Executive Summary

Ⅰ. Introduction

Ⅱ. Measurement of Market Integration

Ⅲ. A Theory of PPP

Ⅳ. Empirical Methods

Ⅴ. Summary Statistics of Consumer Prices and Exchange Rates for APEC Member Economies
 
Ⅵ. Empirical Methods
   1. Panel Unit Root Test Results
   2. Robustness

Ⅶ. Concluding Remarks

References 

This paper examines persistent behavior of deviations from purchasing power parity (PPP) constructed using consumer price indices and nominal exchange rates for APEC member economies over the period of 1981-2015. In particular, we ask if these deviations tend to converge to their long run equilibrium value. For this, we consider three different sample periods of 1981-2015, 1997-2015, and 1981-1996. We find that the panel unit root test rejects the unit root hypothesis that a deviation from PPP does not converge to its long run value for the period of 1997-2015 but does not reject it for the other two periods. We then investigate how quickly this deviation converges to its long run value and find that a half-life of a deviation from PPP is 5.7 quarters, which is much quicker than the estimates of 3 to 5 years reported by previous studies. This result is consistent with the argument that globalization and advancement in transportation and information technology significantly contribute to lowering trade barriers among APEC member economies.

Keywords: PPP, half-life, panel unit root tests, deviations from PPP, trade barriers
JEL Classification: F31, F41 

  The year 2015 marked the 20th anniversary of the establishment of the World Trade Organization (WTO). Over the past 20 years, notwithstanding certain difficulties in concluding the Doha Development Agenda (DDA) negotiations, the WTO to a certain degree has achieved one of its original missions: promoting trade liberalization through bilateral free trade agreements (FTAs) and regional or plurilateral FTAs. Since the global financial crisis in 2008, however, the growing criticism of globalization based on neo-liberalism has created the need for a new trade paradigm. In particular, Brexit and the election of Donald Trump as the 45th US President in 2016 have fueled the uncertainty hanging over the global economy and rising protectionism, which could eventually provoke trade war. Upon his inauguration, President Trump withdrew from the Trans-Pacific Partnership (TPP) and the United States introduced a new set of trade policy measures that could adversely affect world trade volume and the existing global trade system.
  Recent changes in the international trade environment have presented new challenges for policymakers, particularly for those in Korea, which is highly interconnected with the world economy through an extensive network of global value chains (GVCs). Korea has regarded itself as the most benefited member of the WTO multilateral trading system (MTS). By adopting a simultaneous and multiple FTA negotiations strategy, Korea has increased its economic expansion and grown into a global FTA hub. However, it is time for Korea to consider revising its current trade policy centered on the expansion of bilateral FTAs, which may cause a spaghetti-bowl effect where a host of bilateral FTAs increase trade costs due to the complexity and diversity of rules of origin (ROO). As such, plurilateral FTAs have emerged as a viable alternative to the multilateral trading system or bilateral FTAs.
  This study investigates the effect of rules of origin on trade costs. In particular, we examine different types of cumulative rules of origin adopted by various FTAs across the world ‒ how they are arranged and how they work. Existing literature on the effect of ROO on trade costs provides mixed results. Theoretically, allowing cumulation in FTAs should bring trade costs down. Nevertheless, some practical issues in complying with the rules of origin and certification and verification requirements may prevent companies from taking advantage of cumulative rules of origin. Research methods employed by this study include both the conventional way of indirect estimation in calculating trade costs through the trade creation effect, and direct estimation of trade costs which employs the methodology recently made available by Novy (2013). Then we use these estimated trade costs in the computable general equilibrium (CGE) model of the Global Trade Analysis Project (GTAP) to analyze the economic effects of ROO on trade costs. We apply the analysis to mega-FTAs in the Asia Pacific region such as the Regional Comprehensive Economic Partnership (RCEP) and TPP-11 (TPP without the United States), as well as a potential FTA between Korea and Mercosur. Our results show that all three different types of cumulation (bilateral, diagonal, and full) reduce trade costs with the magnitude greatest for full cumulation.
  Our empirical and policy simulation results suggest that policymakers should make efforts to simplify and harmonize various ROOs and pursue single ROO with full cumulation in FTA negotiations. In addition to simplification and harmonization of ROOs, institutional support and assistance in the areas of ROO and cumulation are essential for small and medium enterprises (SMEs) to reduce trade costs and fully entertain the benefits of FTAs. Finally it would be desirable for Korea to participate in negotiations of plurilateral FTAs rather than bilateral FTAs. 

  The exchange rate is one of the most influential factors in the economy in Korea as Korea highly depend on the external sector. In an economy that is highly dependent on the foreign countries, changes in exchange rates affect imports and exports and cause changes in growth and income. Also, it affects the price level, the competitiveness of enterprises, and the level of employment.
  In this study, we investigated the effects of exchange rate not only on macroeconomic analysis but also extended to a micro analysis by using the firm-level data. It may contribute to more accurate and efficient policy responses by combining macroeconomic policy with microeconomic analysis.
  In Chapter 2, we analysis the effect of exchange rates on macroeconomic aggregate data as in many previous studies. We also analyze the impact of exchange rates on the supply side whereas most previous researches mainly focus on the demand side. Moreover, unlike the method of analyzing the effect of specific variables, comprehensive analysis has performed considering the total effects of the related variables. The main findings from Chapter 2 are as follows: First, the appreciation of the Korean Won may have a negative impact on economic growth, consumption, investment, and exports. Second, the level of the exchange rate and the volatility of the exchange rate have substantially increased in the 2000s, and the volatility of macroeconomic variables also has increased. Third, the impact of exchange rates on the macroeconomic variables would remain shortly and become insignificant in the long-run.
  The main policy implications of these findings are as follows: First, the exchange rate changes can cause economic growth and exports to decline. Especially, positive and negative effects are different for each industry, making it difficult to use the exchange rate as a policy tool. Therefore, policy-maker should be concerned as it is not easy to achieve the policy goal and may cause conflict between economic entities if she wants to achieve the specific policy goal by influencing the exchange rate. Second, the effect of the exchange rate change on macroeconomic variables remains only in the short-run. Thus, the effectiveness of exchange rate policy as a policy tool is low. It is because the effect of changes in the real sector may be neutralized by changes in the capital market due to the financial liberalization progress. Third, considering the volatility of the foreign exchange market, changes in the level, and the different effects of each industry, the exchange rate policy should be aimed at maintaining the stability of the exchange rate rather than level. Since the policy on the level of the exchange rate is less effective and can lead an international conflict, the policy that reduces the volatility can lower the transaction cost of the economic agents and obtain the more certain policy effect. Fourth, since the exchange rate policy itself appears to have limited influence, it is desirable to enhance the efficiency of the exchange rate policy by using the so called policy mix method in which the policy is implemented in parallel with other related policies. Fifth, It is necessary to promote foreign investment and policies to boost domestic demand aggressively as the devaluation of the exchange rate may improve the current account, but have negative impacts on other macroeconomic variables such as employment and growth.
  In Chapter 3, we conduct a micro analysis by using the firm-level data. The main findings are as follows: The decline in the real effective exchange rate cause that firms that are highly dependent on exports increase their price competitiveness and increase their productivity. On the other hand, firms with low exports and high reliance on intermediate imports have little impacts on their productivity. These results are consistent with the economic theory, and this fact is confirmed in the micro data of Korean companies. In particular, most of the firms in the service sector have a low proportion or exports, so the decline in real exchange rate has a relatively large negative impact on their productivity as compared to firms in the manufacturing sector.
  In Chapter 4, we analyze the exchange exposure of the listed firms. The main findings are as follows: increase in the exchange rate has negative effects on a relatively significant portion of the firm in the short-run. It may be attributed to the fact that the Korean Won depreciation may drop the firm’s value. Also, the withdrawal of funds from foreign investors who concerned about the stock price fall in dollar terms may affect the situation. However, the share of firms, whose value is positively influenced by the increase in the exchange, is relatively increased in the medium- and long-run. In particular, we find that firms with substantial external assets, firms with few external debt, firms with high capital adequacy ratio, firms with high cash holding ratio, and companies with high profitability are positively influenced by the increase in the exchange rate.
  Chapter 5 summarizes the implications and derives policy implications as follows.
  First, the increase in the exchange rate is not necessarily positive impacts on macroeconomic variables. This fact is derived not only macroeconomic analysis using aggregate data but also in the micro-level analysis using individual firm data. In other words, unlike the conventional wisdom, depreciation of the Korean Won may have a negative impact on the Korean economy for a specified period of time. This implies that the devaluation of the exchange rate does not necessarily contribute to the expansion of exports or the economic growth.
  Second, although the effects of exchange rate fluctuations are short-term, the volatility of exchange rates has increased. Policies that aimed at lowering exchange rate volatility and strengthening stability are more likely to contribute to the economy rather than targeting the level of the exchange rate. This implies that not only is the effect of external factors on the Korean economy expanded, but also the real and financial sectors have influences mutually. Thus, those policies are desirable as the effect of the exchange can surge in the specific period.
  Third, the effects of exchange rate fluctuations vary across industries and firms. Thus a customized exchange rate policy is required. Since firms have different characteristics from those whose exposure to the exchange rate is either positive or negative, it is analyzed that the increase of exchange rate does not necessarily provide favorable conditions for all firms. The sign of effects depends on the share of exports or intermediate imports. Achieving industry-level targets only by the exchange rate policies is difficult. Thus, it is necessary to develop policies that are related to fiscal policy or employment policy to control the negative influences.
  This study examines the impact of changes in the exchange rate at the time when the overall economic conditions such as the industrial structure, demographic changes, and the capital market condition in Korea are changing. In particular, we use firm-level data to complement the previous studies mainly focus on the aggregate level. We can partly expect the macroeconomic effects by summing up the effect of micro-level analysis. However, the linkage between macroeconomic effects and microeconomic analysis is still weak and limited. In the future, more efficient research methods can be expected.
  What we emphasize in this study is that devaluation of it currency is not necessarily beneficial to the economy. Most of the debates on exchange rates are the adequacy level of the exchange rate. It is based on the assumption that depreciation of the exchange rate is beneficial to economic growth and the economy. However, this study shows that this assumption is not valid. This may vary depending on the level of exchange rate or the rate of exchange rate change. However, these issues are beyond the scope of the study. Therefore, it is necessary to further investigate the effect of exchange rate depreciation in depth by analyzing the issues related to exchange rate fluctuation in the future studies. 

  As the world is entering the new age of Industrial Revolution, advanced economies such as the United States, Germany and Japan are striving to lead the trend and are preparing to cope with new system of advanced technologies. Three countries have different strengths to achieve to promote new revolution, but they share common perspectives that the Fourth Industrial Revolution (4th IR) is the basis of the ‘Manufacturing Innovation’ or ‘Digital Manufacturing’. This study focuses on the 4th IR related policies of the three countries to make an implication for Korea to draw out its own policy for digital innovation/digital manufacturing. Even though differences exist in economic/social structure, industrial bases and technologies, it is important to analyze the 4th IR policies in three advanced countries as all their governments are striving to prepare strategies that promote economic growth in the future. Furthermore, the work focuses on the cooperating organizations of the academia, businesses and government such as Plattform Industrie 4.0.
  The second chapter “The Concept of Digital Economy and the Fourth Industrial Revolution” defines terminologies relevant to the 4th IR as the description of the 4th IR concept differs globally as there is no clear definition to it. IT revolution in the mid-90s followed by mobile platform technology led to a new ecosystem of “Digital Economy” or “Internet Economy”. Such evolvement developed the Internet of Things (IoT) technology, which is a critical component of the 4th IR, which connects mobility, home and factory to the Internet. Moreover, the national strategies of the 4th IR linked to the manufacturing, such as Germany’s Industrie 4.0 and the U.S. Industrial Internet of Things (IIoT), are outlined with organizations and consortiums that are established as means of achieving 4th IR.
  The third chapter “The Fourth Industrial Revolution in the U.S.” emphasizes that the American government and businesses identify their own roles in achieving 4th IR in market based manner. The U.S. government did not set up the long-term strategy or roadmap for the 4th IR, but it is preparing the systems for the issues that emerge from the technological revolution such as data security, autonomous driving vehicle and so forth. On the other hand, it is the American companies that create new business models in new technology fields such as big data analysis, cloud computing, augmented reality (AR) that can be adapted to manufacturing industry. In addition, multinational companies in the United States are gathering to form consortia in their interested areas to make their own system for 4th IR related activities and to cooperate at international level. Such liberal market economic movement in the United States is possible under the entrepreneurship that is rather unique in the world, which endlessly creates new companies that implement new ideas in the market. Various entrepreneurial activities from “Startup America Partnership” provides network to entrepreneurs with mentors and investors from corporate, venture capitals that lead to efficient manner to promote innovation.
  The fourth chapter “Germany’s Fourth Industrial Revolution” describes the background how Germany came with the idea of “Industrie 4.0” and policies that are in action. “Plattform Industrie 4.0 (Platform)”is the German organization that promotes Industrie 4.0 with various stakeholders in German society including governments, industrial associations, companies, academic institutions and others. This Platform acts as a mainstream organization for decision making in implementation of Industrie 4.0 policies which are supported by the working groups in various subjects such as standardization, research and innovation, data security, legal framework and labor. Furthermore, the Platform has mutual communication channel that efficiently delivers the messages and suggestions from the society level to governments and vice versa. Industrial associations takes important part as they gather and organize the suggestions from their members to convey to the government and as they act as a mediator that disseminate government policies to its stakeholders. In fact, Germany’s government and private players have analyzed their strengths to achieve the 4th IR prior to setting up Industrie 4.0 agenda as they also seek for cooperation domestically and internationally to promote their program. For example, German companies are cooperating to develop standardization model called “Reference Architecture Model Industrie 4.0 (RAMI4.0)” and are continuing to seek for opportunities to work with other countries, including government and corporate, to set it as one of international standard for digital manufacturing system. Moreover, Germany is considering small and medium enterprises (SMEs) as a final piece to achieve Industrie 4.0 that its government and business societies are concentrating on its inclusive development.
  The fifth chapter “Japan’s Fourth Industrial Revolution” reviews the Japan’s manufacturing industrial policies that are linked to the 4th IR. Through government’s growth strategies 2017, Japanese administration selected Smart Health, Smart Mobility, Smart Supply-Chain, Smart City and Infrastructure and Fintech as five main areas to promote its future economic growth. Out of five areas, this study concentrates on Japan’s policies on Smart Manufacturing.
  Japan has brought some specific strategies to support its Smart Manufacturing industry from the cooperation among academia- businesses-government such as RRI, ITAC, and IVI. Its strategies include Smart Factory pilot project, test-beds, SME support, international standardization. However, Japan needs to overcome its closed technology-innovation system. Network between large companies and middle-sized companies is strong, but the cooperation between corporate and academia/public research institutions is rather weak, which can be shown through the fact that most core technology related patents are owned by American companies. Also, Japan’s inflexible labor market is another factor that hinders its 4th IR. The 4th IR technologies such as AI is expected to substitute human labor in the future, but many experts brings up the point that the such technologies will have limited impact in Japanese market due to its inflexibility of labor market. Therefore, Japanese government needs to encourage more flexibility in its labor system for its economy to integrate IT, robot and AI technologies fully to its market.
  This paper draws out four policy implications from the analysis made in the above sections. First, Korea needs a 4th IR promoting organization that is led under the cooperation among academia-businesses- government. The necessity of national controlling system or platform in the context of the 4th IR or new industry creation is discussed in Korea, but actual system has yet to be implemented. U.S., Germany and Japan cases show that the 4th IR is not led by the governmental support, such as financing and tax credits, to certain industries or corporate, but rather the government and businesses must set up a system together that they can cooperate to develop and share technology, which is mostly known as “Open Innovation” system. Moreover, such system should be supported by the government in setting up relevant regulatory framework and in making changes of the traditional system to adjust to the new environment under the 4th IR. Secondly, regulatory reform and system alignment should be come ahead of the 4th IR. For now, enacting a bill called “Regulatory Free Zone Special Law” seems to be the regulatory movement that can be take in action imminently in Korea. The bill is related to autonomous driving vehicles and drones where twelve states and Washington D.C. in the U.S. allowed test-driving of autonomous vehicles legally since June 2011 and Japan is on the legal process of permitting various sets of autonomous vehicles and drones test-driving in their National Strategic Special Zones. The same bill in Korea will also efficiently lead to the Big Data commercialization as no action was taken after the introduction of “Guidelines for De-identification of Personal Data”. Also, it is important to take a note of Japan’s movement as its government is focusing to support promoting the Big Data market as a part of developing Smart Manufacturing. Thirdly, support to the SMEs must be followed as a part of preparing the 4th IR era. The Ministry of Trade, Industry and Energy of Korea is promoting the installation and expansion of Smart Factories as a part of “Innovation in Manufacturing 3.0 Strategy”, but Korean government needs to clear out the way for its original SME support policies simultaneously. Korea has its SME policies such as IT solution support, automation of factories along with many others, but its linkage to the 4th IR related businesses seems to be rather ambiguous at this point. German government is striving to focus all its relevant SME policies to Industrie 4.0, which can be represented through its “Mittelstand 4.0” policy. Fourthly, the key point of the 4th IR is international cooperation. Korean government has its cooperation network with the U.S. and Japan in cyber security and SME support, but its limitation is noticeable when it is compared to the cooperation system among the advanced economies. Regarding the 4th IR, it is worth to note that Germany and Japan agreed to work together on nine areas which include cyber security, international standardization, regulatory reform, SME support, R&D, academia-businesses-government organization, human capital development in digitization, automotives, ICT in March 2017. Lastly, Korean government should put effort in supporting Korean ventures in advanced market such as Silicon Valley by connecting them to the local network in venture capital or accelerators. 

  The economic environment of MERCOSUR has been rapidly changing after the emergence of market-friendly governments in Argentina and Brazil and the possibility of starting negotiations for a Korea-MERCOSUR trade agreement is growing. This study is designed to respond to such circumstances and to provide a new breakthrough in the development of previously stagnant bilateral economic relations. The study focuses especially on cooperation among firms, which has recently attracted attention as one of the new cooperation measures between Korea and MERCOSUR.
  In line with these research objectives, the study consists of six chapters. Chapter 2 depicts MERCOSUR’s recent economic environment developments in depth. In addition, we review the results of MERCOSUR’s productive integration policy while considering the rapidly reorganizing international division of labor structure. Finally, we analyze the major changes in the MERCOSUR trade policy and present its future prospects after the emergence of a new government in favor of FTA policies in Argentina and Brazil.
  Chapter 3 explores and analyzes cases of cooperation between firms through which we draw implications for Korean firms wishing to cooperate with MERCOSUR firms. In particular, based on the inter-firm bridge model, the study divides the various types of cooperation into the categories of manufacturing/production, logistics/infrastructure, distribution/marketing, financial cooperation and R&D/technical cooperation.
  Chapter 4 uses quantitative analysis techniques to identify promising areas of cooperation between Korea and MERCOSUR. The study uses revealed comparative advantage (RCA) to identify potential areas of cooperation within the export sector between Korea and MERCOSUR, and the input-output tables provided by the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) for the investment sector. In addition, the study proposes future cooperation areas based on MERCOSUR member countries’ level of participation in the global value chain and the level of product integration among the member countries.
  Chapter 5 suggests ways to invigorate cooperation among firms of Korea and MERCOSUR, compared to the current state of cooperation. First, based on the results of surveys conducted by industry associations in four countries, we analyze the cooperation demand, preferred cooperation method and proposals for the government. Then we summarize the results of the above research to elucidate ways to stimulate cooperation at the firm level, and suggest ways to support such cooperation at the government level.
  Finally, Chapter 6 summarizes the results of the study and suggests a comprehensive plan for strengthening cooperation between Korea and MERCOSUR. First, both governments and firms must swiftly recognize the rapid changes within the economic environment of MERCOSUR and prepare countermeasures. MERCOSUR’s two major countries, Argentina and Brazil, are facing major changes in the external trade environment such as the end of the primary product boom caused by slowing economic growth in China and the rise of protectionism within developed countries following Brexit and the Trump administration taking office, and are actively pursuing open policies to secure new growth engines. In particular, the upcoming EU-MERCOSUR FTA is expected to have a significant impact not only on the advancement of MERCOSUR’s foreign trade norms but also on the entry of firms to those markets from non-FTA nations. In the MERCOSUR market, the entry of Korean companies, which compete with their EU counterparts, may also be affected in the export sector, in particular due to tariff cuts. The Korean government and its firms should precisely identify and respond to MERCOSUR’s internal and external changes in the business environment, and prepare joint strategies to cope with such changes.
  Second, Korea should actively utilize the MERCOSUR Trade Agreement (TA) as a turning point in the development of the economic relationship between Korea and MERCOSUR. As the recession of the MERCOSUR member countries has worn on, interest in the MERCOSUR market by the Korean companies and the government has been in marked decline: the suspension of Korean Air’s Sao Paulo operations in September 2016 is one such symbolic event. The TA between the two, however, will be a boon to invigorate the importance of the MERCOSUR market in Korea and to revitalize stagnant cooperation. As we lack cooperation channels with MERCOSUR, we need to use the TA as a platform for expanding cooperation. For this purpose, it is necessary to stipulate a separate chapter of business cooperation within the FTA agreement and to use it as an institutional channel for future cooperation between companies from the two regions.
  Third, the two regions should build various forms of sustainable platforms for business cooperation. In previous surveys and interviews with companies from both sides, we have identified a high degree of interest in building business cooperation channels. However, most of the cooperation channels between the two regions are only temporary or one-time events. In order to meet the cooperation demands of both regions, it will be necessary to establish lasting, diverse channels of cooperation. A Korean Desk, for example, should be established within the investment promotion agencies of MERCOSUR countries to identify and help establish business partners among enterprises. A MERCOSUR Technology Innovation Center or MERCOSUR Export Incubator could also serves as helpful channels to support Korean SMEs with the technological capabilities necessary to enter the MERCOSUR market. In addition, it is necessary to establish a B2B cooperation platform with regional development banks, including the Inter-American Development Bank (IDB) and Development Bank of Latin America (CAF), which have large financial mobilization powers and business networks in Latin America.
  Fourth, a comprehensive cooperation strategy at the regional integration level is needed. Cooperation with MERCOSUR remains at the level of individual member countries rather than MERCOSUR as a whole. It will be necessary to pursue an integrated cooperation strategy in parallel with bilateral cooperation as a means to complement the gap between bilateral cooperation through multilateral cooperation at an integrated level. Deployment of integrated local currency payment systems between Korea and MERCOSUR, participation in the MERCOSUR production integration program, establishment of an export incubator targeting the MERCOSUR market and operation of a Korea-MERCOSUR business council are among the potential co-op initiatives that can be implemented across MERCOSUR.
  Finally, Korean firms need to establish a strategy to accurately understand and utilize the strategic value of business aspects present within MERCOSUR member countries and companies. In particular, in order to establish an entry strategy aimed at the MERCOSUR integrated market, it will be necessary to accurately grasp the characteristics of the market of individual member countries. For instance, though their value as end-consumer markets lags behind Brazil and Argentina, Paraguay and Uruguay’s potential as a production and logistics base for entry into the Brazilian and Argentine markets is relatively high. One example is THN, an automobile parts company aimed at the Brazilian market that has built production bases in Paraguay due to its simplified labor management and low wages. In addition to the diversification of target countries, a change in the paradigm of entry mode is required; we need to move beyond simple exports or investment measures to more sophisticated, collaborative relationships such as strategic alliances, joint ventures, and technical cooperation with local companies. Hana Micron’s technological cooperation and Dongkuk Steel-POSCO-Vale’s joint venture (CSP) are examples of new possibilities for cooperation between the two regions. 

  The global trade slowdown since 2012 is reputed to be very astonishing in that it was unpredictable in terms of the magnitude. This trade slowdown was cyclical in that it mainly resulted from the global economic recessions especially in China and Europe. Also, this phenomena can be explained by structural reasons such as the fall in the income elasticity of trade, that is, the rise in income does not contribute to the trade expansion as it used to. This study aims to investigate the structural change in global trade mainly using the world input-output database and to decompose the change in value added exports into three relevant factors.
  This study reveals that the composition of global commodity demand has changed in recent years and the share of intermediate goods to the total import has declined as the low economic growth rate, low price level, high interest rate, and high unemployment rate have dominated the global economy since 2012. Chinese re-balancing turns out to have reduced the demand for import from the world as China, the global factory, transitioned from an export-oriented development strategy to policy focusing on domestic demand. The global value chain turns out to have diminished since the global financial crisis, thereby contributing to the global trade slowdown. The non-tariff barriers such as anti-dumping duties, TBT, and SPS, among others, have been more prevalent in recent years while the average tariff rates in most of the countries have been falling since the mid-1990s.
  On the other hand, this paper estimated value added exports (VAX) by using the World Input-Output Database released in 2016, in order to analyze causes of the recent global trade slowdown. We also decomposed the change in value added exports into the three factors of value-added coefficients, change in input structure, and change in final demands. According to the results, the change in value added exports in Korea are largely explained by the change in input structure, and change in value-added coefficients. Since 2012, the increase in final demands has played a major role in the recovery of value added exports at world level, while in Korea, increase in input structure explains more of rise in value added exports. That is to say, the change in value added export is cyclical at the world level, while structural in the case of Korea.
  The findings of this study indicate that it is crucial for Korea to reinforce the core competence of domestic industries in line with the following. First, Korean industries need to diversify their export products and gear up for standardization of parts and materials, thereby pursuing preemptive industrial restructuring. Second, Korean industries need to strengthen the knowledge intensity of high-skilled labor and make the best of global value chains. Third, the Korean government needs to support processes to improve transaction practices and incentive systems for large companies and small- and medium-sized companies, thereby establishing a fair market mechanism. Finally, the Korean government will need to contribute to multilateral as well as regional trade liberalization. 

  2017 marks the 5th year of Kim Jong Un’s reign, and evaluating the economic performance during this period is meaningful in that by doing so we can measure the future direction of the North Korean economy. However, despite the great efforts made to survey the North Korean economy, there is still only a superficial understanding regarding its economic size, industrial policies, industrial situation, and factories.
  The purpose of this study is to provide a new type of perspective through analyzing new kinds of data to help evaluate the North Korean economy. To this end, we provide a comparison between the industrial policies of the Kim Il Sung and Kim Jong Il regimes and the industrial policies emphasized since Kim Jong Un came to power. We then analyze the North Korean import and export data by industry, technology level, and utility purposes. Finally, this research considers the changes in North Korea’s industrial policy and import and export statistics to assess the economic situation of North Korea and the outcomes of its industrial policy after Kim Jong Un’s incumbency, and predicts the effect of sanctions on North Korea’s economy.
  Specifically, Chapter 2 provides an analysis of the transition process of North Korea’s industrial policies and those that have been emphasized after Kim Jong Un came into power. Section 1 analyzes the implications of North Korea’s foreign relations development strategy in light of its industrial policy. We show how the establishment and emphasis of the three major policy lines for North Korean industrial policies (i.e., the policy of autonomous national economic construction, the policy of parallel development of economy and nuclear weapons (byungjin policy), and the policy of prioritizing heavy industry development while simultaneously developing agricultural and light industries) evolved based on changes in its external circumstances (e.g., the inter-Korean armistice, Sino-Soviet dispute, competition with South Korea, collapse of the socialist economy). Section 2 summarizes the industrial policies of the Kim Jong Un regime, and then identifies the commonalities and differences vis–à–vis the previous Kim Il Sung and Kim Jong Il regimes. Based on a content analysis of the New Year’s address and Rodong Sinmun, North Korea’s state media, as well as interviews with North Korean defectors and people who have visited North Korea, we explain the pragmatic nature of emphasizing short-term achievements and avoiding large-scale heavy industries investment, focusing on the parallel pursuit of economic construction and nuclear armed forces construction, which are the characteristics of the Kim Jong Un regime.
  Chapter 3 jointly analyzes the changes in industrial policy and import composition. Section 1 summarizes the industrial policies proposed in Chapter 2 and summarizes the various issues and solutions that can be raised when linking each industrial policy with changes in import composition. In addition to industrial policies, we also considered the proliferation of the market and foreign currency usage in North Korea, economic growth and increase of income, preference for science and technology (resource consumption and production cost reduction), and inflation. In Section 2, we analyze the changes in import composition with three methodologies. First, we analyze the characteristics of the change in imports from before Kim Jong Un’s leadership to the early years of his leadership. There are three time points in this respect: 2005 (during Kim Jong-il’s rule), 2010 (end of the Kim Jong-il regime), and 2015 (the beginning of Kim Jong Un’s rule). Group 1 consists of items whose imports decreased in both 2010 and 2015, Group 2 consists of items whose imports increased in both 2010 and 2015, Group 3 consists of items that increased in 2010 but decreased in 2015, and Group 4 consists of items that decreased in 2010 but increased in 2015. Industrial categories (grouped in 2 digit HS code levels) consist of twelve types - agriculture, fisheries, chemicals, electronics, wood, machinery, minerals, plastics and rubber, metals, clothing, transport equipment and others. Second, North Korean imports are analyzed in terms of changes in the share of intermediate goods, capital goods, and consumer goods. Through this, we confirm whether North Korea has succeeded in implementing the policies of localization and normalization of industry, which it has emphasized. Third, we analyze the technology level of imported goods in North Korea. The level of technology was analyzed from the three aspects of “change of technology level by industry,” “change of technology level by purpose of use,” and “change of technology level by both industry and purpose.” In short, North Korea shows the characteristics of industrial and technological development at a level similar to South Korea in the 1970s and 1980s. Through analyzing the level of technology in North Korean import goods, we discover how North Korea is utilizing advanced overseas technology.
  Chapter 4 analyzes changes in the composition of exports. In addition, we summarize the changes in industrial and trade policies prompted by changes in external conditions of countries similar to those of North Korea. Based on the above discussion, we also show how sanctions against North Korea would impact its economy. Chapter 4 differs from Chapter 3 in that exports are affected by factors compared to imports. While imports are affected by changes in domestic industrial policies, socioeconomic economic activities and consumption trends, exports are mainly influenced by external factors such as strengthened international sanctions against North Korea and the slowing growth of the Chinese economy. Section 1 summarizes the industrial policies linked to exports. In Section 2, we analyze the changes in the composition of each group by industrial sector, the change of percentages by usage purpose, and the change of technology level among industries in accordance with the three methodologies of Section 2, Chapter 3. In Section 3, we select a transitional country with similar economic and industrial policies to North Korea, and then investigate the industrial policy that the state has pursued to respond to changes in its trade environment (reduction in economic income of major trading partners, economic crisis, etc.), after which we analyze the consequent ripple effect. Finally, Section 4 analyzes the effects of international sanctions on the North Korean economy.
  In Chapter 5, we analyze the linkages between foreign trade and industrial policies, and propose policies to normalize inter-Korean economic cooperation. Section 1 assesses and forecasts the present and future of the North Korean economy. At present, the North Korean economy seems to be gradually recovering from poverty and chronic economic downturn, albeit very slowly. As long as the strengthening of sanctions against North Korea continues, it is unlikely that its economy will continue on the path of normalization and improvement. Section 2 assesses the outcome of Kim Jong Un’s industrial policy. We find that the industrial policy newly emphasized by the Kim Jong Un regime is projected to some degree on the changes in import statistics. However, due to limitation of data, we could not clearly distinguish Kim Jong Un ’s byungjin policy from Kim Il Sung’ s and Kim Jong Il ’s policies. Section 3 predicts the impact that sanctions against North Korea will have on its economy. In the mid- and long-term, sanctions against North Korea will inevitably have a negative impact on its economy. However, the short-term impact is likely to depend on how North Korea responds. Section 4 suggests proposals for inter-Korean economic cooperation based on the above discussion. 

  The World Bank estimates that US $1.5 trillion, or 2 percent of global GDP, is paid each year in bribery. Moreover, as globalization advances and economic integration deepens, this corruption undermines and distorts fair competition in international transactions as it induces misallocation of resources. The OECD (Anti-Bribery Convention of 1997) and the UN (Anti-Corruption Convention of 2003) have established legally binding standards to fight against corruption. Korea is a party to the OECD (United Nations) Anti-Bribery (Corruption) Convention, and is actively engaged in anti-corruption activities in the international community, including the G20 and APEC. However, over the years Korea has been ceaselessly embroiled in bribery scandals, which has damaged its global image and reputation. According to the 2016 survey of CPI (Corruption Perception Index) conducted by Transparency International, Korea ranked 52nd place out of 176 countries, a rank plunge by 15 steps compared to the previous year.
  From this point of view, this study aims to empirically examine how corruption affects trade, economic growth and welfare. Based on these empirical findings, policy implications and suggestions for the successful implementation of anti-corruption policy will be drawn. These evidence-based analyses and policy suggestions can then be used to form a public consensus on the benefits of successfully implementing anti-corruption policy.
  Chapter 2 explores anti-corruption efforts taking place in the international community. The members of the OECD concluded the 1997 OECD Anti-Bribery Convention and 2009 Recommendation. In addition to these measures, the OECD published the Guidelines for Multinational Enterprises to combat bribery in international business transactions. In 2003 the United Nations Convention against Corruption (UNCAC) was concluded at the UN, making it the most comprehensive and universal of international anti-corruption instruments, and currently state members are undergoing Implementation Review. The G20 is biannually publishing the G20 Anti-Corruption Action Plan and has been releasing its High-Level Principles series on several anti-corruption issues. The APEC, OAS, EU have also been contributing to the enhancement of anti-corruption policies and capacities in the region. The WTO failed to conclude anti-corruption norms but some regulations in the Government Procurement Agreement and Trade Facilitation Agreement have been designed to improve transparency and tackle corruption. Free trade agreements initiated by the U.S. such as the KORUS FTA and TPPA include anti-corruption provisions and the contents of those provisions have evolved over time.
  In Chapter 3, we attempted to examine the inefficient and ineffective elements embedded in Korean anti-corruption policy and its implementation. We also utilize the outcome of surveys produced by the Transparency International (TI), the International Institute for Management Development (IMD), World Economic Forum (WEF) and Korea’s Anti-Corruption and Civil Rights Commission. The results of the analyses are as follows: ① Inefficiency of government anti-corruption policy, ② Low public awareness of anti-corruption participation, and ③ Lack of ethical awareness of corporations are identified as the key factors that hinder the efficiency of anti-corruption systems.
  In Chapter 4, we use the Novy (2013) model to empirically measure the effect of corruption on trade costs. The correlation between corruption control and trade costs was estimated using the corruption perception index of the Transparency International as a proxy variable and the corruption control index of the World Bank as an alternative index. According to the estimation outcome, the trade cost decreased by 0.406% when the corruption perception index increased by 1%. On the other hand, when we apply the World Bank’s Corruption Control Index as an alternative index, a one-point increase in the control index is expected to yield a 21.7% reduction in trade costs.
  In Chapter 5, we attempted to measure the economic effects of corruption on trade and welfare by using a computable general equilibrium (CGE) model. In the first scenario, in which we assume an improvement in Korea’s level of anti-corruption to the average level of APEC economies, exports are expected to increase by 3.84% over the medium to long term. Meanwhile, when Korea’s anti-corruption level rises to the OECD average, in which scenario trade cost is assumed to be reduced by 11.973%, real GDP increased by 8.36% and the welfare increase amounted to about $158.3 billion. Also, taking into account the additional effects of capital accumulation, real GDP gain could reach up to 23%.
  In Chapter 6, based on the previous analysis, we propose the following policy suggestions. First, Korean businesses should establish ethical management principles to correct illicit business behavior. In addition, as addressed by the OECD Policy Framework for Investment, Korean companies should be more actively responsive to societal expectations communicated for instance by inter-governmental organizations, within the workplace, by local communities and trade unions, or via the press. Second, the Korean government should take concrete steps to fight corruption, and take the UK Anti-Corruption Plan and US FCPA and Criminal Code as reference points for establishing “zero tolerance” practices. Third, the Korean government may consider delegating a powerful level of authority to corruption prevention organizations in the manner of Singapore and Hong Kong, and building an effective anti-corruption system by reinforcing education on the harmful effects of corruption. Finally, there is a need for policy consideration to provide stronger protection for so-called “whistleblowers” to facilitate the process of reporting cases of public and private corruption and foreign bribery.
  This study contributes to the academia in that it is the first attempt to estimate the correlation between levels of corruption, trade costs and trade. However, despite the many advantages of the CGE model, it is inevitably subject to interpretation of the estimates, which in turn cannot be technically captured by the structure and characteristics of variables used in the quantitative analysis. In order to conduct an empirical analysis which is more realistic in its approach, we will continue to develop a GVC corruption index that takes an in-depth approach to new areas of ​​corruption occurrence and value added factors.
  In addition, while this study analyzed the effects of corruption on trade and trade costs using the corruption perception index and corruption control index, we cannot rule out the possibility that corruption levels in a country bear a close relationship with the stage of development or institutions of the country. The challenge of analyzing the effect that interactions between the system and level of corruption have on trade costs remains a task for future study. 

  The entry pattern of Korean small- and medium-sized enterprises (SMEs) into Southeast Asia was influenced by the ASEAN FTA in 2007 and the global financial crisis in 2008. SMEs that have entered the market with the aim of utilizing the low-wage labor force have been placing the most importance on entering the local market since 2007. In addition, after the global financial crisis in 2008, large corporations reshaped their production network rapidly to Southeast Asia, but not to SMEs, which were vulnerable to risk. Fortunately, since 2014, SMEs’ investment in Southeast Asia has recovered to pre-2008 levels, mainly in Vietnam and Indonesia.
  As Golovko and Valentini (2011) pointed out, it is possible to measure the business performance of the enterprise to the extent that the small- and medium-sized enterprises enter the overseas market. While many Korean SMEs have moved into Southeast Asia, there are still very few studies that have conducted fundamental research into their management status. Instead, there have been abundant studies about how to enter Southeast Asia in order to meet the needs of Korean companies that want to go there. Considering the shortage of information on the management status of Korean SMEs participating in the regional production network (RPN) Korean large corporations have newly established in the Southeast Asian region, data on the Korean SMEs in Southeast Asia is required to prepare the future direction and the support policies for the SMEs. This study was conducted to meet this demand.
  The second chapter summarizes how the economy of Southeast Asia is affected by changes in the external environment, such as slowing growth in the Chinese economy, low prices of raw materials, collapse of mega-FTAs, and the recent strengthening of protectionism. Fortunately, Vietnam, which is the largest investment destination of Korea, still maintains a market-opening tendency even though the top leadership of the Communist Party in 2016 was composed of conservative figures. Despite the USA withdrawing from the TPP negotiations, the Vietnamese economy has not been adversely affected because the opacity of the Vietnamese economy has been largely eliminated in the process of joining the TPP, and the opening trend has been maintained, such as pushing for an FTA with the EU. However, as Vietnam opens its market, Korean SMEs that have entered Vietnam may face various exposure risks such as intense competition within the market. Indonesia is striving to foster its own industry through various trade policies. For example, a company that wishes to export ore stones should meet the requirements for construction of a smelter facility and payment of export tax in Indonesia. Beginning from January 2017, LTE mobile phones can only be sold locally if they use more than 30% of domestic parts.
  Changes in the international trade environment can affect policies in Southeast Asian countries. There was concern that policy changes in each country could affect the performance of Korean SMEs. However, we find that Korean SMEs in Southeast Asia were not directly affected by the policy changes in Vietnam, Myanmar, Indonesia and Cambodia. Instead, we find that the Korean SMEs have been influenced by domestic policy changes, such as rising labor costs and tax collection, rather than changes in the international trade environment. Most SMEs only supply the amount of the orders from large companies. On the other hand, 58.2% of Korea’s parent companies expect long-term changes in the international trade environment.
  Chapter 3 analyzes the investment strategy of Japanese SMEs in Southeast Asia. We examine the response of the Japanese government and SMEs to changes in domestic and international economic conditions in Southeast Asia. Based on the results of the survey, we introduce this case as a benchmarking example to Korean companies and the government. Japan’s investment in Southeast Asia is centered on manufacturing rather than non-manufacturing. Japan regularly conducts surveys to identify the status of Japanese SMEs located in Southeast Asia. Japanese small and medium-sized enterprises (SMEs) emphasized the use of low-cost labor force when they first invested in Southeast Asia, but they are more concerned with demand in Southeast Asia than cheap labor force over time. This means that Japanese SMEs have entered Southeast Asia and built a production network to participate in the local market. The Japanese government’s policy of supporting small and medium-sized enterprises to enter the overseas market sees overseas expansion as a new opportunity for job creation and export. In particular, it supports fundraising, risk avoidance, intellectual property rights, and business restructuring not only before and during the business preparation phase but also at the entry phase and beyond. As the international trade environment has changed recently, the proportion of reshoring from Southeast Asia to Japan is low. However, the Japanese government provides funds for overseas business restructuring in order to support the regional supply chain and business restructuring in accordance with the integration movements in Southeast Asia.
  Chapter 4 analyzes the management status and business performance of SMEs entering Southeast Asia through surveys. Based on the results of the analysis, it is possible to prepare a support plan for the enterprises that have entered into Southeast Asia, including the business restructuring of Korean SMEs. Korean SMEs have suffered from complex administrative systems, cultural differences, change of attitude by license agencies and investment partners, among others. Small- and medium-sized enterprises with large sales have less barriers to administrative procedures through their securing some degree of bargaining power with local governments and the central government. Meanwhile, most of Korean SMEs entering Southeast Asia relied on the Korean head office (parent company) for financing. Only 25% of respondents use local financial institutions. In particular, when SMEs enter Southeast Asia, the guarantee of a parent company was essential for local financing. Therefore, financial support for the parent company should be made available.
  Korean SMEs in Southeast Asia purchase raw materials at 31.8% from local sources, 46.3% from Korea, and 21.9% from third countries. Therefore, it is concluded that Korean companies make a great contribution to Korea’s export to Southeast Asia. In addition, production facilities, including used equipment and new facilities, accounted for 54% of all facilities run by Korean SMEs in Southeast Asia. Therefore, it is reasonable that Korean SMEs that have entered Southeast Asia contribute to Korea's export growth rather than lowering Korea’s exports. In terms of total sales of Korean SMEs by region, domestic sales account for 47.2%, exports to third countries account for 37.2%, and that to Korea accounts for only 15.6%. On the other hand, there was no empirical evidence that decisions to invest in Southeast Asia had a negative effect on the management index, sales, production scale, number of employees, R&D workforce of the Korean parent company. In the case of plastic/non-metal companies, sales, production volume, number of employees, and R&D workforce have all declined. However, this sector has mostly moved to Southeast Asia from Korea due to environmental issues.
  Localization is being emphasized to improve the sustainability of SMEs located in Southeast Asia. Most of the decisions directly related to production, such as delivery, employment, and selling prices, are made locally, but investment decisions are made by Korean parent companies such as new market development, new product development, expansion of production facilities, and financing procurement. In terms of profitability, SMEs that perform various functions such as production, sales, and research and development are more profitable than SMEs that perform only production functions. Satisfaction with profitability is not as good as expected in cases where Southeast Asia is simply used as a production base. Therefore, it is necessary to carry out activities across the value chain such as production, R&D, and sales through localization. Consulting support is needed to set the appropriate range of decisions related to the value chain. On the other hand, there was no relationship between business function and growth of SMEs. It is possible that the Korean parent company considered the local branch in Southeast Asia as a tool to generate short-term profit without establishing a long-term development plan for the local branch. This is because SMEs have been located in Southeast Asia due to the needs of buyers or large corporations. On the other hand, SMEs are able to cope with changes in the situation flexibly because their capital size is relatively small compared to large corporations. In terms of corporate sustainability, it is necessary to establish a long-term growth plan. The long-term development plans of Korean SMEs include plans to grow together with local SMEs in Southeast Asia, and Southeast Asia and Korean SMEs can grow together if they are deeply rooted in the host country. Also, considering the demographic structure of Korea, there is a limit to continuous export of commodities, so it is necessary to share the fruits of growth through equity investment or M & A in local companies.
  The SMEs’ recognition of the change in international trade environment did not affect their profitability and growth. While Korean SMEs were expected to have a long-term impact on changes in the international trade environment, they did not recognize the need for immediate action. This is because the SMEs responding to the survey supply most of the products to large multinational corporations rather than directly exporting them. Finally, in Appendix 2, we analyzed the evaluation of management performance between Korean parent SMEs and their branch subsidiaries in Southeast Asian to date. Empirical results show that there is no difference in profitability between the parent SMEs and their local subsidiaries. However, the profitability and growth potential of local branch subsidiaries were higher than the profitability and growth potential of Korean parent SMEs, despite the recent changes in trade and investment policies, the development of high value-added industries, and the launch of AEC. In the long term, the Korean parent SMEs think that the performance of the local branch subsidiaries is better than theirs. This result confirms that Korean SMEs would transfer their production facilities to Southeast Asia, so it is necessary to differentiate the location of their value chain between the Korean parent company and its local subsidiaries in Southeast Asia in the long run. On the other hand, the Korean parent SMEs, which lack accurate information about the local situation in Southeast Asia, would be more optimistic about the given situation. That could be a risk for their management. In particular, special attention should be paid before parent SMEs decides to enter into new markets.
  Based on the above results, the direction and implications of SME support policy for the Korean SMEs working in Southeast Asia are presented as follows. As the global production network expanded, Southeast Asia became the outpost of Korean production. In the survey of Chapter 4, many raw materials and capital goods were procured from Korea (see Figure 4-22). It was also confirmed that 54% of capital goods were imported from Korea. Therefore, it is necessary to consider expanding support for SMEs entering Southeast Asia as an export expansion plan. In Chapter 3, Japan recognizes the importance of supporting Japanese SMEs in Southeast Asia and various measures are implemented to support overseas SMEs. It is time to reevaluate the value of SMEs entering the market. Meanwhile, local subsidiaries in Southeast Asia have more information on Southeast Asia than Korean parent companies (see Appendix 2, Figure 16). If a domestic firm that wants to enter Southeast Asia or a company that wishes to start a business in Southeast Asia can be linked with the SMEs that have run in the market, this would increase the likelihood of success. Since private companies will not easily share their information for the benefit of other new comers, it is necessary to establish a support policy for enterprises that will enable SMEs to collaborate each other.
  In addition, as we have already confirmed, local subsidiaries in Southeast Asia and Korean headquarters, and domestic firms in Korea have established a strong relationship through production networks. Therefore, these firms expanding abroad does not necessarily mean the loss of jobs in Korea, but instead that new opportunities are brought to Korea. In addition, the establishment and localization of local subsidiaries in Southeast Asia is a process of growth for the company. Consulting support should be increased not only for SMEs seeking to enter Southeast Asia but also for SMEs already in the market. In addition, restructuring of regional production networks in Southeast Asia should be supported. For this purpose, this study suggests the direction of support policy for enterprises entering into Southeast Asia, considering that it is important to build a reciprocal ecosystem through collaboration between the enterprising companies and new entrants. First, it is necessary to construct a research infrastructure to grasp the status of SMEs entering Southeast Asia. As confirmed in Chapter 3, Japan checks local reactions and responses through surveys of Japanese SMEs in Southeast Asia whenever the international trade environment changes (see Figure 3-10, 3-11, 3-12, Table 3-10). Since we form the Korean SME support policy under the situation where we do not fully understand the current status of Korean SMEs in Southeast Asia, the effectiveness of the policy has come under doubt. Therefore, we need to construct an infrastructure that enables us to conduct periodic surveys upon SMEs abroad, like the case of Japan.
  Second, it is necessary to provide a tailored support plan based on the understanding of the status of Korean SMEs in Southeast Asia. Since most support policies for the Korean SMEs are concentrated in the pre-export promotion and overseas expansion stages, the support for Korean SMEs that already entered into Southeast Asian market is relatively poor. It is time to provide broad support for the Korean SMEs that are functioning to increase Korea’s exports. According to the results of this study, it is necessary to make efforts to produce solutions on a case-by-case basis as the difficulties felt by the Korean SMEs in Southeast Asia are different across countries. In particular, since Korean companies report various labor- and tax-related difficulties, it is necessary to establish a specialized center in the relevant field and cultivate relevant experts locally. If the relevant professional qualifications system is not available locally, it is necessary to support the formation of professional qualifications system through bilateral negotiation. ODA funds, CSR (corporate social responsibility) or CSV (creating shared value) funds can be utilized as a source of funds for this purpose.
  Third, it is necessary to prepare a plan to support the restructuring of business in line with the reorganization of regional production network in Southeast Asia. As seen in Chapter 3, as the economic conditions of China and Thailand change, the Japanese government encouraged its firms to adapt to the China plus One strategy and Thai plus One strategy. With the launch of the ASEAN Economic Community at the end of 2015, it has formed a single market and a single production base in this region. Along with these changes, the promotion of the mega-FTA involving ASEAN, changes in industrial and trade policies in each country have an impact on the overall economic structure of Southeast Asia. This policy change and the change of surrounding conditions in Southeast Asian countries are demanding the reorganization of the regional production network in Southeast Asia. Therefore, it is necessary to provide a plan to support Korean SMEs that entered into Southeast Asia in order to freely restructure their business. In the meantime, in order to diversify Korea’s production network concentrated in Vietnam, it is necessary to prepare support plans for Korean SMEs there to restructure their business.
  Fourth, it is necessary to establish a plan to create a linkage between the current Korean SMEs in the market and new Korean entrants of SMEs. As mentioned earlier, incumbent SMEs in the market have much more information about the local area than newcomers. The survey in Appendix 2 confirms that the local subsidiaries have more local information than the Korean head office in Seoul. It is necessary to establish an incentive system for incumbent SMEs to share information with new entrants of SMEs. Moreover, Korea has to work as a direction setter of the ASEAN regional production network by constructing a long-term roadmap.
  Finally, it is absolutely necessary to train regional experts on Southeast Asia for this purpose. The survey pointed out that communication and cultural differences are the biggest obstacles to Korean SMEs who have recently entered Southeast Asia (see Figure 4-36). Regional experts are needed to expand mutual understanding. There can be no doubt that the activities of regional experts will help strengthen economic cooperation between the two regions. 

Executive Summary

1. Introduction

2. Summary of Regional Trade Agreements in Africa

3. Methodology and Data
3-1. Empirical Strategy
3-2. Data

4. Results

5. Conclusions

References

Appendix 

  Africa is one of the most economic-integrated continents by a number of regional trade agreements in the continent. There are about 30 bilateral and multilateral trade agreements within the continents so that each African coun-try is a member of at least one regional trade agreement. Trade between Afri-can countries, however, barely exceeds 10% of the total trade of Africa, which is much lower than other continents’ intra-regional trade share. This discrepancy between many regional trade agreements and small intra-continent trade share tells that regional economic integrations in Africa are very unsuccessful trade liberalization policies to promote trade. This paper examines a reason why trade liberalization policies in Africa fail. In particular, we investigate the impact of trade agreements in Africa on trade conditional on financial market development and political instability. An empirical study finds that Africa countries’ poor financial market accessibility and political instability are key barriers to trade integration in the region. These two factors can explain most disadvantage of African countries in their intra-regional trade. In a dynamic regression, the two factors depress the long-run growth of trade due to trade liberalization in the region significantly, while African continent dummy variable that captures other unobserved trade obstacles in the region has much less effect on trade compared to the literature on Afri-can regional economic integration.