Beginning from the end of 2012 and up to recently, approximately 4 million new jobs have been created in Japan and the unemployment rate has fallen to the low 2% range, showing a great improvement in employment conditions. At the same time, however, the average wage level of workers remains at pre-1997 levels. In this study we analyze the reasons why wage levels remain stagnant in the Japanese economy.
   Our analysis reveals the following reasons. The first is a change in the composition of the Japanese workforce. Female workers, elderly workers, and non-regular workers, who on average receive lower wages, now represent a larger proportion of the workforce and employment has increased in industries with lower wage levels. For instance, the percentage of female employees has increased from 32% in 1970 to 45% recently. The shares of non-regular workers increased from 20.2% in 1990 to 37.6% as of the 1st quarter of 2018. On average, non-regular workers and part-time workers receive 67% and 75% of the wages of regular workers, respectively.
   Our study also identifies certain structural factors contributing to the situation. The aging of regular employees leads to a sharp increase in labor costs, and a flattening of the wage curve has begun in response to this. Another factor is that foreign shareholders have increased greatly, contributing to the spread of shareholder-oriented corporate governance and performance-based pay schemes.
   Japanese corporations have revamped their business strategies as well. Since the mid-1990s Japanese businesses have recognized the need to reduce overall labor costs as an important element of their strategies to gain competitiveness amidst steeper international competition. This has led to a shrinking in the regular workforce and subsequent increase in non-regular workers, and the curbing of seniority-based payment. Due to the downward rigidity of wages, compensation levels are slow to rise despite short-term recovery in the economy.
   We also observe a cohort effect contributing to this trend. The so-called “employment ice age” generation in Japan, who finished education and entered the labor market between the years of 1993 to 2005, have faced various disadvantages compared to other generations in terms of wage levels or the forms of employment offered in the market. Among these, middle-aged “freeters” (free arbeiter) – non-regular workers between the age of 35 to 54 (excluding married women) – were mostly men and working under low-wage and unstable employment conditions, totaling approximately 2.73 million people in 2015. As such, a large portion of a particular generation has remained in unfavorable conditions in terms of employment and wages. Failure to resolve this situation has contributed to sluggish wage growth.
   The results of our study provide the following implications. First, it is very important to maintain the competitiveness of the manufacturing sector in the domestic context. The Japanese manufacturing sector shows a significantly lower percentage of non-regular employment and higher productivity compared to other sectors, thus providing better job security. While employment has sharply increased over the past 20 years in sectors related to healthcare and welfare, food and beverage services and accommodations, wholesale and retail, and other services, wage levels in these sectors remain below the overall average. Elevating productivity in these services sectors is at the crux of increasing the average wage level across all sectors.
   Another important agenda is to create an environment where more women and elderly workers can participate in the labor market. We can see how the “employment ice age” generation in Japan struggled with unstable employment and relatively lower wages, and how failing to resolve this situation over the years led to further social problems. Korea as well is faced with acute difficulties as its younger generation continues to struggle in the job market, and there is a significant possibility of a similar situation unfolding in Korea over the next couple of decades.
   The aging population and stagnation in productivity lie at the root of Japan’s sluggish wage growth. Employee compensation schemes formulated during the nation’s period of rapid growth have continued to falter since the mid-1990s as the Japanese society experienced the adverse shocks of an aging population. Ultimately, the only way to increase wage levels is to elevate international competitiveness in the manufacturing sector and productivity in the services industry, where employment has increased significantly. 

   This study is a forward-looking study that deals with South Korea-North Korea-China economic cooperation amid rapid changes in the situation on the Korean Peninsula. The study consists of four chapters. In Chapter 2, following the introduction, each country’s position on economic cooperation between South Korea, North Korea and China is analyzed. Chapter 3 explores cooperation by sector and consists of six sections covering transportation and logistics; the energy sector; industrial complexes; the environment sector; education, science and technology; and the culture and tourism sectors. Each section examines the appropriateness of cooperation by sector, the status of cooperation between past and present cooperative projects, and future tasks and prospects. The last Chapter 4 summarizes the results of our analyses, and goes on to discuss economic cooperation between South Korea, North Korea and China in key areas such as Dandong, Shinuiju, Hunchun and Rason, and presents the limitations of this study. In particular, since cooperation cannot be considered separately from the sanctions against the North Korea, the study developed a policy roadmap by dividing cooperation policies according to the level of sanctions maintained and lifted.
   First of all, at the stage of maintaining sanctions, it will be necessary to push for cooperation unrelated to sanctions while efforts are made to build up experience and trust in cooperation between South Korea and China through various forms of bilateral cooperation. Therefore, in a situation where sanctions are maintained, cooperation in the three northeastern provinces of China (linking China’s One-Belt-One-Road Initiative with Korea’s New Northern Policy) and cooperation between the two Koreas and China in areas not affected by sanctions against the North should be pursued at the same time. The three northeastern provinces have failed to find new growth engines despite being areas where China’s state-level development plans, in line with the One-Belt-One-Road Initiative, the China-Mongolia-Russia Economic Corridor project, Changjitu (Jangil-do) development plan, the New Northeastern Promotion Plan and Liaoning Free Trade Zones all intersect. From Korea’s perspective, the northeast region of China is also the main target of its New Northern Policy, linking the Korean Peninsula to the One-Belt-One-Road Initiative through the China-Mongolia-Russia Economic Corridor. In addition, Northeast China is an area where many ethnic Koreans reside and share historical relics, and where platforms have already been formed for North Korean projects in Dandong, Hunchun and other areas, making it a region where the government and companies can build a bridgehead for the future development of North Korea. As the Northeast region of China shares similar demands for mutual cooperation with South Korea, the two need to actively pursue bilateral cooperation strategically while preparing for the development of North Korea and trilateral cooperation between South Korea, North Korea and China in the future. Second, cooperation in “software” areas, such as the environment sector, medical (sanitary) projects, education and tourism should be promoted first as a trilateral cooperation project unrelated to sanctions. Currently, international research on environmental issues such as the spread of fine dust in Northeast Asia and the destruction of North Korea’s domestic environment is urgently needed. In addition, health care and sanitation issues such as the recent African pig fever and the Changchun rabies vaccine incident are particularly grave matters which could escalate significantly if the epidemic spreads across the border. North Korea has poor quarantine and medical facilities and could be dealt a fatal blow. In response, South Korea and China should consider working actively with North Korea to jointly carry out control measures on both sides, border quarantine and expansion of medical facilities. We can also consider various knowledge-exchange projects to spread knowledge about the market economy and science technology to cultivate future North Korean talents. If such programs could convey the knowledge needed for market economy operations to the North Korea and foster talent, this would alleviate the expected side effects of the North’s reform and opening-up process. This would also be a measure to gain mutual trust by focusing on people’s livelihoods and educational issues before full-fledged economic cooperation. Also, joint research on tourism route development around the cross-border areas, such as the Tumen River and the Amnok (Yalu) River, can be pursued. The Tumen River-Amnok River belt, which runs across the Korean Peninsula and China, retains many historical legacies, including beautiful natural environments such as Mt. Baekdu and historic artifacts of the anti-Japanese resistance, which are expected to bring huge demand for tourism to the North Korea when it opens up. Limited cooperation is also possible in the transportation and logistics sectors. The establishment, joint investigation and studies for a railway between the two Koreas and China, and a road consultative body, in preparation for the establishment of the East Asian Railway Community would become possible. It is also necessary to discuss concrete measures to push forward the standardization of railway and road facilities, and to simplify customs clearance procedures in a rational manner. Another promising project would be to train transportation and logistics experts from North Korean workers in cooperation with China, as part of a transportation and logistics education project. Finally, though full-scale cooperation is currently impossible in the area of energy and industrial complexes while the current sanctions remain in place, it could be possible to push for joint research on cooperative projects and measures, albeit limited.
   Next, if sanctions are eased along with the denuclearization of North Korea, trilateral cooperation between South Korea, North Korea and China and other multilateral cooperation projects related to sanctions should be developed as a multi-pronged approach, while making efforts for cooperative development of the Korean Peninsula and Northeastern China. Through this process, the government should prepare a framework for developing the northern part of the Korean Peninsula and Northeast Asia. At this stage, various cooperative projects in sectors such as transportation, logistics and energy infrastructure construction (operating), industrial complexes, agriculture and fisheries, special economic zone development, tourism, education, environment, etc. proposed in this study could be carried out in the border areas between North Korea and China, such as Dandong-Sinuiju and Hunchun-Nason. In particular, there is a high possibility that connection of transportation and logistics infrastructure will be promoted first. The East Asian Railway Community initiative proposed by President Moon Jae-in will link the Korean Peninsula to Northeast China, and continue on to Mongolia, Russia and Europe once it is connected, thus serving as a crucial corridor for multilateral cooperation in various fields.
   As a final step, if the sanctions against North Korea are fully lifted, full-scale bilateral and multilateral economic cooperation will become possible without restrictions. In particular, if the so-called “Northeast Asian Economic Corridor” is established, it could be organically combined with China’s One-Belt-One-Road Initiative, South Korea’s New Economic Map Initiative of the Korean Peninsula, the New Northern Policy and North Korea’s reform and opening policies. With Northeast Asia connected through transportation, logistics and energy networks and common markets formed with value chains by industry, the possibility of developing into a Northeast Asia economic community can finally be explored.
   This study is meaningful in that it was the first comprehensive approach to South Korea-North Korea-China cooperation projects in the face of rapid changes in the situation on the Korean Peninsula, seeking possible directions for cooperation by sector and providing basic ideas for cooperation. However, in order to promote practical cooperation, it is necessary to overcome a number of difficulties that have not been examined rigorously in this study. First of all, the policy directions of the three parties (South Korea, North Korea, China) on these issues must be aligned with each other, the sanctions currently preventing cooperation with the North should be eased or lifted in line with progress in denuclearization, and the projects that will be pursued must be able to yield adequate returns. There are an additional host of challenges, including the need to fund projects and to derive specific cooperative models and projects in each sector. Therefore, subsequent work will be necessary to cover areas not examined in depth in the current study.

Executive Summary

Contributors

Introduction

Part One. The Changing Constellation of Risks and Opportunities
Section A. Three Key Trends
Trend 1. Protectionism and Trade War
Trend 2. Rapid Development and Spread of DisruptiveTechnologies
Trend 3. The Rapid Rise of China

Section B. Main Challenges for Korea
Dealing with the Increasing Frictions Between the United States and China
Dealing with the Challenge of a Stronger and More Dominant China
Dealing with Disruptive Technology
Conclusion

Part Two. Possible Korean Policy Responses
Section C. Repositioning Korea on Trade
Reducing Dependence on Trade and Finding New Trade Partners
Exports to the World
Developing New Products and Services for Export
Navigating a New Korea-China Relationship on Trade and Technology: Where to Compete, Where to Concede, and Where to Cooperate
Where to Compete and Where to Concede
Where to Cooperate
Future Prospects
Compete
Cooperate
Concede

Section D. Increasing the Competitiveness, Flexibility and Resilience of the Korean Economy
Benchmarking Korea on International Competitiveness and Flexibility
Benchmarking Korea on Innovation
Conclusion

Appendix

References 

Korea needs to think strategically how to position itself advantageously in today’s rapidly changing and uncertain world. This paper focuses on three economic and geostrategic challenges. These are the trade war between the U.S. and China, the challenges and opportunities presented by the rapid development and application of disruptive technology, and those presented by the rapid rise of China. The three are interrelated. The trade war between the U.S. and China are fundamentally about competition between the leading global economy and a new superpower revolving over leadership in new and potentially disruptive technologies. This has serious implications for Korea because China and the U.S. are Korea’s largest trading partners. The first part of the report lays out the context and challenges. The second part lays out some of the actions that Korea should consider on the international side as well as on the domestic side to improve its competitiveness and flexibility to deal with these challenges. 

JELClassification:F13(Trade Policy), F50(General International Relations, National Security, International Political Economy), O33 (Technological Change)
Key words:China, Korea, United States, Disruptive Technology, Trade, International Competition
 

   This paper investigates the change in industrial structure in Korea, China and Japan in the 2000s by using the product space model. As Korea, China and Japan are key competitors in global markets while closely related to each other through the regional value chain, we expect the comparison in changes in the industrial structure of the three countries will help identify the characteristics of the Korean industrial structure and provide implications for the enhancement of Korea’s industrial structure.
   The main results of the analysis of the change in comparative advantage of Korea, China and Japan in the 2000s are as follows. First, the similarity of the three countries’ comparative advantage has increased. In 2017, the industries which the three countries commonly have strong competitiveness were general machinery, electrical and electronic, and steel and metal. Secondly, with common comparative the number of comparative advantage products in Korea decreased. During the same period, the number of comparative advantage products in China surged and exceeded the level of Japan, in some industries, while that of Japan’s maintained.
   The results of comparative analysis of industrial structure changes of Korea, China, and Japan in product space in the 2000s are as follows. First, all three countries strengthened its competitiveness in products located at the center of the product space. This result implies that all three countries have achieved the structural transformation in manufacturing industries along with the global trend of export sophistication. Secondly, all three countries have strengthened their competitiveness in products, which requires higher level of capacity. Among the three countries, China in particular showed rapid achievement while the country also maintained its competitiveness in products with lower level of capacity. Korea also strengthened its competitiveness in products with higher level of capacity while losing competitiveness in lower level capacity products. Thirdly, focusing the analysis on products with high level of capacity located in the center of the product space, the number of comparative advantage products in all three countries increased. This reflects the fact that Korea’s industrial structure has become more reliant on higher-level capacity products. Fourthly, China’s rapid achievement in structural transformation, however, seems to have been dependent on lower level of quality products compared to Japan and Korea’s.
   The followings are the policy suggestions drawn from the result of this paper. First, support policies for industrial sophistication are expected to be effective if they are implemented together with the support policies for current key industries. Second, creating business infrastructure by removing regulatory barriers could be an important political measure since the industrial structure in Korea has been shifted to produce more central and higher-level capacity products. Third, continuous efforts from both the government and the private sector are necessary for the improvement in product quality while China has achieved quantitative enhancement in terms of the number of comparative advantage products.

Executive Summary

1. India’s ASEAN Significance: A Primer
1-1. The ASEAN Distinction
1-2. Objective of the Study
1-3. Methodology and Structure
1-4. Significance of the study

2. From “Look East” to “Act East” to “Act Indo-Pacific”: Factoring South Korea
2-1. India’s LEP: The ASEAN and a New Beginning with South Korea
2-2. Strategic Partnership: Transitioning from the LEP to AEP and Relations with South Korea
2-3. “Act East”: Taking Guard in the Indo-Pacific with ASEAN Centrality
2-4. “Delhi Dialogue”: Deliberating for an Action-Oriented Engagement

3. Scaling Connectivity in the East and Bridging the Gap
3-1. Delhi Declaration to AICS: Endorsing the ASEAN Spirit
3-2. IMT Trilateral Highway (IMTTH): Emerging as a New Gateway
3-3. Kaladan: Not Just a Transport Connectivity Project
3-4. “Bharatmala Pariyojana”: Neighbourhood First Policy and Land-Based Connectivity
3-5. BBIN, BIMSTEC and the MGC: “Neighbourhood First” to “Destination ASEAN” to “ASEAN First” Approach
3-6. The BCIM and Connectivity Cooperation with China
3-7. India’s Cautious Approach to BCIM
3-8. Between Connectivity and Conflict: Reviving the Ancient Silk Route
3-9. The Stillwell Road and Car Rally
3-10. Fukuda Vision: India-Japan Connectivity Cooperation in the ASEAN Framework
3-11. Japan’s Chemistry with Northeast India to Test China’s Nerve
3-12. Tokyo Strategy 2018 and India-Japan Possible Cooperation 

4. India-ASEAN FTA and the Regional Economic Architecture
4-1. An ASEAN-centered Economic Engagement
4-2. ASEAN-India Cooperation-Contradiction Context
4-3. India’s Cautious but Ambitious Approach on the RCEP
4-4. China’s Unilateralism on Free Trade and India
4-5. Japan: More of a Bilateral Economic Partner
4-6. South Korea: A Potentially Great Economic Partner

5. ASEAN and India-South Korea Cooperation in ASEAN by 2025
5-1. Why an ASEAN Framework of Cooperation?
5-2. India-South Korea Ties Vis-à-vis the India-China and India-Japan Ties in ASEAN
5-3. A Country-specific ASEAN Engagement
5-4. Exploring Connectivity Cooperation
5-5. Avenues for Cooperation in SAARC and BIMSTEC
5-6. Search for a ‘Plus’ Policy Context
5-7. Policy Recommendations

References

   One of the principal objectives of New Delhi’s ‘Act East Policy’ (AEP) is to strengthen India’s contact with the ASEAN as well as with the countries in Southeast Asia. The pursuit is evolving and ever-growing, both institutionally and regionally. With a focus on ASEAN-centric cooperation, forging a closer multi-modal connectivity cooperation between India’s bordering states and the immediate Southeast Asian countries has been one of the guiding principles of this engagement. Also, this engagement is becoming deeper with India aiming to extend the connectivity cooperation to the interior parts of the ASEAN region from the immediate neighbouring region of India. A renewed focus on engagement through increased cooperation in areas such as economic, political and security realms offers a positive future graph to the India-ASEAN engagement at present which is becoming one of the defining features of Indo-Pacific.
   With the possible conclusion of the Regional Comprehensive Economic Partnership (RCEP) in 2019-20, the regional economic architecture will move to a new level of maturity in which India would like to factor in its engagement strongly with the other countries. More importantly, it is in India’s interests to further deeper cooperation with the ASEAN as an institution. The economic role of ASEAN’s dialogue partners, especially that of China, will test India’s relationship character with the ASEAN. How should India react to the evolving regional economic and security architecture around the ASEAN?
   Options for India are perhaps plenty. Yet, India needs to find strategic compatibility with most of the ASEAN dialogue partners – some of which are influential economic actors in the region – to position its strategic interests more coherently. South Korea (officially known as the Republic of Korea) is one of those prime actors with whom India must envision to have more policy convergence keeping the ASEAN framework in mind, and draw strategic compatibility in specific areas of cooperation and mutual benefit. This study examines India’s growing engagement with the ASEAN and factors how India-South Korea could possibly cooperate within and outside an ASEAN framework. The study tries to establish policy convergence between India’s Act East Policy (AEP) and South Korea’s New Southern Policy (NSP), bilaterally and regionally, factoring the ASEAN and the countries around as the central focus of this cooperation.

Keywords: Act East, New Southern Policy, ASEAN, Indo-Pacific, Connectivity
JEL Classification: R50

- 

Executive Summary

1. Introduction

2. Literature review

3. Empirical analysis
3-1. Empirical model
3-2. Data and basic statistics
3-3. Empirical results

4. Robustness tests
4-1. Alternative model: Panel regression with the country-fixed effect
4-2. Extended model including country-specific factors
4-3. Alternative data frequency: Yearly variables
4-4. Alternative capital flow measure: Gross capital inflows
4-5. Alternative interest rate variable: Real interest rates

5. Conclusion

References 

   Capital market integration contributes to economic growth and it can be more beneficial for emerging market economies (EMEs, hereafter) at their early stages of development where the capital is relatively insufficient. An open capital market also enables investor to share the country-specific risks by holding foreign assets. However, there are also some negative side effects of capital market integration. Financial shocks originating in the center coun-try can be quickly propagated through the integrated financial market. The Global Financial Crisis (GFC, hereafter) is a good example of the contagion of the financial crisis. Volatile cross-border capital inflows and outflows nega-tively affect financial stability, which eventually lowers economic growth by causing financial crises.
   Despite of these negative side effects, capital market integration has been an inevitable long-term trend for many EMEs over the past few decades (Aizenman et al. 2010). There have been continuous capital flows to EMEs, which started even before GFC and this trend has been more pronounced during the U.S. zero-interest rate period (Ahmed and Zlate 2014). Though some monetary authorities in EMEs tried to moderate the procyclicality of credit flows by implementing policy instruments such as capital controls or macro-prudential policy measures after GFC (Kim and Mehrotra 2018), the common factors in the global financial market still play a crucial role in de-termining capital inflows to EMEs.
   The relationship between the global financial condition and its impact on capital inflows to EMEs, has been a long-debated issue. This issue concerns whether push or pull factors are the major determinant of capital flows. The push factor represents the common factor that exists in the global financial market or center countries, which influences capital inflows to peripheral countries. These factors are interest rates and GDP growth rates of advanced economies (AEs, hereafter), global risk factors such as VIX (S&P 500 Volatili-ty Index), and the commodity price index. The pull factor denotes domestic factors that attract funds from the global financial market to domestic finan-cial markets. These factors are domestic interest rates, domestic GDP growth rates, and other country-specific characteristics such as exchange rate regime, degree of the capital account openness, institutional quality, and stages of economic development.
   In previous literature, many scholars have found strong evidence for push factors being the major determinant of capital movement. The interest rates of mature economies and VIX are significant determinants of capital inflows to EMEs. However, there is only some evidence that higher domestic interest rates and higher domestic GDP growth rates pull capital from the center countries to individual EMEs (Koepke 2015).
   Related to this long-debated issue in academia, the Chairman of the Federal Reserve, Jerome H. Powell recently stated, "... I will argue that, while global factors play an important role in influencing domestic financial conditions, the role of U.S. monetary policy is often exaggerated."  With this statement, he also pointed out that the slowdown in capital inflows to EMEs which has been happening ever since 2011 has been mainly due to the narrowing of GDP gaps between AEs and EMEs, i.e., the recent decrease in capital in-flows to EMEs can be attributed to the decline in EMEs' GDP growth rates given the fact that the U.S. GDP growth rate has picked up.
   In this paper, we revisit this issue of push and pull factors of capital inflows. To this end, we consider the heterogeneity that exists in EMEs by dividing them into four subgroups. We investigate which is the main driver of capital inflows between push and pull factors across country groups. Categorizing subgroups is important for two reasons. First, EMEs are so heterogeneous that we make subgroups which share similar economic fundamentals by re-gions. Second, making subgroups across EMEs is an effective way to indi-rectly consider the regional contagion effect. With this cross-country analysis, we can figure out the differing effects of push and pull factors across country groups, and this can eventually lead to the development and implementation of appropriate policy instruments. 
   Our empirical finding shows that the push and pull factors play a different role in determining capital inflows to AEs and EMEs. The major drivers of capital inflows to AEs are both push and pull factors, but push factors turn out to be the main determinant of capital inflows to EMEs. When EMEs are divided into four subgroups, we find sizable heterogeneity across subgroups. In Asian countries, both push and pull factors are significant, which is similar to AEs, but only U.S. interest rate plays a major role in Eastern Europe. Some pull factors are important in Latin American countries and other EMEs, but these are not robust to alternative empirical models and measures.

Keywords: capital flows, push factor, pull factor
JEL Classification: F3, E5 

   Good trade policies should be fair as well as efficient. Fairness in trade policies incentivizes people in the right direction and ultimately increases the efficiency of the economy by promoting productivity. Providing proper education regarding trade policies helps people to correctly understand the fairness of policies pursued by the government, thus eliciting support from the people. Building up social capital through inclusive trade policies that are grounded in both efficiency and fairness, together with diverse strategies to raise the public’s understanding of these inclusive policies, is the primary component of “good” trade policies contributing to our society’s integration and enhancing trust in the society.
   According to our survey of the Korean people’s perception on Korea’s trade policies, people believe that the fairness of trade policies can be achieved by supporting  small and medium enterprises (SMEs) at the firm level and by strengthening the social security system at the individual level. People tend to think that trade policies are unfair because these policies mostly benefit large companies. Although this kind of perception can be attributed to Korea’s past economic growth paths that had emphasized trickle-down effect, the fact that SMEs utilize FTAs to a lesser extent than large firms also reinforces this popular perception. However, it should be noted that the lower FTA　utilization rate by SMEs is more attributable to structural factors such as relatively high fixed costs for SMEs utilizing FTAs  rather than any intrinsic unfairness in trade policies per se. Therefore, we need to develop trade policies that one friendly to SMEs in order to improve the fairness of trade policies. Simultaneously we need to implement policies that help SMEs enlarge their capacity for utilizing FTAs and outcomes of trade policies. Further, in order to raise the level of fairness, an effective trade adjustment system should be set up for individuals who were hurt directly by trade policies.
   Thus, we suggest the policy recommendations in the structure of principles, goals, and tasks for inclusive trade policies as follows: <Figure>

   China’s overseas investment is expanding, led by M&As. According to the UNCTAD World Investment Report, Chinese overseas M&A has been growing rapidly compared to greenfield investment. In 2016, Chinese overseas M&A reached a record high of US$92.2 billion, a 60 fold increase from 2007. As a result of the expansion, China’s share of global cross-border M&As also expanded significantly, reaching 18.9% in 2017, making it the world’s leader in M&A execution.
   With the rapid expansion of China’s overseas M&As and shift in acquisition targets to companies with cutting-edge technology, high-end brands, and top-level market shares, regulations on Chinese companies’ M&As are tightening, especially in advanced economies such as the United States and European Union. In particular, the U.S. is keeping Chinese companies in check by mandating a stricter reviewing process by the Foreign Investment Review Committee (CFIUS) to stop high-tech leaks and national security threats.
   The overseas M&As of Chinese companies are facing a new phase in the wake of internal and external obstacles and Belt & Road initiatives of China. As of 2017, overseas M&As of Chinese companies showed a significant decrease in size overall, but M&As to Belt & Road countries showed an increasing trend. However, major M&A industrial sectors showed different patterns in different countries. In Kazakhstan, in particular, all of China’s M&As have taken place in the energy sector. On the other hand, M&A projects conducted in Israel were led by the high-tech sector. Meanwhile, in Singapore, where China has executed the most M&As among all Belt & Road countries, it was clear that the M&As had been executed in more diverse industrial sectors than Kazakhstan or Israel, spread across industrial goods, finance, real estate, consumer goods, etc.
   If we look at the characteristics of Chinese companies’ M&As through a case analysis of Chinese companies, first of all, it can be seen that Chinese companies’ overseas M&As have been affected by the Chinese economy’s overall level of development and China’s foreign investment policy based on Chinese national strategies. In addition, while most global M&As are based on commercial incentives of companies, there are quite a few cases of M&As in China that are based on strategic motivations rather than the commercial motives of companies, and it likely that there will be more M&As in line with China’s Belt & Road initiative and China Made 2025.
   In recent years, China’s foreign investment policy has reached a turning point. China has imposed restrictions on foreign investment in sensitive industries such as real estate and hotels since the end of 2016, while the 19th Party Congress held in October 2017 aggressively promoted overseas expansion of Chinese companies in pursuit of the Belt & Road project. In particular, China emphasized innovation in the field of overseas investment and established a network of global trade, investment, production and services. In addition, the 13th National People’s Congress, China’s largest annual political event held in March 2018, announced plans to: promote stable development of foreign investments; construct Trade Cooperation Zones; and promote the convenient use of RMBs in global trade and investment. Therefore, China’s overseas investment will be focused on Belt & Road projects, aimed at establishing a global production network and building overseas economic and trade cooperation zones.
   As a target for Chinese companies’ overseas investment expansion Korea remains but the 13th among all other targets in priority, but its importance is expected to grow gradually. Although Korea does not account for much of China’s total investment, Chinese investment in Korea has been on the rise in recent years, and corporate investment is on an upward trend as well. The recent expansion of China`s investment in Korea reflects the impact of its policies and changes in its consumer market. For example, the manufacturing sector has accounted for an increasing portion of China’s overseas investment since 2015, while Chinese investment in Korea in this year also expanded in machinery and equipment sectors such as mold casting and mold manufacturing machinery and machinery for semiconductor manufacturing. This trend has become more pronounced in recent years. When considering how the Chinese government is planning to increase the portion of overseas investment by the manufacturing industry during the 13th Five Year Plan (2016-2020), it is likely that it will be able to attract investment from South Korean companies that have technological advantages in areas of interest from China in the future. Moreover, Korea is geographically close to China and can expect to enjoy tariff benefits and the alleviation of trade barriers by signing FTAs with major countries such as the U.S., Europe and Australia, which is why China is interested in Korea as a manufacturing base. China’s M&As are mainly centered on ICT and game-related industries or the financial sector, all areas in which Korean businesses are considered highly competitive. Recently, Chinese capital investment in insurance and science & technology-related industries in Korea has expanded, which is also explained by 13th Five Year Plan which promoted the advancement of China’s companies to overseas in the areas of industrial equipment, technology, standards, services, insurance, etc. In addition, as we see a change in China’s economic growth paradigm recently, the scope of overseas investment has also been diversified into IT services, consumer goods and distribution sectors, which can be seen as linked to China’s recent expansion of investment in Korea.
   This report presents some policy implications based on the analysis of China’s overseas M&A characteristics and outlook. First, we cite the need to redefine perceptions of Chinese capital and seek a win-win solution. Overall perceptions toward Chinese M&A have not been positive in the past, as seen in the cases of Ssangyong Motor Co., Hynix Semiconductor Inc., and the tightening of regulations by advanced economies such as the United States and Europe against China’s aggressive M&A. However, Chinese capital has already emerged as a big hand vying for the first or second place in the global M&A market. In addition, in the case of a leading global company acquired by a Chinese company, it protected shareholders’ interests through a high premium and provided a new opportunity for entering the Chinese market. These developments indicate that a win-win structure can be formed by selling and investing in future industries that need to be nurtured. Accordingly, Korea and China need to come up with measures to utilize Chinese capital in a mutually beneficial way through a shift in perceptions toward Chinese capital.
   Next, it is necessary to come up with measures to prevent leakage of core technologies and attract selective investment. As advanced economies such as the U.S. and EU tighten regulations on M&As by Chinese companies for fear of national security threats and high-tech leaks, Chinese companies are expected to aggressively pursue M&As for Korean companies with global competitiveness and high technological prowess. Up to now advanced countries have refrained from intergovernmental involvement as much as possible by accepting global M&As as market behavior, but now they are viewing these M&As as a part of China’s national-level industrial development strategy and have begun to tighten regulations. According to the analysis of this study, most of such cases of limiting investment occurred in the semiconductor industry. Given that most of the world’s leading companies that China acquired in the past actively pursued these M&As at a time when business conditions in the semiconductor industry were deteriorating, while semiconductor equipment manufacturers are currently enjoying a good period due to the booming global semiconductor market, we can expect Chinese capital to aggressively pursue M&As with Korean semiconductor equipment manufacturers should the market economy slow down in the future. Outside of the semiconductor sector, the U.S. and EU’s tougher regulations on M&A investment are likely to lead to an increase in China’s interest in Korea as a partner in its Made in China 2025 initiative and attempts by Chinese companies to merge with or acquire Korean high-tech companies. The cases we see of upgrade in the industrial structure of China’s private companies pose a potential threat for Korean business, against which institutional safeguards should be established to prevent the leakage of Korean technology and guarantee managerial control and job security, but at the same time they present opportunities for further cooperation in new industries. In addition, selective attraction of Chinese capital is needed. Although the attraction of Chinese capital may help create jobs and improve corporate financial structures, a thorough verification process on the financial structures of the Chinese acquirers will have to precede in order to avoid the risk of worsening financial status after takeovers, being lured by high premium offers, as shown by cases of reckless expansion or reliance on excessive borrowing regulated by the Chinese government.
   Third, it is expected that future M&As of Chinese companies will be carried out in conjunction with China’s Belt & Road operations. In particular, we can expect to see more Chinese M&As in the areas of finance, transportation infrastructure construction, culture and electronic commerce. Korea has agreed to cooperate with China by linking China’s Belt & Road initiatives with Korea’s New Southern Policy, and should seek opportunities to jointly advance into the markets of countries participating in the Belt & Road initiative, based on strategic partnership with China that draws upon Korea’s development experience and technological prowess. As part of China’s measures to utilize Belt and Road M&As, it proposes to secure a joint route into the target country’s market by first attracting Chinese companies’ M&As to Korea based on Korean companies’ comparative advantage in the ICT area, and then joining China’s drive for digital silk road construction projects in the future. In addition, the Chinese government is pushing to build overseas economic and trade cooperation zones, or overseas industrial cooperation complexes, for the stable development of overseas investment. Bilateral cooperation at such overseas industrial cooperation complexes has recently been the subject of discussions between Korea and China as part of their joint advances into third countries. Beijing proposes a way for South Korean companies to participate in industrial cooperation complexes built mostly by China in Southeast Asian countries, which should be conducted in the form of two-way cooperation between the two countries, meaning that cooperation can continue between the two countries in Korean industrial complexes built abroad as well.
   Considering the advantages that overseas M&As offer, such as revitalizing the domestic market, expanding new investment in the industry, creating more jobs and securing a path to overseas markets, it is necessary to review China’s pursuit of preemptive and active use of M&As, a trend which is likely to expand in the future. Implementation measures include identifying China’s demand for M&As in Korea, providing consulting services related to M&As, and providing platforms where suitable companies in Korea to be acquired are introduced. In addition, it is necessary to select target companies for 12 promising new industries emphasized by Korea, such as the bio, semiconductor and robot industries, which are related to the Fourth Industrial Revolution and offer high value-added and job-creation effects, and to establish an online platform that can match Chinese investors with domestic companies. Finally, it is necessary to consider establishing a monitoring system aimed at looking at the Chinese government’s overseas investment policies and investment trends, so that we can closely analyze and prepare for changes in the Chinese government’s overseas investment policy stance.