policy of the Kim Jong-un regime.
The July 1st Measure represents a core policy for the support of the ‘Military-First Economic Policy’ which is Kim Jong-il’s long-term strategy for rebuilding the economy(‘Building the Strong and Prosperous State’). In other words, to concentrate insufficient resources to the strategic field, North Korea could not help increasing autonomy of non-strategic fields not to commit additional resources there; also, the Measure was implemented to move surpluses occurring in the non-strategic field to the strategic field. In this sense, the July 1st Measure can be characterized as two-tracking of the economy involving reinforcement of planning mechanism in strategic fields and marketization in non-strategic fields.
The July 1st Measure and successive radical reform experiments of the Park Bong-joo cabinet (2004~2005) intensified the marketization of the North Korean economy by combining institutionalization of the market mechanism with autochthonic marketization from the ‘grassroots.’ However, this led to a problem where, at one point, the marketization exceeded the scope initially intended by regime. Especially, the capital of the so-called donju(capitalist) was spread throughout the state enterprises, leading to widespread, de-facto privatization. This prompted the North Korean regime to constrain implementation of the July 1st Measure during 2006~2009. Also, Currency Reform was promoted at the peak of this anti-reform period, in late 2009. However, it was actually not an attempt at abolition of the market. Instead, it should be regarded as an attempt for restoring a situation where the market would be more manageable. The basic framework of the July 1st Measure including reduction of the planning mechanism and expansion of market mechanism, especially in company management, remained intact. Coexistence of planning and the market is an inherent demand of the Military-First Economic Policy. In this sense, the move toward preparations for ‘New Measures for Improving Economic Management’ immediately following the failure of Currency Reform was the logical conclusion.
Yet, the outcome of the July 1st Measure was decidedly negative, as it only led to side effects. First, there was almost no improvement of productivity in both strategic and non-strategic fields save for the defense industry; mainly due to the excessive exploitation of the non-strategic field by the strategic field. More specifically, surpluses from the former were siphoned off to the defense industry. In addition, the excessive supplying of currency prompted an inflation tax which meant a penalty for those held on to their cash during high inflation. As a result, a vicious circle of ‘rapid increase of money supply →inflation →rise of exchange rate →inflation’ became entrenched.
In this respect, one can infer that the stabilization of market price and exchange rate after 2/4Q of 2013 is related to the change of North Korea’s currency policy. It appears that North Korea has been reluctant to artificially increase currency supply since the failure of its Currency Reform. Moreover, the dollarization seems to contribute to the stability of exchange rate and price level ironically. However, as dollarization also means the weakening of government authority over the economy, it is more likely to pose a threat for the stability of the regime in the long run.
Kim Jong-un regime has promoted economic reform package (‘New Measures’) from the beginning of 2012. The measures include downscaling businesses operated by the party and the military, and transferring them to the cabinet; thus strengthening the cabinet’s authority for economic control. It also bolstered the autonomy of factories, company and collective farms (plan mechanism is downscaled and market mechanism expanded), and newly established a number of special economic zones/local development zones. In particular, the increased autonomy of factories, comp anies, a nd collective f arms c an b e regarded a s a revival of Park Bong-joo’s radical experiment from 2004 to 2005. Some suggest that the new reform measures are similar to past reform and opening up policies of China in early 1980s’.
At present, the main problem of the reform lay in financing. In order to avoid another inflation, there is no other way but earnest financial reform and North Korean authorities seemed to have understood the fact very well. The regime is trying to centralize the accumulated capital by developing financial instruments and encouraging credit cards. However, these measures have proven inadequate in resolving the people’s distrust of the financial system with those limited attempts.
For successful economic reform, North Korea has no alternative but to implement full-scale financial reform including establishment of a commercial bank. However, financial reform cannot be promoted simply by establishing commercial banks and introducing interest rates. Although the speed of reform could be controlled, it would mean abolition of current dual price system corresponding to market supply-demand. In this regard, the current system of cashless distribution also needs to be abolished. In other words, the regime has to implement fundamental reforms in the financial sector and of the price system to the point of actually decentralizing the planned economy. As the dual track strategy is an inherent condition of the Military-First Economy, the future of new reform policies depend on how far the Kim Jong-un regime can move beyond the strictures of a military-first economy.
At this point, it is worth paying attention to the Policy of Parallel Development of Economic Development and Nuclear Arming (hereafter Byungjin Line) that the Kim Jong-un regime adopted on April of 2013. North Korean authorities assert that this policy is designed to concentrated resources to the civil economic sector freezing defense budget. In this sense, Byungjin Line has possibility of either relaxing or abolishing the Military-First Economic Policy.
The relaxation or abolition of the Military-First Economic Policy, however, has an important precondition: North Korea’s international security environment must be improved. Because of unstable external security situation, North Korea’s nuclear ‘deterrent’ actually has a chance to spark an arms race, which would demand even more investment in national defense. So, the Byungjin Line does not necessarily mean North Korea would promote nuclear armament unilaterally, but likely is an ‘open-ended policy’ with the possibility of freezing nuclear development if the international community accepts their requirements (to accept North Korea as a nuclear power; official diplomatic relations and peace treaty between North Korea and the U.S.)
The problem is that the international community demands that the nuclear issue should be resolved first before international relations as it relates to North Korea can be improved. As for North Korean regime, they insist on improved relations before resolution of the nuclear issue. Therefore, North Korea’s developmental strategy and concomitant reform policy seem to depend on how this chicken-and-egg dilemma can be solved. 

 At the United Nations Sustainable Development Summit 2015, the Member States unanimously adopted seventeen Sustainable Development Goals. Among them, SDG 7 calls for substantial increase of renewable energy use. In addition, under the UN Framework Convention for Climate Change, individual countries - developed and developing alike ？ will work to further encourage and disseminate the use of renewable energy in order to meet their commitment on greenhouse gas reduction. Especially for developing countries, renewable energy development will become a key for sustainable growth for they now face a dual challenge of pursuing economic development while reducing greenhouse gas emission.
 Since participation from various stakeholder is imperative for sustained yet sizable investment, Korea must seek a proactive strategy in pursuing renewable energy projects in developing countries. In doing so, collaborating with various partners, especially the private sector, is extremely important. This study focuses on mobilizing private sector resource for renewable energy projects in Korea’s priority partner countries. While a number of Korea’s priority partners possess considerable potential in renewable energy development, the lack of institutions, market and awareness have hindered development. The study highlights the fact that renewable energy investment is shifting towards the global South and that the main cause of such transition is the favorable regulatory and institutional environment along with significant demand.
In several emerging economies with the highest amount of renewable investment - namely, China, India, South Africa and Brazil - such transition was coupled with governments’ support for technology R&D and subsidies. On the other hand, Vietnam and Indonesia are in the process of actively developing a more conducive environment. That is, laws and regulations, market readiness and awareness regarding renewable energy are being developed. Therefore, we expect rapid progress in relevant investment, development and deployment in these countries in terms of renewable energy in the near future.
 In the following chapters, the study reviews some examples of international support for private sector participation in renewables in the developing countries and makes comparisons with Korea’s experience in supporting renewables. Multilateral and bilateral international development organizations are currently seeking various measures to stimulate investment in renewable energy. One example of the support is that for early stage development of a project. By providing public resource to investigate laws and regulations, market readiness, and other factors related to economic viability of a certain country or region in the very early stage of development, a project developer spends less money on securing a feasible project with which they can appeal to private investors and reach financial closure. The study surveyed the UNEP Seed Capital Assistance Facility and the Scaling-up Renewable Energy Program under the Clean Investment Funds as successful prototypes.
Another line of support can be provided at stage of financial closure, by presenting guarantees or subsidies on renewable energy projects. The study conducts a review of Germany’s Global Energy Transfer Feed-in Tariff (GET FiT) as well as the Accelerating Renewable Energy Investments in Central America and Panama (ARECA) as successful cases of guarantee and subsidies support.
According to our review, all of the examples combined various support measures, such as grants and concessional loans, rather than relying on a same kind of source. The examples also included a wide array of support tools from technical assistance, financial consultation, and capacity building.
 On the other hand, Korea’s experience in official development assistance for renewable energy remains at a basic level, support being given in a rather random and sporadic manner. Therefore, there has not been an overarching program or project aimed at mobilizing private participation. Upon a formal request from the recipient country, the Economic Development Cooperation Fund (EDCF) supports power generation project which mainly comprises of facility construction with some capacity building depending on the project. Korea Energy Agency (KEA) also provides financial support to private energy companies for feasibility studies in developing countries. However, in many cases, projects fail to achieve financial closure despite financial viability due to the lack of financial structure and track-record of companies, most of which are small-to-medium-sized. The lack of mid-to-long-term expectations of financial intermediaries and investors also create barriers for financial closure of projects.
 Reflecting on the experiences of international development organizations and Korean support in renewable energy, this study presents a set of suggestions for renewables investment catalyzed for Korea’s priority partner countries. The first is to enhance overseas profiles of energy companies. Such profiles will include companies’ track-record, financial soundness, as well as utilization of human capital. One concrete example in terms of developing overseas project profile will be to provide financial incentive for companies that partners with SMEs when applying for a project funded by the government, that is, EDCF and KEA. On the other hand, energy companies can take advantage of the networking opportunity provided by public organizations such as the KEA. KEA hosts a regular networking program where the Agency invites government officials from developing countries to participate in networking sessions with Korean energy company representatives.
 Secondly, establishing a consultation facility specializing in overseas renewable energy financing - or infrastructure, in general - can be highly beneficial. Deploying its financial expertise, the facility can run programs to foster financial know-how for energy companies. The facility can also provide consultation on structuring finance models for renewable energy projects, and on reaching financial closure by blending various financial tools and funds. The facility can also host general information sessions and tailored advising events to inform companies about ways to access international funds. In doing so, the facility can utilize accumulated knowledge and network from the EDCF, KOTRA, KITA, Small & Medium Business Corporation, and so on. Consultation on accessing international funds and creating advanced finance structure, as well as fostering financial capability of pioneer energy companies, can bolster successful financial closure for companies and leverage private resource for renewable energy projects in developing countries.
 The third suggestion for catalyzing investment in renewable projects is to create a favorable environment by concentrating official development assistance in related infrastructure and institution. Based on the survey results in Chapter Two, additional study can be conducted regarding the elements for successful resource mobilization. Korea’s development assistance and cooperation can be guided towards a given direction, based on the results. For instance, there can be additional support and attention given to specific areas such as institutional development, power grid connection, and/or capacity development for government officials. With increased capability and financial expertise, the private sector will be able to participate more actively in renewable projects in the global South. It is needless to mention that the possibility of resource mobilization will increase even more with the enabling environment and network in place. 

Contents

Contributors

I. Introduction

1. The current status of bilateral trade between China and Korea
2. Degree of integration, trade combined index, and trade structure between China and Korea
3. Problems of the bilateral trade between China and Korea
4. Overview of China’s international capital flow
5. Overview of Korea’s international capital flow

II. Empirical Study of China and Korea’s International Capital Flow and Impacts of Federal Funds’ Rate

1. Background and overview
2. Decomposition of equity flow return
3. Data and description
4. Benchmark model
5. Extended model

III. Effects of USD Appreciation on Bilateral Trade between China and Korea

IV. Effects of the U.S. Monetary Policy on China’s Capital Market Stability

V. Policy Implications and Concluding Remarks

References

Executive Summary 

This paper first reviews the trade structure between China and the Republic of Korea (hereafter referred as Korea) and the two countries' international capital flow. Then it discusses the effect of the Federal Reserve rate on UIP in both China and Korea, which turns out to be uninfluential through our analysis. Then we use VAR model and the extended model, the multivariate GARCH-DCC model to examine interaction between different factors.
The result shows that positive-legged equity return would induce outflow and flow positively affects equity return. Sharp offshore RMB devaluation would cause domestic market plummets and higher legged spread means higher carry trade return. Besides, in the respect of capital control effects, offshore RMB devaluation would cause spread to be wider because of inelasticity of the onshore RMB rate. Carry trade return has positive and significant intercept.
Finally, we argue that although the appreciation of USD has little impact on bilateral trade between China and Korea in short time, in long run, currency risk exists and it may cause significant fluctuations in the trade. We suggest that China and Korea should gradually use local currency to price their trade. 

At the 2015 Paris Climate Conference (COP21), the Parties to the UN Framework for Convention on Climate Change (UNFCCC) will reach an agreement on a new global climate regime. The agreement, which will come into effect in 2020, is the first agreement with a legally binding character since the Kyoto Protocol. For this reason, the Paris Conference will provide additional momentum for global climate change negotiations. The essence of the new climate regime is that all countries, developed and developing alike, are responsible for reducing greenhouse gas emissions to mitigate climate change. As the first step,
the Parties have submitted voluntary reduction targets to the UNFCCC, formally called the “Intended Nationally Determined Contribution (INDC).” Climate finance is deemed as the key for the successful launch of the new climate regime. As mentioned above, while participation from both developed and developing country Parties is absolutely essential, developing country Parties demand, as preconditions, that developed country Parties provide substantial financial support for climate action. In fact, the global community has agreed on mobilizing 100 billion dollars in climate finance by year 2020. However, actually meeting the goal seems uncertain at the moment.
Korea is now facing a new challenge: to minimize the greenhouse gas reduction burden imposed on the private sector, and to meet global expectations as a member of the G20. Furthermore, Korea as a member of the OECD Development Assistance Committee (DAC) is expected to provide substantial support to developing countries in order for them to tackle climate change. Also, as the host country of the Green Climate Fund (GCF) Secretariat, Korea shall seek mid- and long-term strategy that will contribute to the progress of the Fund.
In this regard, this study seeks to provide policy direction for Korea in resolving global climate challenge, in consideration of our role as the bridge between countries of the South and the North. The results of the study can be utilized in development of a logical framework for Korea's climate change negotiation strategy. The study first analyzes the level of emission reduction and financial contribution that is deemed appropriate for Korea, and compares them with other countries. To derive a level of GHG reduction and climate finance burden-sharing for major countries from years 2020 to 2050, the study utilized three indices - historical responsibility (aggregate GHG emission), equality (GHG emission per capita), and capability (GDP per capita).
By differentiating the weight on each indices, the study sought to deduce levels of GHG reduction by countries and compared them to the level stated in their INDC. Reckoning the possibility of increased donors for climate finance, the analysis considered potential donors in addition to the countries included in Annex II of the Convention. The analysis revealed that developed countries bear the most GHG reduction burden when historical responsibility is highlighted, whereas developing countries are obligated to most GHG reduction when participation from all Parties is requested.
Korea's quota for GHG reduction is estimated to be between 1.0~1.6% of the total global reduction. By year 2030, it implies that Korea should reduce at least 330 million to 410 million tons of greenhouse gas, which is a figure larger than the level suggested in its INDC (310 million tons). Furthermore, Korea's burden for climate finance is estimated to range between 1.6 to 4.5 percent when all the OECD DAC members are assumed as donors.
The study also provides an analysis of the traits and determinants in climate support of a number of donors. The regression results revealed that, in the case of Japan and Germany - the two largest donors in climate change, a positive link between climate change ODA and bilateral economic relationship exists. On the other hand, results of the analysis on France, Norway and Korea did not uncover significant contributing factors besides the recipient country's population.
Moreover, the estimation model showed low explanation power. The study suggests the followings as the causes of unsuccessful identification of climate support factors. First of all, while donors have channeled their financial support on the basis of a policy, it is unclear whether the actual disbursement or implementation followed certain standards/criteria. Secondly, there are limits to the DAC's climate change marker data which was used as a dependent variable. Donors submit their own marker data after screening individual projects according to the rough guideline provided by the DAC. Therefore, we speculate that there are limits to accurately providing what factors influence an individual donor's climate change support with such limited data available.
The study presents the following policy implications. Firstly, a more ambitious effort on GHG reduction is required. Korea's INDC states that the country will reduce 37% of GHG compared to BAU by 2030. Nonetheless, this figure is not sufficient when compared to the study results as previously mentioned. Korea's INDC also indicates that a third of the emission reduction will come from the international carbon market. Regardless, a clear agreement on the new market mechanism in the post-2020 climate regime has yet to be finalized.
Therefore, such a statement is actually accompanied by substantial uncertainty. Developing a domestic policy framework for GHG reduction is absolutely urgent for Korea. Secondly, Korea must be prepared to join as a donor of climate finance. It is difficult to refute that Korea's stance has shifted between developed and developing country Parties. Under the new climate regime, more countries will be obligated to provide support. Since Korea is among the potential donors, an adequate and timely plan regarding financial support is required. As the host country of the Green Climate Fund Secretariat and a member of the G20, Korea needs to develop a strategy/plan which will fulfill international expectations. For instance, Korea may suggest that while meeting the current goal of mobilizing 100 billion dollars by 2020 is an obligation that must be fulfilled by developed countries, developed as well as potential donors should equally bear the burden for any additional finance required.
Thirdly, Korea shall seek participation in the process of improving climate finance monitoring. Climate finance monitoring is an integral procedure that is necessary for verifying the effectiveness and implementation status of globally promised finance targets. Presently, there is no globally agreed measure other than the climate policy markers announced by the DAC. Individual organizations have been reporting different figures for public finance in leveraging private finance because of the lack of a clear terminology. Korea has suggested the use of the term "Green ODA." However, it has yet to receive sufficient attention from the international community. OECD is currently working on improving measures for tracking climate finance. It is imperative that Korean experts take a meaningful part in the various efforts and contribute to the process.
Lastly, a strategy is required on how Korea would mobilize climate finance. Korea is entirely dependent on the ODA budget for its support of developing countries. However, current global discussions repeatedly mention that ODA should mainly focus on poverty reduction while the support on climate change should be facilitated with private finance elicited through various public measures. Namely, Germany and France are major actors who pursue mobilization of additional finance by utilizing various public financial tools such as guarantees, equity investment, mezzanine financing and so on, aside from concessional loans. Korea should carefully analyze such examples and advance its own framework for scaled-up climate finance which suits its purposes.
That is, ODA funds shall be directed to awareness and capacity development regarding climate change. On the other hand, the government should be able to provide financing tools to the private sector so that private participants would be able to reduce investment risk and improve financial viability in massive projects, for instance, infrastructure development in developing countries. A precondition for the above-mentioned suggestion is a re-adjusted institutional arrangement enabling the use of financial tools for the private sector. 

This paper examines the short and long-term causes of current account deficit in India. This paper also investigates key determinants of current account for India.
The findings from impulse response functions show that oil price has effect on current account only and the effects of other factors, such as exchange rate, growth, and fiscal balance, are minimal. An analysis of forecasting error variance decomposition suggests that the problem of current account deficit in India be systemic rather than short-term.
The results from an empirical investigation of determinants of current account provide that current account in India is negatively correlated with real GDP, openness and net foreign assets. In accordance with the analysis of short-term effect, no relationship between fiscal balance and current account is detected.
In a long-term perspective, long lasting current account deficit in India looks structural phenomenon. It is an outcome of greater domestic demand than production. Greater amount of outflow of foreign investment than inflow has also contributed to current account deficit. Moreover, structural change in population toward higher proportion of working age population is one of the key factors to give rise to current account deficit in this country and it is inevitable for a fairly long time.

Along with the rapid process of trade liberalization, developed and developing countries began to put forth a multilateral effort into promoting foreign direct investment (FDI) for the purpose of capital inflows, technology transfer, and job creation. By implementing FDI promotion policies such as providing investment incentives and lowering investment barriers, global FDI inflows have increased constantly over time. In case of Korea, the size of FDI inflows and number of foreign invested companies dramatically increased after the government implemented foreign investment promotion policy to overcome the Asian financial crisis in 1998 and reached its highest peak in 2014. While FDI inflows became an essential part of domestic economy, they are still considered to be marginal when compared to those of developed and also developing countries. Taking into account of the importance of FDI inflows in Korean economy yet marginal FDI performance with respect to its potential, therefore, it is important to acknowledge the determinants that promote and hinder the FDI in Korea. This report analyzes and evaluates the determinants of FDI by investigating prior foreign and domestic trade studies and by performing the empirical analysis. In particular, we estimate for the determinants of FDI by dividing the analysis based on FDI patterns (Greenfield FDI and M&A FDI). In particular, based on the results from analyzing the changes in investment barrier across domestic industries over time, we derive FDI openness index for each industry sector and estimate its effects on different patterns of FDI inflows into domestic industries by using Korean industry-level FDI data.
Investigating for global and domestic FDI trends from the statistical and institutional perspective indicates that while FDI inflows were restricted and strictly regulated at the individual country-level before 1980s, countries began to promote FDI competitively as positive perception on FDI expanded across the globe along with the Uruguay Round Agreement and WTO establishment. Recently, it is observed that countries are amending regulation systems to promote FDI strategically by putting more weights on its quality than quantity. Consistent with institutional trends, the size of global FDI inflows began to increase after 1980s, with having its rapid growth between late 1990s and early 2000s, and had a stable growth after late 2000s. The most distinguishable feature of global FDI trend is the emergence of developing host countries and an increase of M&A FDI share. In particular, FDI inflows into developing countries have constantly increased over time and accounted for 55% of global FDI inflows in 2014, which surpasses that of developed countries. While M&A FDI inflows, on the other hand, is smaller than greenfield FDI in terms of its size and share, it constantly increased over time and recorded an increase of 28% in 2014 compared with the previous year.
Consistent with global FDI trends, Korea was reluctant to implement FDI promotion policies before 1980 and instead, relied heavily on a foreign loan to develop its economy. After the Asian financial crisis in late 1990s, however, the government began to remove all of M&A investment barriers to recover the economy in short time. Recently, the government is implementing FDI promotion policies strategically and selectively that can coincide with its goal of advancing certain domestic industries. In terms of FDI size, Korea experienced a rapid growth in M&A FDI after 1997 and it showed a constant increase over time. Investigating Korean FDI inflows by taking into account of source countries and FDI patterns, we find that while prior FDI inflows were concentrated in greenfield FDI form, mostly from industrialized countries such as European countries and United States, recent FDI inflows are concentrated in M&A form, mostly from Asian countries.
Examining the changes in investment barrier across domestic industry sectors, we find that most of manufacturing sectors were fully liberalized in 1990s and except for few sectors, all manufacturing sectors were liberalized after 2000. Service sectors, on the other hand, showed a lower level of investment liberalization relative to manufacturing sectors. In particular, sectors that include public services and transportation services showed the lowest level of investment liberalization. After analyzing the changes in investment barriers, we computed for the FDI openness index for each industry sector by using the methodology from Hoekman (1995). Taking into account of prior results that examined the determinants of FDI, we performed an empirical analysis on the determinants of different patterns of FDI. In particular, we used country-level and Korean industry-level FDI data to estimate the determinants of greenfield FDI and M&A FDI. Examining the determinants of country-level FDI by decomposing the sample based on the income-level of host countries, the estimation results showed that GDP per capita has significant effects on greenfield FDI, while inflation rates, real exchange rates, and financial market development have significant effects on M&A FDI across developed countries. Across developing countries, on the other hand, GDP growth, inflation rates, and country risk indices had significant effects on greenfield FDI, while real exchange rates, financial market development, country risk indices, and number of investment treaties with other countries had significant effects on M&A FDI.
Examining the determinants of domestic industry-level FDI by dividing the sample on the basis of time periods, we found that greenfield FDI is likely to increase among industry sectors where firms can use high-skilled labor by bearing higher wages and where FDI openness is high during the earlier sample period, while it is likely to increase among industry sectors where FDI openness is small over the recent sample period. M&A FDI, on the other hand, is likely to be associated with R&D investment and FDI openness during the earlier sample period, while it is significantly affected by the number of labor-management dispute cases over the recent sample period. These results imply that while FDI openness previously had a large impact, investment environment is becoming more effective on promoting M&A FDI.
This report provides important policy implications on promoting FDI in Korea. First, the estimation results on FDI openness having a significant effect on both greenfield and M&A FDI imply that investment liberalization policy is effective on promoting FDI and that additional investment liberalization on service sectors that showed the smallest FDI openness would be more effective on promoting FDI in the future. However, it should be noted that Korean government have already adopted and made much improvement on legal systems to promote FDI.
To make more practical progress, therefore, we need to focus on improving business and investment environment, such as “regulation free zone” that is currently being considered for the promotion. Amending numbers of FDI promotion systems that are already being implemented in correspondence to policy objectives would also make practical progress on promoting FDI in the future. Second, the estimation results on country’s financial market development showing significant and positive effects on M&A FDI across developed countries where Korea is included imply that advanced financial market is essential to promote FDI in the future. In particular, implementing policies that can promote more financial companies and produce professional manpower can strengthen the competitiveness of financial systems and can lead to promote more M&A FDI in the future. Furthermore, high-skilled labor and numbers of labor-management dispute cases having significant impact on greenfield FDI indicate that the government should support training programs that can produce professional manpower who can fit into interests of foreign firms and need to put forth additional efforts on improving labor-management relations.

 As global production networks proliferate, assembly processes tend to create less value added than other activities along value chains such as design, research and development (R&D), distribution, and after-sale services. In addition, domestic value added in gross exports turn out to be smaller than foreign value added in gross exports. As a result, which tasks along global value chains a company decides to participate in has become more important than how much a company exports. In other words, companies pay more attention to value added than gross exports.
This study decomposes the value added in gross exports into its components including domestic value added and foreign value added. Specifically, we exclude transaction costs such as net taxes on products for this study, which accounted for about 3 percent of total gross world exports from 1995 to 2011 on average. This study indicates that the share of Korean domestic value added in exports to exports in gross value decreased from 69.9 percent in 1995 to 55.4 percent in 2011, comparable to the shrinkage in the world average from 83.5 percent to 78.3 percent during the same period.
Domestic value added in exports returned to Korea increased from 0.5 percent to 0.6 percent while domestic value added reexported to third countries rose from 12.7 percent to 13.8 percent during the same period. On the contrary, foreign value added in exports increased substantially from 22.7 percent to 37.8 percent. This result reveals that Korean exports of parts and raw material have been utilized in a relatively small degree, while foreign components imported to Korea have been utilized for Korean exports in a relatively large degree.
The decomposition of value added in exports shows that a network of value added along global value chains centers around the United States, China, and the European Union. When we investigate the comparative advantage of Korean industries from 1995 to 2011, they turn out to have utilized the benefits of global value chains. Specifically, electronics, transport equipment, machinery, metal, distribution and transportation services, and telecommunication and transportation services have made the best of global production networks by efficiently outsourcing intermediate goods.
This study also investigates the determinants of value added in exports by estimating the expanded multi-sector gravity model, with panel data covering 13 countries and 18 sectors for 17 years from 1995 to 2011. Empirical evidence shows that trade costs such as tax and transportation costs reduce value added in exports, implying that trade facilitation measures and tax policy lowering trade costs are vital for the promotion of value added in exports.
We also find that material and service offshoring have a significant positive effect on value added in exports, supporting the notion that efficient offshoring of material and services inputs raises productivity and competitiveness in manufacturing as well as services industries. In addition, we find that regional trade agreements have significant value added trade creation effects. However, the magnitude of these effects is smaller than those of RTAs on gross exports.
This is because the reduction in trade costs prompts firms to split the stages of their production processes across member countries of RTAs. Thus, goods and services move across countries multiple times while the amount of value added contained in gross exports does not increase as significantly.
Furthermore, we find that a higher share of imported intermediates encourages participation in GVCs. Finally, we explore the determinants of industrial competitiveness measured by the trade specialization index, and find that the reduction of transaction costs is crucial for enhanced competitiveness. Also, service offshoring strengthens competitiveness in intermediates. The results from this study provide the following implications for Korean policy.
First, Korea needs to initiate industrial restructuring in order to tackle the issue of the fall of domestic value added in exports since the early 2000s. Second, it needs to set up strategies to upgrade its position along global value chains, considering that the networks of value chains depend on country and industry. Third, it needs to implement trade facilitation measures in order to reduce transaction costs, of which results for Korea turn out to be higher than the world average. Fourth, the role of the services sector is very important in upgrading the comparative advantage of manufacturing sectors. Finally, the improvement
of domestic regulations are urgently called for to facilitate the free movement of production factors and to efficiently utilize global value chains.

Contents

Executive Summary

I. Introduction

II. Literature Review 10

III. Data
1. Employment Exchange in India
2. Data Description

IV. Specification of a Matching Function in the Stochastic Frontier Framework

V. Estimation Results
1. Estimation of Matching Functions
2. Estimation of Stochastic Frontier Models to Produce Matching Efficiencies across States
3. Relationship between Matching Efficiencies and Variables of Interest

VI. Concluding Remarks

References 

We analyze state-level matching efficiency in the Indian labor market using stochastic frontier analysis. The key contribution of this research is the estimation of matching efficiency at the state level because the estimates can be used for a state-level measure of labor market conditions.
Next, we explore the relation between estimated matching efficiency and population density (or labor market flexibility). The results show that matching efficiency is heterogeneous across states with considerable variation in accordance with the regional diversity in India.
However, we find that there is no relationship between the estimated matching efficiency and the well-known labor market conditions of interest. The correlations are either close to zero or not statistically significant, suggesting that other regional diversity may affect matching efficiency in India. 

Preface

I. Introduction

II. Structural Problems of the Korean Economy: Dampened Ripple Effects from Export Sector and Decrease in the Growth of Households Income

1. Motivation
2. Methodology
3. Stylized Facts
4. Reasons for the Decline in the Growth of Domestic Demand
4.1. Dampened Ripple Effects from Export Sector
4.2. The Decrease in Growth of Households Income
5. Concluding Remarks

III. The Temporary Employment Contracts and the Productivity of Firms: Evidence from Korean Panel Data

1. Introduction
2. Empirical Specification
3. Data
4. Estimation Results
5. Concluding Remarks

IV. Households Debts and Consumption: Necessity-driven Entrepreneurs

1. Introduction
2. Necessity-driven Entrepreneurs
3. Empirical Framework
4. Empirical Results
5. Concluding Remarks

V. Conclusion

References

Appendix

Executive Summary 

Economic growth in Korea has slowed down dramatically after the Asian financial crisis of 1997. The average growth rate of real GDP of Korea before the crisis (1981-1996) was 9.3%, while it was reduced to 3.7% during the period (2003-2014) after the credit card lending boom following the financial crisis. Coincidently, the patterns of domestic demand growth before and after the crisis were similar to the GDP growth: the average growth rate of Korean real domestic demand was 8.8% and -0.3%, in the respective periods.
This remarkable decline in both growth rates should not be attributed to the factors that are linked to the short-run economic fluctuations because these phenomena have lasted more then 10 years after the Asian financial crisis. Instead, structural factors related to the domestic market or exports are more likely to induce the significant declines in the growth of these two variables. In this study, we focus on identifying those structural factors that are responsible for the decline in the growth rate of domestic demand after the Asian financial crisis, which may result in the decrease in economic growth.
Motivated by observing dramatic changes in the growth rates of the relevant variables such as GDP, domestic demand, investment, and exports, we consider two structural problems that the Korean economy faced after the Asian financial crisis: i) one is the dampened ripple effects of exports on domestic demand and thus on GDP; ii) the other is the decrease in the growth of household disposable income.
First, exports can contribute to the economic growth via two channels. One is the direct contribution to the GDP. The other is the indirect contribution to the GDP through the domestic demand (that is, the ripple effect of exports on GDP). As firms export more, they tend to use more production inputs and thus are more likely to increase investment and employment, which results in the increase in domestic demand. In fact, the data reveal that about one third of GDP growth can be accounted for by exports directly in the period of 1981-1996. This implies that two third of GDP growth can be explained by the domestic demand. In contrast, the Korean economic growth after the Asian financial crisis is entirely driven by export growth, that is, the growth of export sector does not boost domestic demand after the crisis. In other words, the ripple effect of export sectors on GDP has significantly dampened after the Asian financial crisis.
Furthermore, we found two potential reasons for the dampened ripple effect from the export sector. These reasons are closely related to changes in investment behaviors of large-sized Korean exporting firms before and after the Asian financial crisis: i) the large-sized exporting firms do not invest their earnings from exports any more to create new industries; ii) they tend to use more foreign value added contents for their exports and to increase outward FDI by participating in the Global Value Chains (GVCs).
Second, another structural factor that affects the pattern of domestic demand before and after the Asian financial crisis is closely associated with the decrease in the growth of household real disposable income. Its growth rate was 10.3% in the former period (1981-1996), which is higher than the GDP growth rate. Its growth rate, in contrast, was 2.3% after the financial crisis, which is lower than the GDP growth rate. This remarkable decrease in the growth of household income may influence household consumption, and hence economic growth. In fact, the data reveal that the real consumption growth rate was 8.4% in the former period and 2.4% in the latter period, respectively. These patterns of consumption growth rates before and after the crisis were similar to the patterns of both the GDP and the income growth rate. In addition, the decrease in household disposable income is more likely to induce increase in household debts and thus an increase in the burden of debt service.
This will further restrict consumption and domestic demand growth, which may result in an overall decline in economic growth. To be more specific, we pointed out three potential factors that are closely linked to the decrease in the growth of household disposable income. These reasons are related to the labor market reforms after the Asian financial crisis: i) a seizable number of necessity-driven entrepreneurs (i.e., self-employed households) whose income are relatively low, ii) a large proportion of temporary workers whose wages are about 70 to 80% of the regular workers, and iii) a relatively low wage in small and medium-sized enterprises (SMEs) which employ a large portion of total workforce.
In the two subsequent chapters, we examined the two issues related to the structural problems of the Korean economy using the micro-level data: i) a link between temporary employment contract and firms’ productivity and ii) a difference in consumption behavior between wage workers and self-employed households. Motivated by concerns that an increase in the share of temporary workers in total employment can potentially harm firm productivity, we empirically investigated the relationship between temporary employment and firms’ productivity. The estimated results show that using temporary workers decreases firms’ productivity.
Besides, we found some evidence that a higher conversion rate from temporary to permanent worker leads to the increase in firm’s productivity. Finally, we looked into the seriousness of the self-employed household debt that may negatively affect consumption, and thus the overall domestic demand. To do this, we examined the different patterns of consumption behavior between wage workers and self-employed households using the household-level panel survey data.
The key finding is that the financial debt of self-employed households is negatively associated with consumption expenditure, while this relationship is positive for wage workers. That is, the self-employed households tend to make a loan (i.e., business loans) that is not directly related to consumption itself. Rather, they tend to reduce their consumption due to a heavy debt burden from business loans.
To the extent that the dampened ripple effects from the export sectors after the Asian financial crisis are mainly due to the changed investment behaviors of large exporting firms, policy makers should develop policies which aim at providing a better environment where small and medium-sized firms can participate in global value chains more actively. Those firms are not likely to use more foreign value added contents or invest in foreign countries because of their small sizes and limited capabilities. Instead, they may participate in global value chains by attracting multinational firms. To do this, those firms should develop better technologies or produce high quality goods and/or services which can be differentiated from foreign small- and medium-sized firms so that they can have comparative advantages. And policies should be able to encourage small and medium-sized firms to develop those technologies and to produce those goods and services.
Most importantly, polices should be aimed at attracting foreign multinational firms so that domestic firms benefit from the active participation in global value chains. To the extent that the decrease in the growth of household disposable income is due to the presence of significant share of necessity-driven entrepreneurs and non-regular workers, and their relatively low income, policy makers should reform labor markets to deal with these issues. In particular, policies should be aimed at reducing the use of temporary workers by raising the conversion rate from temporary to permanent employment. In addition, alternative job opportunities which may absorb those self-employed workers should be created.
There is a large degree of human capital mismatch: retired workers, in general, are more likely better matches for new businesses such as food and beverage franchise and agency for selling mobile phones. If there exist jobs where they can take advantage of their human capital, they would have less incentive to open those businesses which contribute to decreasing labor productivity in the service sector. 

내용없음 

The influx of foreign investment to Korea began in the 1980’s, and increased dramatically following the establishment of the ‘Foreign Investment Promotion Act’ in 1998. However, it declined in the early 2000s because of global economic slowdown due to events such as the 9-11 terrorist attack and Information Technology Bubble Decay, etc. Investments have rebounded since 2004 and attracted more than 10 billion dollars thereafter, reaching a peak of 19 billion dollars in 2014.
Most governments believe that FDI contributes to economic development by creating jobs and introducing advanced technology and management practices to the host country. Based on this belief, governments provided various incentives such as tax breaks, relaxed regulations, and cash grants to attract multinational companies to their respective countries. This includes the Korean government, which changed its restrictive strategy to actively attract foreign firms since the Asian financial crisis by providing a variety of incentives for foreign firms.
As a result, foreign firms now account for about 20 percent of total exports and 6 percent of employment, and have had significant impacts throughout the economy. In recent days, some questions have been raised concerning differential effect of foreign firms on domestic small and medium sized enterprises (SMEs) and skilled labor, with subsequent discussions on the relationship of FDI and economic polarization. As multinational firms which are known to be more productive and possessed of more advanced technology enter the domestic market, they might bring about intense competition and crowd out domestic firms from the market, in particular SMEs.
Also, foreign firms in technology-intensive and services industries might demand more skilled labor, and thus increase wage premium for high-skilled labor. Although both foreign direct investment and economic polarization are very important issues, there are relatively few studies which investigate their relationship. It is this lack of research on FDI and economic polarization that provided motivation for this report, which examines whether foreign firms have differential impacts on the survival and growth of SMEs and increase wage premium for high-skilled labor. This was done by using foreign investment data from Korea's Ministry of Trade, Industry, and Energy; firm-level data from Statistics Korea; and survey on labor conditions by type of employment from Ministry of Employment and Labor.
According to the empirical investigation on FDI and exit and sales of domestic firms, foreign firms exert pressures to drive domestic firms from the market, and SMEs in particular. In addition, crowding-out effects are shown to be stronger for SMEs in the manufacturing sector and the low-export group. In contrast, according to the empirical investigation on FDI and change in sales of domestic firms, the presence of foreign firms in the same industry increases sales of domestic firms; the magnitude of the change being larger, in particular, for SMEs. Also, the positive impact are larger for SMEs in the manufacturing sector and high-export group.
To summarize the results on FDI and survival/growth of domestic firms, we cannot say that FDI aggravates polarization of firms because while it drives SMEs from the market on one hand, its raises their sales on the other. From the perspective of the whole economy, foreign firms raise productivity of the economy by removing uncompetitive firms from the market and then increasing productivity of the surviving domestic firms. According to the theoretical and empirical investigation on FDI and wage premium for skilled labor, we found that FDI in specific sectors, such as electronics and electricity, food and accommodation, finance and insurance, machine equipment, business service, wholesale and retail distribution, other manufacturing, professional engineering in chemical industries; increases wage premium for high-skilled labor.
In other words, foreign firms in these industries are more skill intensive, demand more high-skilled labor, and hence increase wage premium for high-skilled labor. Also, since these industries have common characteristics of having high levels of FDI, the impact of FDI on the increase in the wage premium for high-skilled labor can be interpreted as not being limited to these industries but in general.
These results provide useful policy implications which bolster the positive impact of foreign firms. As foreign firms increase sales of domestic survival firms, the mechanism for linkage and technology diffusion effects should be expanded to reinforce growth of domestic firms. For example, there should be places to exchange business information and opportunities, and the government should provide various incentives for foreign firms to develop linkages with domestic firms. Furthermore, the linkage between foreign and domestic firms should be expanded to services such as R&D, accounting, consulting etc. beyond the manufacturing sector.
Also, as presence of foreign firms in the same industry increases wage premium for skilled-labor, adequate labor reallocation and job training are needed to balance supply and demand of skilled-labor forces. For example, the government should facilitate efficient matching through programs to connect domestic labor supply and demand of foreign firms. In addition, the government should strengthen the social safety net for low-skilled labor, to aim for inclusive growth.