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A Study on the ESG Management of State-Owned Enterprises: Focused on Foreign Cases
ESG management, which started from the perspective of investment by financial institutions such as pension funds, has become a management trend for global companies by pressing target companies for sustainable management. Recently..
Tae Ho Lee et al. Date 2022.11.21
regulatory reform, business managementDownloadContentSummary<ESG management, which started from the perspective of investment by financial institutions such as pension funds, has become a management trend for global companies by pressing target companies for sustainable management. Recently, ESG management has been spread not only to private companies but also to public institutions, which is reflected in Korea’s performance evaluation of public institutions.Public institutions are in a suitable position to lead a change in the private sector by setting an example in ESG management because their establishing purpose is for public interests and the community building. However, Korean state-owned enterprises and quasi-governmental organizations have not established proper ESG management strategies yet.The public sector has different characteristics from private companies in three areas of ESG: E (environment), S (social), and G (governance). First of all, public companies have similar characteristics in G as private companies, so they pursue the interests of shareholders, but on the other hand, they must simultaneously pursue the policy goals, too. Public institutions other than public companies are different from public companies in G.In the case of the social (S) sector, the public sector should pursue social values more than private companies. This is because public institutions themselves were established to increase social value or social utility.In the case of the environmental (E) sector, The public sector should lead the private sector in achieving national carbon reduction targets, using renewable energy, reducing sediments and wastes, and realizing a circular environment because they are public.In the end, the core of the ESG management strategy of public institutions can be said to be a leading role in establishing a governance structure suitable for the public sector, promoting social values, and coping with climate change.However, there are not many preceding studies on how the public sector should practice ESG management. Therefore, to establish the ESG strategy of the Korean public sector, it may be beneficial to identify cases of public institutions in major advanced countries around the world that are already building performance and establishing systems ahead of Korea.There are different kinds of interesting cases of ESG management by public institutions. First of all, France has traditionally accumulated know-how in public sector management of public institutions. The UK public institutions are an important subject of research due to the abundance of cases of privatization. Sweden has a strong public sector due to the social democratic tradition of Northern Europe. German cases are also interesting because of their stakeholder governance, involving stakeholders such as workers in the corporate supervisory board.The U.S. is a leading country of shareholder capitalism centered on the capital market, and the role of the public sector is not large. However, its public sectors such as Fannie Mae (housing finance) and Amtrak (railroad) are also exemplars. In addition, Japanese public institutions are of interest because they have a similar corporate culture to Korea.Regarding ESG management of public institutions, international organizations present some guidelines. Representatively, the OECD announced guidelines for multinational enterprises, governance guidelines for state-owned enterprises, and anti-corruption guidelines for state-owned enterprises, It is no exaggeration to say that these three are OECD ESG guidelines.The UN’s Global Compact, Principles of Responsible Investment (PRI), SDGs, and principles for human rights and business (UNGPs) are important guidelines that Korean public institutions should follow.In addition, initiatives related to ESG information disclosure also affect the management of public institutions. Public institutions need to understand and apply various initiatives, such as the Sustainable Accounting Standards Board (SASB), the International Sustainability Standards Board (ISSB), the Carbon Information Disclosure Project (CDP), and the Climate-Related Financial Information Disclosure Task Force (TCFD), and the GRI.In this study, the following implications were derived as a result of studying the policies and ESG status of public institutions in the EU, France, Sweden, Germany, Japan, the United States, and the United Kingdom.First, in terms of the management type of public institutions, it was found that major countries around the world are converging into a centralized management system. This is the recommended method by the OECD’s governance guidelines for public enterprises, and countries with decentralized or dual management systems are also shifting to centralized management systems.Second, the governance structure of public institutions is bound to be more stakeholder-centered than that of private companies, and public institutions in major countries were implementing stakeholder-centered ESG management.Third, The pursuit of social values of public institutions is more powerful and is being promoted through ESG. This is because the purpose of the establishment itself is for the benefit of the community.Fourth, public institutions were leading the private sector in environmental management. Setting and implementing environmental goals such as NetZero RE100, and SBTi requires considerable cost and sacrifice, where public institutions show examples for the private sector.Fifth, public institutions in major countries’ESG management target are 17 SDGs, Global Compact, Principles of Responsible Investment (PRI), and Human Rights and Business Principles (UNGPs).Sixth, as guidelines for achieving these goals, public institutions adopted and followed OECD guidelines for multinational enterprises, governance guidelines for state-owned enterprises, and guidelines for anti-corruption and integrity. In particular, Germany has made 20 principles of the Sustainability Code and 20 checklists by creatively synthesizing these guidelines.Seventh, in the environmental field, most state-owned companies around the world aim to achieve carbon neutrality before 2050. In addition, as a means of achieving it, it has joined RE100 and has joined SBTi, which scientifically verifies its methodology. In addition, most of them had ISO 14001, an environmental management certification, and 50001, an energy management certification.Eight, in terms of governance structure, most public institutions had a board-centered management system. The board of directors could appoint and dismiss the head of the agency with independence. The chairman of the board of directors and the head of the institution were separated, the proportion of directors of women or minorities was set, and the proportion of independent non-executive outside directors should exceed half.Ninth, in the case of Germany, France, and Sweden, which have relatively strong socialist tendencies in the pursuit of social values, the strong momentum of social value was confirmed, but in the case of the United Kingdom, the United States, and Japan, the momentum of social value was relatively low.Tenth, in connection with the appointment of heads or directors of public institutions, most countries established a tradition of excluding politicians. In the case of the United Kingdom, the Commissioner for Public Appointments monitors, regulates, and discloses the appointment of executives of various public institutions, and the main role is to block personal influence and personnel intervention. The French Public Enterprise Management Agency (APE) integrates and manages the appointment of executives, management contracts of the head of the agency, management performance evaluation, and disclosure of management information including financial information.Eleventh. a significant portion of public institutions in major countries prepare and disclose sustainability reports through the GRI reporting methods. Public companies in each country include sustainability in their annual reports or publish sustainability reports separately.Finally, as the above analysis was applied to Korean public institutions, we know that ESG management of Korean public institutions is still in the introduction stage and is at a standstill. In particular, only a few public institutions have declared Net Zero in the environmental field or participated in RE100 and SBTi. Of the 63 domestic RE100 declaration companies, 13 are public institutions. The Korea Agricultural and Marine Products Distribution Corporation is the only public company that has joined SBTi, a scientific methodology for Net Zero.However, since 2018, the social aspect of ESG management in Korean public institutions has been improved but ESG management across employees, consumers, supply chains, and social contributions is still not organized.The Achilles heel of ESG management, a Korean public institution, is the governance structure. Above all, the management of public institutions is still centered on the head of the institution, not the board of directors. However, it has become fixed that the head of a public institution is not appointed mainly based on competence or expertise, but is appointed as compensation for its contribution to the election campaign.To overcome this situation, the management goals and missions of public institutions should be redefined. The U.N. Sustainable Development Goals (SDGs) can be used as an important criterion. The 17 SDGs objectives can be mapped accurately to ESG. Among the 17 goals, selecting goals suitable for their establishment purpose and applying them to management is the way public institutions in advanced countries implement ESG management.After selecting goals, detailed action plans should be created according to global guidelines for each field of governance, environment, and society. The first thing to be improved in terms of governance, which is a weak point in the Korean public sector, is the ownership management system in the external governance structure. The Public Institution Steering Committee, which can be said to be an external governance organization of public institutions in Korea, is established as an institution under the Ministry of Strategy and Finance, so its independence is not guaranteed. It seems a desirable plan to reorganize it into an independent ownership management organization like the French Public Enterprise Management Agency (APE).Regarding the external governance structure, the issue of securing transparency and expertise in the appointment of heads of public institutions is also an urgent task to be solved. One of the chronic problems related to the selection of heads of institutions in Korea is the issue of appointment and replacement of heads of institutions linked to regime change. The OECD Anti-Corruption Guidelines recommend banning the appointment of political figures without the expertise to the public institutions.Next is the improvement of internal governance. it is important to secure management transparency to prevent a head of the institution from pursuing private interests and lax management. To this end, it is essential to secure an internal control system by enhancing the role of the board of directors.Regarding the improvement of internal governance, the OECD guidelines stress that the board of directors should be able to determine practical management strategies in the management of public corporations and to monitor and check management strategies.However, in the case of Korea, there is a clear tendency to focus all authority and responsibility on the head of the public institutions.Korea should now improve the internal governance structure of public institutions, which means centering on the board of directors. The OECD guidelines for determining the independence and autonomy of the board of directors has three criteria: whether the chairman of the board of directors is separated, the proportion of non-executive directors within the board of directors, and the right to appoint and dismiss the head of the institutions. The president of Korea directly appoints the heads of large institutions and public enterprises, and the heads of quasi-governmental institutions are appointed by the minister. The authority of the board of directors is very weak in that the government holds the right to appoint the head of the institutions.Currently, the appointment and dismissal of directors for the formation of the board of directors of public institutions are made separately by the minister regardless of the characteristics or size of the institution. It is necessary to clearly define the qualifications and requirements for the appointment of directors. Auditor has the same situation.Another thing the OECD emphasizes concerning the role of the board of directors of public institutions is the risk management ability. The OECD stresses that the role of non-executive directors who do not directly participate in management activities but have accumulated various experiences in each field is very important for crisis management. In Korea, the board of directors of public institutions lacks not only expertise but also diversity, so improvement is urgent.In addition, the minutes of the board of directors meeting should be transparently disclosed. In addition, the term of office must be guaranteed with sufficient authority to the board of directors, and the activities of the board of directors must be strictly evaluated. In addition, it should be possible to give sufficient authority to non-executive directors.The OECD also emphasizes transparency in board activities, and Korea is required to disclose matters related to the management of public institutions through www.alio.go.kr. Basic information related to the operation of the board of directors is being disclosed on the site, but it is pointed out that there are still many things to be improved.Most of the public institutions in major countries are leading the NetZero under the Paris Agreement. Most are aiming to achieve NetZero by 2050, with some disclosing their goal of achieving NetZero earlier than 2050. In addition to responding to climate change, public institutions are taking the lead in implementing a circular environment system that respects biodiversity and uses resources in circulation.Korea’s public institutions shouldl not only declare 2050 carbon neutrality but also have to present their goals to SBTi and certify their methodologies. In addition, it is necessary to reduce water use and discharge of attractive substances, increase the use of renewable energy, recyclables, and eco-friendly products, and transparently disclose related information.The way public institutions in each country implement social values is very diverse. In the case of the UK, social value laws are simply intended to consider social value in public service procurement, but Swedish public companies are pursuing social value broadly based on the concept of community building.It is the OECD guidelines for multinational enterprises that well define ESG activities in the social sector. This covers the United Nations’ human rights and business guidelines. These values of the social part have already been well introduced in the social value part of the performance evaluation of public institutions in Korea, and have been strengthened since 2018. However, it is still pointed out that the indicators of diversity and inclusion are insufficient.For public institutions to effectively manage ESG in the future, it is necessary to reorganize the current public institution performance evaluation system centered on ESG. A policy was recently announced to reduce the social value sector, which has been increased significantly in the Moon Jae Inn government, and to increase the score of the financial sector. As the regime changed, the direction of ESG management in public institutions changed.This change due to the political perspective of the government makes public institution difficult to manage ESG. The organization of the institution was changed according to the performance evaluation result and manpower was reassigned, but it was in a situation where it had to be repaired at once. In addition, the consistency of the evaluation was undermined, and it was difficult to use the results of the performance evaluation for future management.One idealistic alternative is to use an internationally reliable sustainable report format as a standard format for the performance evaluation report of public institutions. The GRI method, the world’s most widely used sustainability report format, can be used to prepare a performance evaluation report for public institutions.If the reporting format is adopted following international standards and experts in the field evaluate the report by international standards, the management of public institutions in Korea will be internationally certified. For example, disclosure using the GRI criteria in the pursuit of achieving the UN SDGs will increase consistency between objectives and reporting and result in a self-contained quality ESG evaluation.However, in reality, since this work takes a lot of time, it is necessary to thoroughly analyze the current performance evaluation indicators of public institutions from an ESG perspective and add new indicators. It is also a natural step to change the allocation percentage of the changed indicators.Analyzing the 2022 management evaluation indicators released at the end of 2021 from the perspective of ESG, too much focus on the social sector was found. In the case of the environment, only 0.5 out of 50, and the governance structure is only about 7.5. On the other hand, 32.5 points are assigned to the social sector. making it difficult to evaluate ESG in a balanced manner with the existing performance evaluation indicators. Of course, there is a separate auditor evaluation to supplement the governance structure, but it cannot be denied that the performance evaluation as a whole is too biased toward social value evaluation. Therefore, such a system cannot properly evaluate or encourage ESG management of public institutions.Therefore, the management evaluation index of public institutions should be revised significantly. It is desirable to classify the whole into five categories: management strategy, governance structure, society, environment, and finance, and balance the proportion of each index at 20%. In addition, it seems necessary to assign five points to ESG among 50 points in the major business sector by establishing an index to evaluate whether the project has been carried out from an ESG perspective.In addition, it is necessary to adopt a differentiated evaluation method considering that public companies, quasi-governmental institutions, and other public institutions have different purposes of establishment, management goals, and ESG management environment.In conclusion, ESG management of public institutions should establish a transparent decision-making structure centered on the board of directors in the governance structure, serve as priming water in the environmental sector and pursue social values more actively than the private sector. The government should make efforts to improve the public sector performance evaluation system in consideration of global ESG trends and overseas cases as a powerful means to drive this. -
Sustainable Growth Strategy of Qatar and Implications for Cooperation
As a small state surrounded by great powers such as Saudi Arabia, UAE, and Iran, Qatar has historically had little influence within its region. Until 1971, Qatar was considered an emirate along with the other emirates, which forme..
Munsu Kang et al. Date 2022.10.31
economic growth, economic cooperationDownloadContentSummary<As a small state surrounded by great powers such as Saudi Arabia, UAE, and Iran, Qatar has historically had little influence within its region. Until 1971, Qatar was considered an emirate along with the other emirates, which formed the United Arab Emirates (UAE). Following its independence from the United Kingdom in 1971, Qatar did not demonstrate much diplomatic power, but Saudi Arabia exerted a strong influence on Qatar. Since the enthronement of King Hamad in 1995, Qatar has changed its diplomatic route. Aside from rapid economic growth, King Hamad pursued a policy of expanding its external influence through internal reform, neutral intermediaries, and pragmatic diplomacy. Specifically, Qatar has formed defense agreements with Western countries such as the U.S., UK, and France, as well as providing land to the U.S. for military purposes. Qatar not only maintains a friendly relationship with pro-Western nations, it also maintains close ties with anti-Western groups, such as the Muslim Brotherhood and Hamas. The broadcasting of Al Jazeera and the hosting of large events (e.g., the 2022 Qatar World Cup) are other ways in which Qatar strengthens its position within the Arab world. As a result, Arab countries such as Saudi Arabia, the UAE, Egypt, and Bahrain broke their diplomatic ties with Qatar in 2017 and implemented a blockade on the country. Following this, the GCC countries, including Saudi Arabia, the UAE, Bahrain, and Egypt, restored diplomatic relations with Qatar in 2021. As a result, Qatar has emerged as a mediating country expanding its influence, seen for instance in the mediation process of the U.S.-Afghanistan conflict.Natural gas exports have contributed to Qatar’s economic growth. With natural gas accounting for 80% of Qatar’s export value, the country is vulnerable to changes in international conditions such as low energy prices. In terms of total gas reserves, Qatar ranks third in the world, and in terms of production volume, it ranks fifth. After Australia, Qatar holds the second largest share of the global natural gas market. In light of Qatar’s high dependence on energy, its GDP has declined since 2013 due to low energy prices. While global energy prices have spiked following the Russia-Ukraine war, the EU, which is highly dependent on Russian gas, has begun to diversify its sources of import. As a result, Qatar is receiving attention from the European Union and Asian countries.Korea is Qatar’s top trading partner after Japan, India, and China. In addition, Qatar exports 16.6% of its natural gas volume to Korea. Korea and Qatar have worked to diversify their bilateral economic relationship since 2007, with the two countries holding high-level talks and agreeing to cooperate in the construction, energy, trade, investment, science and technology, health, defense, and education sectors. However, these efforts have not produced any notable developments to date, except in the energy sector. This study aims to propose bilateral cooperation strategies between the two countries beyond the area of natural resource trade.The second chapter examines the internal and external environment as well as the national development strategy of Qatar. Several initiatives have been launched by the Qatari government to advance a sustainable society by reducing carbon emissions and responding to the effects of climate change. Among these initiatives are the Education City, the Al Jazeera broadcast, and the Science and Technology Park. Qatar also benefits from a favorable environment due to the high demand for natural resources from abroad. Due to this situation, Qatar has announced plans to diversify its economy and become a more sustainable society. To overcome its economic vulnerabilities and drive green transition, Qatar announced its Vision 2030 and National Development Plan 2018-22, focusing on economic diversity, environmental sustainability, human development, and social inclusion. Qatar has also launched a Smart City, e-Government, and the Smart Qatar program (e.g., Hukoomi) incorporating digital technology. As part of its efforts to diversify its economic structure, the Free Zone Authority was established and investment regulations were relaxed in order to attract foreign investors.The bilateral relationship between Korea and Qatar has been described in Chapter 3, along with the demand for sector-specific cooperation. As part of our study, we selected five sectors, which include energy, digital technologies, food and water security, education, and health. In order to achieve an energy mix and industrial diversification, Qatar is developing the petrochemical sector and solar energy. Qatar strives to digitalize the public sector by integrating digital technology into all government sectors. Despite Qatar’s stable position in terms of food security, climate change may raise food and water security issues. Qatar does not perform well in the natural resource and resilience index despite its high food security index, compared to other developed countries, because of the extreme weather conditions. The Qatari government has therefore invested in adopting smart farms and reusing wastewater in agriculture as a result. There is a high demand in the education and health sectors for high-level education, science and technology, human resource development, medical devices, and pharmaceuticals.In Chapter 4, we identify potential areas of cooperation between Korea and Qatar. Our analysis in previous chapters indicates that solar power, desalination, smart farming, education with digital technology, and health services could be areas of potential cooperation between the two countries. It may also be possible to encourage the private sector to participate and cooperate between two countries by holding regular high-level meetings. -
Geopolitical Risk in the Era of U.S.-China Strategic Competition and Economic Security
The concept of economic security largely includes the elements of economic statecraft, economic resilience, and building mutual trust. Economic statecraft refers to the act of using economic means in fields such as trade, investme..
Jaichul Heo et al. Date 2022.10.30
economic cooperation, international securityDownloadContentSummary<The concept of economic security largely includes the elements of economic statecraft, economic resilience, and building mutual trust. Economic statecraft refers to the act of using economic means in fields such as trade, investment, and finance as a source of power in order to achieve one’s national interest or to change the behavior of another country. Economic resilience, then, refers to measures used to preserve the national interest in the economic field from external threats, and signifies the ability to recover immediately even when physically threatened. This can be explained as the ability to respond to areas of sensitivity and vulnerability, which can be secured by reducing sensitivity by lowering dependence on the other party and reducing vulnerability by preparing alternatives for emergencies. Lastly, building mutual trust explains the psychological aspect of economic security, and in the end, it means that a stable economic security environment cannot be created without trust- building between countries.Recently, the intensification of U.S.-China strategic competition, spread of COVID-19 infections, and the Russia-Ukraine war are disrupting the global supply chain and increasing instability in the global economy. The resulting instability in the supply of semiconductors, medicines, food, and energy is leading to an economic downturn, and the U.S., China, Japan, and EU are actively pursuing strategies to strengthen economic security.However, ever since World War II, there has never been a time when economic security was not important. During the Cold War, the United States offered trade and aid to capitalist countries and imposed sanctions on socialist countries to contain the Soviet Union. There was a brief period after the 1980s when the economic-security link was somewhat relaxed, when neoliberalism emphasizing market mechanisms became popular, and as the socialist economy shifted to a capitalist economy after the dissolution of the Soviet Union in the 1990s. However, after the Trump administration, which took office in 2017, started a trade war with China, economic security began to receive attention again. In this sense, the key to recent economic security is the U.S.-China strategic competition. To counter China’s economic rise, the United States is retightening economic- security links that were loosened in the post-Cold War era.On the other hand, it can be said that the difference between the Cold War period and the post-Cold War period is China’s share and influence in the global supply chain. China, which accelerated its industrialization through reform and opening up in the late 1970s, has grown as the world’s factory after joining the World Trade Organization (WTO), resulting in a significant increase in its share and influence in the global economy and global supply chain. Although there is still a large gap with the U.S. in high-tech industries, China is increasing its dominance in the global market in non-high-tech industries. It is also worth paying attention to the trend that the realm of strategic competition between the U.S. and China is expanding to cyber and digital space. This is because China is rapidly developing its own ecosystem separately from the United States.In this situation, the strength and scope of the means that the U.S. can employ in response are gradually decreasing. The U.S. is in a situation where it cannot respond to China just with the traditional means of economic statecraft. For this reason, the U.S. is contemplating new economic statecraft techniques. It is actively exploiting the vulnerability of interdependence in order to maximize its strengths while minimizing the damage it receives. However, unlike in the past, when economic statecraft was mainly used by economically advanced countries such as the U.S., the EU, and Japan, China and Russia have recently responded to the West through counter-sanctions, and the means are becoming more diverse, including both negative and positive sanctions and combining network-based means.The semiconductor industry supply chain is drawing keen attention as a shortage of semiconductors for automobiles occurred immediately after the outbreak of the COVID-19 pandemic. Although the United States maintains the world’s highest level of design and equipment required for semiconductor production, it still lags behind Korea and Taiwan in its advanced semiconductor production capacity. To solve this problem, the U.S. wants to increase domestic production, and to that end, it has pushed for a semiconductor bill and demanded direct investment from Samsung Electronics and TSMC. China is also continuing its industrial policy to dramatically improve semiconductor self-sufficiency. However, China’s semiconductor industry is facing serious difficulty because the U.S. strongly controls the export of key equipment necessary for the production of advanced semiconductors. Meanwhile, Japan also resumed industrial policy aimed at revitalizing the semiconductor industry. Because it is impossible for Japanese companies to manufacture advanced semiconductors alone, the Japanese government is promoting various support policies for cooperation with the U.S. and Taiwanese companies. And the EU, which has ASML, the leading producer of EUV exposure equipment essential for high-tech semiconductor production, is discussing a semiconductor law similar to that of the United States. Since it is impossible to build an independent ecosystem in the short term, the EU is also seeking to attract foreign in-vestment.Meanwhile, the battery industry is important not only for the 4th industrial revolution but also for the prevention of climate change. This is why the demand for electric vehicles is increasing to achieve carbon neutrality and the competition to dominate the battery supply chain is intensifying.The country leading the battery supply chain is China. Chinese companies control about 60% of global production for rare metals essential for battery manufacturing. China’s CATL has already become the world’s largest company in terms of production scale. In view of the rapid increase in the supply of electric vehicles in China, the world’s largest producer and consumer, it is expected that China’s share and role in global battery production will increase. On the other hand, the United States, the home of Tesla, the world’s top electric vehicle company, is a late follower in battery production. American automakers prefer joint ventures with overseas battery companies rather than independent development.The U.S. and China, from the perspective of hegemonic competition, say that the country that dominates the electric vehicle and battery market will dominate the world, and characterize the expansion of battery factories and technology development as a 21st century-style “arms race.” However, the key to reorganizing the battery-related supply chain is securing raw materials for batteries. Even with the crisis of securing raw materials for batteries due to various geopolitical risks, it is predicted that the second semiconductor crisis will be repeated in the electric vehicle battery sector. Therefore, countries showing weakness in the supply and demand of raw materials for batteries will find it necessary to strengthen the triple safety net of “Secure-Stock-Circulation” of key raw materials for batteries.The positions of major countries to strengthen economic security are diverse. Due to different political and economic conditions and external environments, each country is pursuing strategies and policies to overcome the challenges it faces. Therefore, it can be said that there is no panacea for economic security.First, the goal of economic security pursued by the U.S. is to contain China’s economic rise and promote the growth of the U.S. economy. And the U.S. economic security strategy is currently leading the various global economic security issues.On the other hand, the goals of Japan’s economic security strategy can be broadly divided into two categories: risk management from external threats and economic growth. In other words, Japan is responding defensively to risks arising from interdependence with foreign countries, while actively responding to policies to foster strategic industries, especially semiconductor industries, that are both important in terms of security and growth.The EU’s economic security strategy is structured around strategic autonomy. The reason the EU seeks autonomy is because it has different interests and values from the U.S. and China. Unlike the U.S., the EU does not regard China as an enemy. In terms of security, the EU’s biggest external threat comes from Russia, not China. Therefore, the EU is choosing a hedging strategy between the U.S. and China based on the balance of interests rather than band-wagoning with any one side.Under the Xi Jinping regime, China has established and implemented policies and strategies related to economic security more systematically. First, based on its rapidly growing economic power, China is more actively using economic statecraft. In addition to the traditional negative economic sanctions that use economic power as a means of pressure on the opponent, it is actively using positive economic sanctions to entice counterparts through various economic benefits. Meanwhile, for economic resilience, China is actively strengthening its supply chain and industrial competitiveness. China is trying to diversify trade and secure a stable supply chain for energy and resources in order to respond to various U.S. sanctions. To this end, it is actively pursuing a dual cycle policy (双循环), such as seeking internalization of the supply chain by actively utilizing its huge domestic market, and is actively utilizing China’s BRI (一带一路) and GDI (全球发展倡议), a national-level external cooperation initiative. -
Global Supply Chains in the Post-Covid Multipolar World: Korea’s Options
Executive SummaryThe history of South Korea’s spectacular growth trajectory is based on its export prowess, and that industrialization narrative is based on a supply chain strategy that connected the economy to the global economy..
Shahid Yusuf et al. Date 2022.10.28
economic development, economic securityDownloadContentContentsExecutive SummaryContributorsIntroductionSection 1: Dawning of the Supply Chain EraSection 2: Korea’s Industrialization and Participation in Supply ChainsSection 3: Reengineering Supply ChainsSection 4: Learning from Past Shocks, Preparing for Shocks to ComeSection 5: Supply Chain Development beyond Manufactures to ServicesSection 6: Resilient Supply Chains for Key Industries: What it will takeSection 7: Options for Korea’s Supply Chain Management Going ForwardReferencesSummary<Executive SummaryThe history of South Korea’s spectacular growth trajectory is based on its export prowess, and that industrialization narrative is based on a supply chain strategy that connected the economy to the global economy. Korea was able to manage this process with tremendous efficiency and success. Contrary to the experience of past decades, however, the current global constellation of factors and other supply- chain realities are forcing a re-examination of this approach. What specifically has changed?First, the reliability of supply chains was severely impaired by the Covid-19 pandemic and its consequences. Near-shoring or on-shoring became much more attractive as compared with efficient global supply chain management and the costs of interruptions as compared with higher inventory levels has changed the production calculus. Second, the continuation of a bitter economic rivalry between the United States and China has seen both nations trying to become more resilient in the procurement of inputs, with consequences for others, such as Korea. Third, the nature of production has shifted with new technologies and the necessity of securing essential minerals and metals needed for new products, such as electric car batteries and micro-chips. These factors mean that industries that that don’t quickly adapt to new circumstances will suffer competitive disadvantages in the global marketplace.South Korea has long prided itself on being an industrial powerhouse that can insulate itself from many global disturbances. However, as the scenario analysis undertaken by KIEP in 2017 has shown, innocent by-standers can be affected by trade wars, global turndowns, and now pandemics. Korea’s “middle power status “does not provide sufficient insurance in a world of shifting supply chains and geo-political strife. For this reason, KIEP has undertaken a new analysis of supply chain management with the aim of understanding new developments and better protecting today’s, and more importantly, tomorrow’s industries from future shocks.The purpose of this study is to identify Korea’ vulnerabilities and to take a first step at suggesting changes in both government and corporate actions to help protect the economy.As Gereffi (2021) notes the disruptions resulting from the Covid pandemic uncovered supply chain fragilities that companies had previously ignored. As a result, all economies, especially, highly open economies like Korea, must now reassess the risks to existing supply chains. The critical first step is to analyze these linkages and assess vulnerabilities. Previous emphasis solely on immediate cost factors must now be expanded to deal with events that can actually halt production, causing costly ripple effects throughout the economy. The response lies in taking concrete remedial action, such as diversifying into new, less vulnerable supply chains; seeking out alternative strategic partners for key inputs; and undertaking more analysis that subjects production to stress-testing of supply chains and imagining worst-case scenarios.One place to begin involves four industries have proven especially vulnerable to supply chain interruptions: semiconductors, large storage batteries, users of rare earths, and producers of medical supplies. It is noteworthy that Korea sources most of its storage batteries from China, which is also the supplier of lithium and rare earths of the requisite purity. The Covid pandemic and the war in Europe have exposed the Achilles heel of the high-tech industry: its dependence on scarce minerals, which need to undergo environmentally polluting processing before they can be utilized. A robust supply chain for cobalt or lithium or neodymium or manganese requires securing supplies of the raw material and then also establishing a degree of control over its processing either domestically or through the ability to source the refined product from multiple sources. This dependence makes Korea increasingly vulnerable and limits its ability to make other decisions in the national interest.Central to this discussion is the view that Korea has under-invested in access to strategic raw materials and that there is a disconnect between its industrial ambitions and its management of critical inputs. Investment has focused on the technologies, assuming that raw materials would be easily available. Other countries, such a China, a major competitor, have sought access to raw materials through extensive and expensive programs in Africa and elsewhere, some under the umbrella of the Belt-and-Road Initiative. By contrast, Korea’s outreach policies in both foreign assistance and foreign direct investment, have not kept pace.Analysis by Baldwin and Freeman (2020) provides some empirical data on China’s centrality in supply chain, draws attention to the importance of Germany and the U.S., and shows how extensive the linkages are between Korean and Chinese industries. “China really is the workshop of the world – it is central to the entire global network of trade and production.” Manufacturing inputs from China make up over 3.6% of every major nation’s manufacturing output. For Korea, the number rises to over 16% with close to 30 percent of Korea’s imports of certain intermediate inputs for electronics industry imported from China some manufactured by subsidiaries of Korean firms. China is also Korea’s number one export destination. Hence China is central to the analysis of Korea’s supply chains and their vulnerability.China’s drive for self-sufficiency is already reflected in the declining percentage of imports in GDP over the last decade or more, and in its massive investment in semiconductors, which China feels is a vulnerability that other countries can exploit. Central to China’s semiconductor industrial policy is the National Integrated Circuits Industry Development Investment Fund (known as the “Big Fund”), established in 2014 with $21 billion in state-backed financing. The Big Fund was renewed in 2019 for a second round of state financing that exceeded $35 billion. To date, China’s National IC Fund has invested $39 billion, of which 70% has been for front-end manufacturing with the goal to increase China’s share of global semiconductor production. This combined with the Made in China 2025 Report provides a very clear picture of China’s intention with respect to self-sufficiency, and these goals pre-date current supply chain concerns.Moreover, given the dependence of Korean electronics and storage battery producing firms on China’s markets and suppliers, the problem looms especially large. China has demonstrated an increasing proclivity to use its control over supplies of raw material and products to threaten and discipline trading partners and its wolf warrior diplomacy has signaled a readiness to go on the offensive against all countries at the slightest provocation.In response, Korea will need to forge more strategic alliances, something that doesn’t come easily to some chaebol giants. Government will have to align its R&D and other strategic investments with those of the corporate sector in a better coordinated manner; to fail to do so risks Korea falling behind China, Europe, and the US, all of whom are undertaking or assessing how to undertake more dramatic efforts to secure their supply chains and become more self-sufficient in key aspects of production. Having moved away from industrial policies pursued in the past, Korea may need to heed the lessons of greater corporate-government cooperation as practiced in Singapore, and certainly China, in order to maintain its competitive edge in newly emerging industries.While this study and others will have little difficulty in identifying areas where actions are needed, the challenges will rest in the sphere of political economy. Korea finds itself in a difficult situation of economic dependence on China and defense dependence on the U.S. This is a conundrum that will neither disappear nor diminish. In managing this difficulty, Korea needs to reduce both dependencies and manage its situation with clear- thinking, wise investments, coordinated national efforts and smart diplomacy. Although this study doesn’t deal with the geo-political issue, it does need to point out that the China dependency, largely on China’s terms, is worrying. Korea’s response to the China 2025 Report was inadequate, and China’s action in response to the THAAD deployment were at some level shocking, but perhaps not completely unexpected. So what’s to be done?Korea will need to do the following: It will need to invest it the resilience of its supply chains by which we mean it will have to move from “just- in-time” inventory management to “just-in-case” approaches to deal with increased uncertainty. It will have to add to the robustness of its supply sources by diversifying them; insofar as this involves a reduction of Korea’s dependence on China, this is a strategic investment worth undertaking. Next it needs to consider increasing redundancy of suppliers, namely, securing multiple sources of critical inputs. While this may add to the cost of doing business, the alternative of ignoring the chances of supply chain interruptions is costlier.A strategy for supply chains must be intertwined with a development strategy for the medium and the longer term as well. It must factor in the drivers of Korea’s growth both manufacturing and tradable services; geopolitical trends; technological change; the risks from shocks that could increase in frequency and severity; and the changing nature of supply chains as the Korean economy enters a postindustrial stage and the population ages. The biggest challenge is to design measures that can mitigate and manage the impact of disruptions to come.In summary, the actions noted below are advisable if Korea is to reposition itself and make its supply chain less vulnerable.● Continued diversification into high value products and services;● Diversification of sources of inputs to improve supply chain robustness and redundancy, even if this entails some loss of efficiency;● Adoption of a JiC strategy including the stockpiling of essential inputs possibly on a regional basis;● Innovation that reduces dependency on scarce materials;● Some reshoring of items of the greatest strategic importance;● Enhancing trade facilitation practices, transparency, and regulatory cooperation;● Creating mechanisms for consultation and cooperation in crisis situations.● Securing the growth of trade in services through agreements that dismantle the barriers to the flow of digital traffic and to FDI in services.In addition, Korea will need to seek out new long-term strategic partners for essential raw materials, especially key minerals, metals, and rare earths. This admonition leads to a central failure of policy in recent decades and that is to allow corporations to act in what they consider their best interests without considering national goals. Put differently, a number of OECD countries have moved their foreign assistance programs from pure development aid to assistance to strategic trade and investment partners (e. g., see cases of Canada, Australia, and the United Kingdom ). Here is a case where economic interests and political interests intersect and where government needs to take a strong role in forging new alliances with countries in control of strategic inputs.Options to reduce Korea’s dependence on China will not be easy and will not be cheap. Reshoring to Korea would be aided by government incentives and regulatory easing that encourages the inward flow of foreign investment. In addition, Korean outward FDI can proactively build production capabilities elsewhere - as TSMC, Samsung and Intel are now doing in the United States – for example in India as part of Korea’s New Southern Policy. Korea is already recalibrating its ties with the United States and with ASEAN – as is Japan. There are some natural alliances that seem feasible to explore and working more cooperatively with Japan would be in both countries’ economic interests.As it noted in the final section of this report, there are many steps that Korea can undertake to improve its supply chain management position and reduce its vulnerability. To be effective, however, both government and business will have to work in tandem. Moreover, securing safer supply chains will need to be a national priority. Hoping that the global system will return to its pervious state is foolhardy. Expecting that China will be a benign competitor is also ignoring current realities. There are new opportunities for Korea to reposition itself for the production of new industries, and, as the report argues, the production of new digitally-based services; however, any viable innovation and investment strategy will need to make supply chain management a critical component. Korea’s future growth performance may well depend on it. -
Major Issues of DDA Services Negotiations and Implications for Korea
This study seeks to stock-take and assess major issues of Doha Development Agenda (DDA) services negotiations. Unlike previous studies in this area, this study tries to analyze the plurilateral negotiations based on several pluril..
June Dong Kim Date 2022.10.25
multilateral negotiationsDownloadContentThis study seeks to stock-take and assess major issues of Doha Development Agenda (DDA) services negotiations. Unlike previous studies in this area, this study tries to analyze the plurilateral negotiations based on several plurilateral requests which were leaked on the internet.As the major issues at the multilateral level addressed at the Special Session of Council for Trade in Services, this study intends to analyze three areas, that is, the assessment of trade in services, the review of negotiation progress, and the modalities for the least developed countries.With regard to the plurilateral negotiations, among the total of 22 services sectors where plurilateral requests have been exchanged, this study aims to assess 19 services sectors, including 15 sectors whose plurilateral requests were leaked on the internet.As for the discussions at the subsidiary bodies, this study seeks to assess those conducted at the Working Party on GATS Rules, Committee on Trade in Financial Services, Committee on Specific Commitments, and Working Party on Domestic Regulations.As policy implications, this study suggests a pro-active position with regard to the second revised offer, considering the fact that in most of the service sectors, Korea has been experiencing remarkable developments.In addition, with regard to the other negotiation strategies, this study recommends for Korea to request the removal of MFN exemption measures, incorporation of additional commitment in architectural services related to qualification requirements as in Korea’s UR schedule, and request of improving offers in the five infrastructure services of telecommunication, construction, distribution services, financial services, and maritime services.Summary<This study seeks to stock-take and assess major issues of Doha Development Agenda (DDA) services negotiations. Unlike previous studies in this area, this study tries to analyze the plurilateral negotiations based on several plurilateral requests which were leaked on the internet.As the major issues at the multilateral level addressed at the Special Session of Council for Trade in Services, this study intends to analyze three areas, that is, the assessment of trade in services, the review of negotiation progress, and the modalities for the least developed countries.With regard to the plurilateral negotiations, among the total of 22 services sectors where plurilateral requests have been exchanged, this study aims to assess 19 services sectors, including 15 sectors whose plurilateral requests were leaked on the internet.As for the discussions at the subsidiary bodies, this study seeks to assess those conducted at the Working Party on GATS Rules, Committee on Trade in Financial Services, Committee on Specific Commitments, and Working Party on Domestic Regulations.As policy implications, this study suggests a pro-active position with regard to the second revised offer, considering the fact that in most of the service sectors, Korea has been experiencing remarkable developments.In addition, with regard to the other negotiation strategies, this study recommends for Korea to request the removal of MFN exemption measures, incorporation of additional commitment in architectural services related to qualification requirements as in Korea’s UR schedule, and request of improving offers in the five infrastructure services of telecommunication, construction, distribution services, financial services, and maritime services. -
Challenges and Opportunities of Korea’s Foreign Policy as a Developed Country
Despite the fact that China and the United States represent the G2 in terms of economic size, the RMB’s international significance in the existing international financial system is limited. China has made significant progress in ..
Alexander Downer et al. Date 2022.09.30
international politicsDownloadContent
Summary<Despite the fact that China and the United States represent the G2 in terms of economic size, the RMB’s international significance in the existing international financial system is limited. China has made significant progress in encouraging RMB internationalization. It has the ability to disrupt the global financial system, dominated by the US dollar. In order to seize chances under such circumstance, Korea must find a new direction for the internationalization of Korean Won.This collective volume has seven independent papers that investigate the current and future status of the RMB internationalization and its impacts and implications on Korean economy. The summarizations of each paper are as follows: Chapter One explains the background and motivation of this collective volume. Also, it describes the current status of the Korean Won Internationalization. Chapter Two provides detailed descriptions of the current status of RMB internationalization and its future prospects. Chapter Three examines the performance of Shanghai and Seoul RMB-KRW direct foreign exchange markets and figures that such direct FX markets have not been fully developed yet. However, such markets are expected to become more efficient gradually. Chapter Four finds that in the gradual evolution of the RMB internationalization, the KRW is becoming more synchronized with the Chinese yuan. Chapter Five explores the factors for coupling between the RMB and the KRW. Not only trade and finance channels but also policy implementations are important. Chapter Six develops the index for the KRW internationalization in light of the RMB internationalization. This chapter finds that the RMB internationalization may hinder the KRW internationalization. If the Korean government continues to delay the KRW internationalization, the benefit from the currency internationalization will become smaller. In that regard, Chapter Seven emphasizes that at this moment, it is very meaningful to re-examine the long-term strategy for Korea’s won internationalization.The internationalization of the Korean won provides a new opportunity for the country’s financial development, rather than a disruption to the current global financial system. In the process of the internationalization of RMB and KRW, China and Korea should further strengthen bilateral financial and economic cooperation to push forward the process of RMB and KRW internationalization. Because the RMB or the KRW each have such a small proportion of the global monetary system, it is premature to be concerned about competition. Cooperation should take priority. The key policy suggestions for cooperation between these two currency internationalizations could at the very least include: (1) increasing the bilateral currency swap lines (BSLs) and making them more effective; (2) encouraging more usage of RMB and KRW in bilateral trade and direct investment; (3) encouraging more Chinese investors to hold KRW denominated assets and so does the other party; (4) accelerating the development of offshore RMB market in Seoul while having increasingly important offshore KRW market in China; (5) strengthening the coordination and cooperation in exchange rate policies. -
Merkel Era of 16 Years: Observation on Major International Issues and Policies
While Angela Merkel lead Germany for nearly 16 years from November 2005 to December 2021, the voices of both Germany and the EU in the international community had been elevated. Germany, once been called “the sick man of Europe,”..
Hyun Jean Lee Date 2022.09.08
competition policy, political economyDownloadContentSummary<While Angela Merkel lead Germany for nearly 16 years from November 2005 to December 2021, the voices of both Germany and the EU in the international community had been elevated. Germany, once been called “the sick man of Europe,” revived only to achieve economic development and industrial improvement, as well as reinforcing her position in the global society. The EU, on the other hand, has developed to strengthen its solidarity within the Member States by suggesting common responses to the challenges. During Merkel’s era, numerous challenges have occurred in the field of economics, politics, and environment/security, not merely striking Europe, but also the world. Merkel’s “slow and steady” approach had been successful handling the situations. Her policies implemented to seek stability had been overall appreciated by the public.
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A Study on the Effects of Multinational Production on Global and Domestic Value Chains Following Trade Restructuring and Corresponding International Economic Policies
Emphasizing foreign affiliates amid stagnant global value-chained trade, this study provides important evidence for measurable policies which should be taken dependent on the level of GVCs integration in shaping international trad..
Myoung Shik Choi and Hun Dae Lee Date 2022.08.26
industrial structure, free tradeDownloadContentSummary<Emphasizing foreign affiliates amid stagnant global value-chained trade, this study provides important evidence for measurable policies which should be taken dependent on the level of GVCs integration in shaping international trade flows and multinational production activity. The recent decreased share of value-added exports within gross exports represents characteristics of a wider value chained network. It is common not only for firms to increase their economic activities globally but also for oversea affiliates to operate as the linchpin between the international and domestic parts of value chains. Our findings suggest that foreign affiliate activity strengthens domestic value chains, thereby leading to the outcome of further growth in the host country, while domestic affiliate activity abroad strengthens global value chains which spur growth in the broader world economy.Based on empirical discussions centered on participating in GVCs, OECD high-income countries significantly integrated into GVCs will benefit from upgrading their GVCs policies such as capturing value-added in exports and building new technology or innovation. There is also a need to continue enforcing the domestic linkages of MNE affiliates, which contributes to growth and employment as they contract and cooperate with domestic firms. In addition, low-income countries not fully integrated into GVCs in the Asia-Pacific region may need to secure entry into existing GVCs with trade liberalization, while middle-income countries which have secured entry into GVCs may focus on enhancing competitiveness by increasing productivity and developing regional economic integration through forums like APEC. -
COVID-19 and the Health of Banking Sector in Japan and South Korea: A Comparative Study
1. The economies of Japan and South Korea are dominated by banks. Both countries have created a complex financial structure, including a well-established banking industry at their heart that supports economic operatio..
Munim Kumar Barai Date 2022.07.30
financial policy, financial systemDownloadContentExecutive Summary1. Introduction2. Structure of Banking Systems in Japan and South Korea2.1 Japan2.2 Korea3. Literature Review3.1 A Review of the Japanese Banking System3.2 A Review of the Korean Banking System4. Objectives and Methodology of the Study5. Monetary Policy of BOJ and BOK Since 20106. Covid-19 and the Banking Health of Japan and South Korea6.1 Portfolios of Banks in Japan and South Korea6.2 Productivity of Assets and Stockholders’ Equity (ROA and ROE)6.3 Profitability of Japanese and Korean Banks6.4 Operating Efficiency7. Banking Health in Pre-and Interim Period of Covid-19: A Comparative Analysis7.1 Comparative Portfolios of Banks7.2 Productivity of Banks7.3 Efficiency Ratios and NPAs of Banks7.4 Profitability8. Conclusion and Policy RecommendationsReferencesSummary<1. The economies of Japan and South Korea are dominated by banks. Both countries have created a complex financial structure, including a well-established banking industry at their heart that supports economic operations. However, both countries’ banking sectors have previously faced crises such as the Asian Financial Crisis (mostly in South Korea), the Japanese economic slowdown, and the financial crisis of 2007-08 (both). While the Bank of Japan (BOJ) approved the quantitative easing (QE) monetary policy and lowered interest rates to manage the crises, the Bank of Korea (BOK) pursued interest and financial restructuring as well as banking system digitization to overcome the crises. Covid-19 has disrupted the normal operation of banks, and the central banks and governments of both countries have implemented a variety of monetary and other measures to mitigate its economic and financial consequences.2. This study aims to identify and assess the health of domestic banks in Japan and South Korea for the Covid-19 ex-ante and interim periods. Several important variables, i.e., portfolios of assets and liabilities, asset productivity, stockholders' equity, profitability, and operating efficiency, have been included to evaluate the health of their banks. This compari-son of health metrics for 2010 to 2020 could help identify changes or shifts in the banking sector of Japan and Korea. The study has used ex-ploratory and descriptive methodologies to undertake qualitative and quantitative evaluations of important bank health indicators in the ex-ante and interim periods of Covid-19. It also used a hybrid method to produce research goals and arguments, including a framework based on what was already known in the field.3. Japanese banks are divided into four clusters, i.e., City Banks, Regional Banks I, Regional Banks II, and Trust Banks. The City Banks and Trust Banks clusters feature the largest banks, while the other clusters include smaller regional banks with a regional banking concentration. Despite being a large financial institution, Japan Post Bank is not considered a commercial bank in Japan. In Korea, Commercial and specialized banks are the two categories of banks. National and local banks make up the domestic commercial banks. The principal business of special banks is banking too.4. Throughout the timeframe of our investigation, the BOJ and BOK de-ployed monetary policy measures to influence bank conditions. In April 2013, the BOJ used an easy money policy, or QE, for the second time under Abenomics to combat chronic deflation and the rolling-recession effects of the 2007-08 GFC. Under QE-2, which is continuing, the BOJ has been influencing financial markets through interest rates, loan and fund support programs, and market purchases of assets of various du-rations. Starting in January 2016, the BOJ announced a negative interest rate of -0.1 percent on all new deposits. As a response to Covid-19, the BOJ gave institutions extra financial help at a low-interest rate of 0.1 percent and continues to purchase ETFs, J-REITs, JGBs, corporate bonds, etc. Due to QE-2 asset purchases, the BOJ’s balance sheet has grown by more than $5 trillion. BOK, for its part, used the bank rate as a primary policy tool to influence the money supply through bank lend-ing in the 2010s to mitigate the effects of the GFC of 2007–2008. The key interest rate was reduced from 5.25 percent in the third quarter of 2008 to 2.75 percent in the first quarter of 2013. Simultaneously, the sec-tor underwent structural restructuring to boost digitization. However, BOK adopted a more flexible monetary policy approach in response to the poor domestic economic development caused by the Covid-19 epi-demic. BOK also raised the limit on the Bank Intermediated Lending Support Facility to ₩35 trillion and made the Corporate Bond-Backed Lending Facility (CBBLF) a safety net for businesses, banks, and non-bank financial organizations.5. Figures show that the total assets of Japanese banks increased continu-ously, albeit at varied rates, from 2010 to 2019, never falling below 2 per-cent. The increase in bank loan amounts, from ¥8 trillion in 2012 to ¥543.9 trillion in 2021, explains some of the banks’ asset expansion. The loan portfolio breakdown reveals increased bank engagement in the real estate and housing sectors. Real estate has the highest industry share of outstanding loans, accounting for roughly 81 percent of all bank loans in 2020. Before Covid-19, both new consumer and home loans fell. Overall, portfolios of commercial banks did not undergo any significant rebalancing after QE-2. Their stockholdings fluctuated, and corporate bond holdings decreased, but t stock holdings climbed. In contrast to the BOJ's expectations, banks saw a significant increase in JGB purchas-es in FY 2020–21. Except for deposits, the effects of QE-2 and Covid-19 on banks’ liabilities were minimal. Their loan-to-deposit ratio has worsened, with loans accounting for only 66.2 percent of deposits in 2021, a record high during the pandemic. Throughout the period 2011 to 2020, the asset growth lines of Korean domestic banks shifted fre-quently. On the other hand, bank assets have been increasing since 2017, with assets reaching ₩2,977.6 trillion in 2020, up 10.6 percent from 2019. Most of the growth in banks’ assets came from borrowers’ loans and securities holdings, presently hovering around 70 percent. Between 2011 and 2020, the loans stayed higher than the deposits. In 2020, the overall liabilities of banks in South Korea were larger than the country’s GDP.6. Japanese banks had relatively low net earnings against their assets in terms of productivity, resulting in a poor return on assets (ROA). The highest ROA for all clusters of banks, both individually and collectively, was recorded in FY 2013-14. However, their ROA dropped in 2016-17 and 2019-2020. Nevertheless, Japanese banks earned a much higher ROE than their ROA. However, in 2020–2021, the overall bank ROE increased to 3.96 percent. Since 2010, the ROE of Regional Banks I and II has been lower than that of other banks. For Korean banks, the high-est ROA was in 2011, at 0.81 percent, and the lowest in 2016, at 0.11 percent. Banks’ ROA dropped dramatically in 2019 and 2020. Korean banks’ return on equity peaked in 2011 (9.81 percent) and troughed in 2016 (1.37 percent). In the year 2020, Covid-19 had a low ROE of 5.54 percent.7. Japanese banks’ ordinary profits peaked at 7.39 percent in 2014 and have steadily declined. However, the operational profit data from 2015 to 2020 has formed a U-shaped curve, indicating recent improvement. At the same time, banks' net incomes were significantly lower than their op-erating profits. QE-2 is perceived to be the significant underlying factor for their low NIs. When Covid-19 was at its most disruptive, however, the rate of net income increased to 1.84 percent in 2020, up from 1.11 percent the year before. In contrast, Korean banks had a difficult year in 2016, with NI falling by 43.18 percent from the previous year. However, net income improved over the next two years. Nonetheless, their net in-come has fallen since 2018, declining to ₩11 trillion in 2020.8. The efficiency of Japanese banks has remained low for a long time. From 2011 to 2021, none of the Japanese bank clusters met even the less strict efficiency standard of 60%. Even though Covid-19 might the-oretically cut operational expenses, Japanese banks’ overall efficiency ra-tio in 2021 was 83.9 percent. We are constrained by the Korean banks’ operational efficiency data. However, available data for 2020, the year of the COVID-19 outbreak, shows that most of them maintained an effi-ciency ratio of 60% or less.9. Since 2012, Japanese banks have reduced the percentage of non-performing loans to total loans. Between 2012 and 2020, however, the ratio fell from 2.4 to 1.1 percent. Due to Covid-19, the NPL ratio went marginally up to 1.2 percent in 2021. At the same time, Korean banks had significantly lower NPL ratios than Japanese banks. All banks’ total NPL was 0.25 percent of their loans in 2020. Banks in Japan and Korea are well-capitalized, evidenced by their good CARs. However, Japanese banks are better positioned with a higher ratio of CAR. The net interest margins (NIM) index clearly shows that Korean banks do better than their Japanese counterparts. However, in 2019 and 2020, the profitability index of Japanese and South Korean domestic banks fell.10. Despite their differences, the study revealed that Korean domestic banks could sustain better health indicators than their Japanese counterparts for much of the study period. Banks in Japan are trying to maintain bet-ter financial health with the ultra-low interest rates imposed by the QE-2 monetary policy. During Covid-19, the profitability and efficiency of the sector have been adversely affected. In contrast, Korean banks had the advantage of higher interest rates. They maintained a better degree of ef-ficiency, while their low nonperforming loans provided them with man-agerial strength, though Covid-19 seems to have marginally impacted their efficiency, profitability, and performance. -
Changes and Implications of FDI Policies in Major Developed Countries
Due to COVID-19, global FDI has decreased rapidly, and the trade environment to attract foreign investment is rapidly changing. Amid the decreasing inflow of FDI worldwide, the trend of corporate tax cuts continues as competition ..
Hyung-Gon Jeong and Ara Lee Date 2022.07.29
foreign direct investment, overseas direct investmentDownloadContentSummary<Due to COVID-19, global FDI has decreased rapidly, and the trade environment to attract foreign investment is rapidly changing. Amid the decreasing inflow of FDI worldwide, the trend of corporate tax cuts continues as competition among major countries to attract foreign investment intensifies. The global average corporate tax in 2000 was 28.3%, but fell to 20% in 2021. The OECD average fell from 32.3% in 2000 to 22.9% in 2021. Along with the trend of corporate tax cuts to attract investment, there is also a movement to set the so-called global minimum corporate tax rate, aiming to prevent excessive corporate tax cuts. On July 1, 2021, following negotiations at the OECD, 130 countries which account for 90% of the world’s GDP agreed to apply the global minimum corporate tax rate of 15% from 2023. Subject to the application are multinational companies with total annual sales of EUR 750 million or more. In recent years, active reshoring policies to protect domestic industries and create jobs in developed countries have made it more difficult to attract FDI to Korea.On his fifth day in office, President Biden announced Executive Order 14005, which prioritizes the federal government’s financial support and procurement, laying the legal foundation for the revival of U.S. manufacturing and job creation through the “Made in America” and “Buy American” initiatives. In addition, the Infrastructure Investment and Jobs Act (H.R. 3684), which legislated federal support for domestic infrastructure construction, passed both the Senate and the House of Representatives in the 117th Congress.Advanced countries, including the United States, are pursuing active industrial policies and attracting foreign investment to build their own supply chains, which are also expected to pose difficulties in attracting domestic investment. Developed countries are providing investment support for the purpose of stabilizing the supply of semiconductors and integrating into the GVCs of key materials for the fourth industrial revolution. The U.S. Innovative Competition Act (USICA), which passed the U.S. Senate, established a semiconductor support program centered on the Department of Commerce, which invests USD 52 billion for the development of the U.S. semiconductor industry. Japan’s Ministry of Economy, Trade and Industry also decided to provide 19 billion yen (KRW 200 billion) worth of subsidies to joint R&D between Taiwan’s TSMC and Japanese companies in 2021 to enhance semiconductor competitiveness and strengthen GVC linkage.Developed countries are actively attracting foreign investment to reshape their own supply chains, and are also expanding restrictions on foreign investment for the purpose of securing technological supremacy and protecting national security. Investment regulations introduced in 52 countries in 2020 increased by 43% compared to 2019, the highest level since 2003, and most of them have been introduced for national security purposes.This report was designed in accordance with the need to reorganize the domestic foreign investment attraction system according to the aforementioned changes in the global FDI environment. In the case of advanced countries, policies on attracting foreign investment are being promoted more actively, and Korea lies in a disadvantageous environment to attract foreign investment, such as withdrawing tax breaks for foreign investment. This is because foreign investment is still effective in technology transfer, technology development and employment promotion, and presents a good opportunity and means to promote the incorporation of domestic companies into GVC.In addition, countries around the world are strengthening regulations on foreign investment in terms of security, technology, and intellectual rights protection, and it is necessary to review our current foreign investment policy in terms of national security and domestic industry protection through case analysis of advanced countries. Also, with the inauguration of a new administration in Korea in 2022, it is necessary to prepare a timely reform (draft) of the foreign investment attraction support system in line with the changing FDI environment and investment promotion policies for the next five years. And at the same time, the report can provide very useful information on overseas investment environments to Korean companies planning to expand overseas.The following summarizes the policies to attract foreign investment in major developed countries by dividing them into foreign investment regulatory policies to provide investment attraction incentives and those to protect high-tech sectors, and summarizes the implications for Korea’s foreign investment attraction policy.First, in the case of Hong Kong and Singapore, various policies have been promoted to establish business hubs for specific industries while providing various incentives to attract foreign investment. From the perspective of Koreans, these policies are the best examples and are the targets we should benchmark. One of the characteristics of the foreign investment attraction systems in Hong Kong and Singapore is that among the various support systems, cash grants are very diverse. Hong Kong and Singapore operate a tax system that does not discriminate between domestic and foreign companies. In particular, Hong Kong exempts tax on income from the aviation and shipping industries as a way to support business hubs. In addition, Hong Kong and Singapore have simple tax systems. In the case of Hong Kong, there are only business income tax, property tax, and salary income tax, sales tax, capital gains tax, dividend income tax, value-added tax, withholding tax, and inheritance tax. As a free trade port, Hong Kong does not impose tariffs on imports and exports.Hong Kong also runs a very large cash grant program. It operates a green and sustainable growth subsidy system, an innovation and technology fund, an incentive organized by Cyberport, and a smart transportation fund, and each program operates a wide variety of systems. In Korea, although a cash grant program has been introduced, there are limitations in operation, and it is not widely used like Hong Kong and Singapore. Hong Kong’s location supports companies by creating specialized complexes, Hong Kong Science & Technology Park being the most representative example.Due to the nature of the city, Hong Kong cannot provide industrial complexes as locations, and mainly supports startups specialized in high-tech technologies in building locations. In addition, acceleration programs simultaneously incorporate space support programs. In the case of Korea, various incubation programs or systems are currently being created to support startups. However, it is necessary to further revitalize the location support system, which provides space to startups along with comprehensive support programs.In the case of Singapore, the most representative investment incentive is the tax reduction system. Singapore’s tax reduction system is widely operated. Various incentives including the general corporate tax reduction are provided to establish leading industries and intellectual property that increases added value. Like Hong Kong, it operates systems such as aircraft rental and shipping incentives to strengthen its function as a free city. This is interpreted as a system to strengthen Singapore’s function as a logistics hub and further strengthen its current competitiveness. In addition, in order to strengthen its function as a financial hub and intermediary trade center, it operates various specialized support programs for corporate tax reduction and exemption for companies in this industry.Singapore’s cash grants are well known for their scale and anonymity. The Energy Efficiency Enhancement Fund is an official cash aid program. In addition, cash is also provided for the repair and expansion of buildings. Various types of programs are operated to support startups, and these programs are also essentially cash support programs. However, most of the cash support in Singapore is paid only if the company spends first, and is supported legally and in accordance with the support rules through evidentiary documents for subsequent expenditures. Other support programs include granting permanent residency to those who have invested in Singapore with certain conditions, and guaranteeing visas to those who have certain qualifications, so that necessary technicians and experts can work in Singapore.As seen above, the policies to attract foreign investment in Hong Kong and Singapore literally institutionalized various investment incentives to attract foreign investment. On the other hand, the U.S., Japan, and the UK are actively attracting foreign investment in terms of industrial policy to stabilize the supply chain, upgrade the value chain, and enhance the competitiveness of their industries, while strengthening regulations on attracting foreign investment to protect their high-tech industries. Although there are some differences in foreign investment concentration industries in each country, foreign direct investment is intended to be used as a way to foster various high-tech and future industries such as AI, big data, and future mobility, along with areas that are spread by digital transformation (DX). Strategic industries to be fostered are selected and these are intended to attract technologies and capital that the country lacks by attracting foreign investment. In the case of Singapore, companies with advanced science and technology or start-up support programs are promoted, and the UK also implements policies to attract patent-holding companies.Meanwhile, advanced countries such as the United States, Japan, and the United Kingdom are using foreign investment attraction as a policy tool to support underdeveloped regions in terms of balanced regional development. In the case of the UK, enterprise zones are operated in areas such as England, Wales, and Scotland, and as of 2022, a total of 73 enterprise zones have been designated to actively attract investment in promising industries by individual regions.In the case of the United States, it is very active and open to foreign investment, and there are basically no restrictions on the type of investment. The foreign investment attraction policy operates various systems in each state to attract foreign investment at the state level rather than the federal government. The Trump administration pushed for a pro-business policy through corporate tax cuts, which seems to have had a positive effect on attracting foreign investment. In the United States, tax cuts are also the most prioritized incentives to attract foreign investment. Various cash support systems are also being used very actively for industrial innovation. Active support is provided for technology transfer to SMEs, innovation partnerships, early engineering research, and industry-academic cooperation research. Various programs to provide office locations are mainly used, such as in the special zone systems in Japan and other developed countries. Free trade areas and special opportunity zones are in operation, as well as various loan programs.In the case of Japan, policies to attract foreign investment in consideration of the region are operated along with a wide variety of support policies. Foreign investment is used as a means to revitalize the local economy, and to this end, the central government not only offers various subsidies but also guarantees various preferential measures specialized for foreign companies at the local government level. Japan also actively uses its tax system to attract foreign investment, and corporate tax is also being lowered. Various tax benefits are granted to foreign corporations. Depending on the type of corporation, corporate tax is applied differently, and it is used in various ways, such as open innovation, local base strengthening tax system for local revitalization, R&D tax system, tax system for securing talent and expanding income of SMEs, and DX investment promotion tax system. Japan has a much more diverse and wider scope in the use of corporate tax than Korea. Japan also operates various cash grant programs. Most importantly, cash grants are used first for domestic investment to stabilize supply chains. Cash grants are also used in areas that are essential for fostering future industries, such as green innovation. Japan’s location support system is also operated in the form of a special zone like the United States. These special zones are operated for various purposes such as a special structural reform zone, comprehensive special zone, special national strategic zone, special revival zone, and a startup eco-city hub city.The UK is also using various methods to attract foreign investment to create jobs and expand domestic investment. First, the tax was lowered slightly, and from 2023, corporate tax will be applied in three stages. In terms of corporate tax reduction and exemption, corporate tax rate benefits vary depending on the type of reduction program. Venture capital, corporate investment, and early corporate investment are representative examples, but patent boxes are also well-known instruments, especially for corporate investments. This is a system to encourage the registration of intellectual property in the UK and promote the commercialization of patents, with the profits generated by these patents becoming eligible for corporate tax reduction or exemption. The UK is also actively using cash grants for foreign investment, most of these being given to companies that contribute to the local economy. There are systems in place to support office locations in special zones, which also incorporate enterprise zones. Creative industrial clusters and free trade ports are also examples of such location support systems.One of the notable phenomena in the foreign investment attraction policies of developed countries discussed above is to increase financial support along with support for venture investment. The support system for angel businesses or venture investment is being strengthened so that innovative technologies and ideas can grow into industries in the country.The following summarizes the lessons learned from the previous cases of advanced countries. Korea still has a low proportion of foreign investment compared to the size of its economy. ① Korea lacks exceptional incentive means to attract large-scale foreign investment, an issue which needs to be addressed. In the case of Singapore, as previously discussed, pioneer status can be granted, suggesting unconventional conditions such as tax exemption for up to 15 years. ② Another lesson that can be learned from the case of advanced countries is that these countries are using cash grants very actively. However, in the case of Korea, it is necessary to evaluate the economic ripple effect that can be obtained from foreign investment in cash grants, and seek methods to support it accordingly. In particular, in the case of the United Kingdom and the United States, incentives are comprehensively supported by evaluating the economic backwardness of the location. In our case, corporate support is uniformly divided into metropolitan areas and non-metropolitan areas, but in the case of the UK, various elements such as the local unemployment rate, GRDP, financial independence, industrial structure, and infrastructure are comprehensively considered when evaluating regional economic backwardness.③ One of the characteristics of the case of advanced countries is that rent reduction systems are used. In the case of Japan, locational support is provided for various types of special zones, and other countries surveyed in this study also use industrial complex support systems. In our case, the rent reduction or exemption under the Foreign Investment Promotion Act is 1% of the land price (Article 19, Paragraph 4 of the Enforcement Decree of the Foreign Investment Act), which is significantly lower than the 5% rent applied to ordinary industrial complexes. In particular, only foreign investments exceeding $1 million which involve high-tech projects are eligible for 100% rent reduction, which greatly reduces efficiency in terms of the operation of incentives. It would be desirable to switch to a system where the reduced rent is returned in the form of reinvestment.④ It is necessary to supplement the current issuance-type cash support system by introducing a loan-type cash support system and a fund-type cash support system like the UK and Japan. Since the cash support limit can be supported up to 30% of the total investment in the case of the current grant type, it is necessary to expand it to a higher 50% level for the loan type. As in the cases of Japan and the United Kingdom, it is necessary to benchmark loan-type cash support and cash support through fund creation. In particular, along with the loan-type cash support system, a method of combining and operating a part of investment funds using domestic private financial institutions can also increase the effectiveness of cash support.⑤ Finally, it is necessary to refer to various cash support measures under names such as the Investment Effect Adjustment Fund or the “000 Adjustment Fund,” as the term “cash grant” gives the impression of giving to investors for free. Obviously, as mentioned earlier, it is necessary to make sure that this is not a means of inducing preferential treatment or tax obligations because cash support is given depending on the degree of economic ripple effect. Unlike tax cuts, cash support programs are a means of generating financial losses from the government, meaning they require delicate operation.Another important trend in attracting foreign investment in developed countries is regulation on foreign investment. Most of the sanctions on foreign investment are imposed on the grounds of national security, but this is to prevent the outflow of technology such as high-tech industries from the host country. To this end, various means and systems are being created to strengthen the screening function for foreign investment and to prevent investment in certain cases. The United States basically had no restrictions on foreign investment, but recently strengthened foreign investment regulations through individual laws or state laws. The U.S. Foreign Exchange Regulation Act extends to all cases in which a company has the authority to determine major matters and to cases where the U.S. party does not have corporate control in acquisition of minority shares, acquisition of foreign companies in the U.S. and joint ventures. In addition, it imposes a high level of monitoring and obligation to report foreign investments for “all transactions related to core industries including important technologies and materials” with countries of special interest, such as China, but exempts companies that receive potential safe harbor letters.For national security, Japan is tightening regulations on foreign investment by strengthening regulations on foreign investment in designated industries (155 companies) and lowering the standard for pre-report ownership from 10% to 1%. Japan classifies three types of licenses for foreign investors and differentiates the criteria for reporting obligations according to the type of license. Pre-reporting industries and reporting conditions are being strengthened, but reporting exemptions are also being classified into comprehensive exemption and general exemption, according to the type of investor.The UK will introduce a mandatory reporting system in 17 high-tech industries with security risks and implement it from April 1, 2022. Acquisitions subject to report fall under the scope of civil and criminal penalties and fines if acquired without reporting, and even acquisitions not subject to report can be reviewed for up to five years after the acquisition.Since current Korean law has a weak legal basis for screening national security risks, it is necessary to supplement the foreign investment screening system from the perspective of economic security. New technologies, core infrastructure, sensitive personal information, and security screening targets need to be expanded from the perspective of stabilizing the supply chain, and countermeasures for pre-reporting, follow-up management, and reinvestment of private equity funds under the Foreign Investment Promotion Act need to be supplemented. Foreign investment in listed companies in Korea needs to be classified into companies subject to pre-examination and non-examination, and it is necessary to strengthen the evaluation criteria for economic and industrial impact assessment that will occur in the future, such as domestic market structure, market dominance, and technology and intellectual property level. It is necessary to strengthen the requirements for submitting information and data necessary for the examination of foreign investment, and to strengthen functions so that an effective security examination can be conducted by enabling integrated management and ex officio investigation. In addition, through continuous monitoring of foreign investment, preemptive responses from state-run banks and others are necessary even before problems occur, and the functions of the foreign investment committee need to be expanded and strengthened as in the case of advanced countries.
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