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  • 국내 증권시장에서 외국인 자금 이동 결정요인 분석: 금리와 환율을 중심으로
    Determinants of Foreign Security Investment: Focusing on Interest Rates and Exchange Rates

       As the linkage between domestic and foreign financial markets grows stronger, concerns have been raised about the inflow and outflow of foreign investment capital as a source of financial instability whenever the fina..

    Deok Ryong Yoon et al. Date 2020.12.30

    Financial policy, Exchange Rate

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       As the linkage between domestic and foreign financial markets grows stronger, concerns have been raised about the inflow and outflow of foreign investment capital as a source of financial instability whenever the financial market becomes unstable. This is because, as the volume of capital inflows and outflows increases and volatility rises in the market, the financial system becomes more vulnerable and financial market price variables and macroeconomic uncertainty are increasing. Considering that opening the capital market is not an option, it becomes essential to examine the determinants of foreign investment to maximize the benefits of foreign capital inflows and outflows for sound growth in the real sector as well as the financial sector. Accordingly, this study attempts to produce evidence-based policy implications by empirically analyzing the determinants of the inflow and outflow of foreign investment funds.
       Chapter 2 examines the trends of foreign investment-related systems and capital flows. Regulations in the system for foreign securities investment began to ease after the late 1990s, increasing the volume of foreign funds flowing into the stock and bond markets (Table 1). In particular, it has been observed that index funds have increased due to a decrease in active investment and increase in passive investment in the stock market. Also, the turnover rate of foreign stock investment is rising. In the bond market, foreign investment is continuously increasing, and due to the increase in duration and diversification of investors, changes are being detected both in quantitative and qualitative terms. From this, three policy implications can be drawn. First, the increase in passive funds in equity investment implies that the importance of risk management for financial market stability increases. Second, since the movement of bond funds is often determined by the volatility of the exchange rate, management of volatility in the foreign exchange market may be an important condition for the stable maintenance of foreign bond investment. Third, it is necessary to improve the investment environment to increase the inflow of foreign investment funds into the Korean financial market and maintain a long-term growth trend. To this end, it is necessary to consider enhancing the stability of the foreign exchange market by strengthening the global financial safety net and strengthening the transparency of foreign investment-related systems.
       Chapter 3 analyzes the determinants of foreign investors’ stock investment, and the main results and implications derived from them are as follows. First, when foreigners invest in domestic stocks, they consider the foreign interest rate (push factor) as a more important decision-making factor than the domestic interest rate (pull factor). This suggests that Korea’s monetary policy may have a limited impact on the inflow and outflow of foreign investment funds. Second, foreigners’ selling and buying of stocks were affected by different rates of return. When purchases and sales of stocks were at low levels, the Dow Jones yields was an important factor in buying stocks, but the KOSPI return was an important factor in selling stocks. Third, depending on the policy target and the market phase, different policy measures should be selected. For example, there was a difference between a model well-suited to explain the net buying of stocks and another to explain the buying and selling of stocks. Net buying of stocks was best explained by global liquidity, while buying and selling of stocks were better explained by risk indicators. In addition, since the effective determinants differ between the two phases and the sign (direction) of the effect on the variables is different, this implies that the policy authorities can achieve the intended policy objectives by considering different policy measures according to the phases. Fourth, when the outflow of foreign stock investment is high, volatility is high as well. In general, the ripple effect caused by the outflow of foreign funds occurs in the short term, and given that policy responses are difficult, it poses a huge policy challenge for policy authorities. Foreign capital outflows are highly volatile, and the effects of foreign capital outflows can occur in the very short term and disrupt the financial market, as experienced in the Asian foreign exchange crisis and global financial crisis.
       Chapter 4 analyzes the determinants of foreign investors’ bond investment, and four main points can be derived from this. First, foreign bond investment is sensitive to interest rates and exchange rates. Interest rate was a significant determinant not only for the total amount of net purchase, but also for each maturity and phase. The effects of interest rates on long-term bonds were particularly significant in the case of bond purchases. As the proportion of long-term bond investment is likely to increase gradually in the future, it is necessary to understand the impact of interest rate variables on bond purchases. Won-euro and won-dollar exchange rates had a significant effect on both short- and long-term bonds when the level of foreign investment was high. Therefore, when the size of foreign investment is large, attention should be paid to the effect of exchange rates on foreign investment. Second, foreign stock investment and bond investment are related to each other. Therefore, when implementing a policy related to foreign investment, it is necessary to clarify the object of the policy implementation. In addition, bond investment within three years of maturity and net purchase of stocks mainly had a complementary relationship. This points to the need to also closely observe foreigners’ investment trends in the stock market when analyzing foreign investment trends in the bond market. Third, for foreign bond investment, variables related to developed markets are more significant than those related to emerging markets. Therefore, in order to predict foreign bond investment trends, it is necessary to closely examine the situation in the stock markets of developed countries. Fourth, macroeconomic variables have a significant impact on foreigners’ bond investment, and are particularly important determinants when foreigners invest in long-term bonds. Therefore, it is important to increase the stability of macroeconomic variables in order to maintain stable levels in foreign bond investment in the future.
       Chapter 5 proposes three policy implications based on the current status of foreign stock investment and empirical results. First, it was proposed to consider the qualitative aspects of expanded foreign securities investment funds to develop the financial market and mitigate volatility in securities prices and foreign exchange markets. Next, it is necessary to reinforce monitoring of securities investment in order to accurately grasp the policy environment and design policies accordingly. Lastly, there is a need to improve the governance structure for external soundness to enable integrated management and supervision of the foreign stock and bond markets and foreign exchange markets that are linked to each other although they are different markets.

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  • 아시아·태평양 지역의 디지털화와 한국의 협력방안
    Digitalization in Asia-Pacific Region and Policy Implications for Korea

       This study examines the progress of digitalization in the Asia- Pacific region, compares and analyzes the digital transformation policies of major economies in the region using text mining techniques, and demonstrates..

    Yungshin Jang et al. Date 2020.12.30

    APEC, ICT economy Southeast Asia Ocean

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       This study examines the progress of digitalization in the Asia- Pacific region, compares and analyzes the digital transformation policies of major economies in the region using text mining techniques, and demonstrates the effect of the digital gap on economic performance by dividing the regional economic development stage by individual country. Also, an empirical analysis was performed on how the difference in access to digital technology and intensity of use has an impact not only on the overall economic performance of a country but also labor market performance through the mechanism of individual human capital accumulation. The analysis results suggest APEC and its member economies focus their capabilities on digital inclusion policies. And the results propose a direction for strengthening APEC’s function as an international cooperation platform for digital inclusion in the region, and a cooperation plan for strengthening digital cooperation in Korea.
       Chapter 2 compares the progress of digitalization in each stage of economic development in the Asia-Pacific region and the digital competitiveness of significant economies in the region, and examines the status of digital economy cooperation in APEC fora. The digital gap between high- and low-income member economies of APEC is examined using ICT indicators published by the International Telecommunication Union (ITU). According to the results of our comparative analysis of digital competitiveness in 10 major developing economies in the region, using the IMD World Digital Competitiveness Ranking, etc., there was a digital gap by income group within APEC in terms of the quality of ICT infrastructure utilization and companies’ ICT utilization. But, fortunately, the gap appears to be shrinking in terms of ICT accessibility. After adopting the APEC Action Agenda for the Digital Economy and APEC Internet and Digital Economy Roadmap for the first time in APEC’s core agenda in 2017, the number of digital economy-related cooperation projects within the APEC fora has steadily increased.
       In Chapter 3 text mining techniques are used to compare and analyze critical areas of digital transformation policy pursued by major developing economies such as Malaysia and Vietnam and leading APEC members in the digital sector such as Korea and the United States, China, and Japan. While certain differences exist, digitally leading countries tend to focus on basic and applied research, talent attraction, and development. In contrast, digitally developing economies focus on public sector reform and infrastructure creation. The results also confirm that both digitally developed and developing economies’ groups have focused on using digital transformation as a tool for economic growth rather than improving digital inclusion and international cooperation. Also, these policies have been implemented within each country rather than as a form of international cooperation.
       Chapter 4 analyzes the impact of progress on digitalization in the Asia-Pacific region on economic growth and income inequalities. For this, we measure the degree of digitalization at the country level by ICT accessibility (e.g., the sum of fixed telephone subscriptions per 100 people and mobile cellular subscriptions per 100 people) and ICT use intensity (e.g., the ratio of fixed broadband subscriptions to individuals using the internet). We first study the relation between digitalization and economic growth using country-level panel data. We construct two samples for comparison: one the total sample, which consists of 114 economies globally, and the other the APEC sample, which consists of 17 out of the 21 APEC member economies for which data was available. According to the estimation results, economies with larger ICT accessibility have higher economic growth rates for both samples. We also find that ICT use intensity increases economic growth rates for both samples. We also study the relation between digitalization and income inequality using country-level panel data. We construct two samples for comparison: one the total sample, which consists of 134 economies globally, and the other the APEC sample, which consists of 18 out of 21 APEC member economies for which data was available. According to the estimation results, ICT accessibility tends to reduce Gini coefficients for both samples. Regarding the effects of ICT use intensity, the results are reversed: ICT use intensity tends to raise the Gini coefficient for both samples. But the estimates are not statistically significant for the APEC sample. We further study if the effects of digitalization on income inequalities are different across income levels. For high-income economies, ICT accessibility and ICT use intensity negatively affect income inequalities, while for low-income economies, ICT accessibility tends to improve income inequalities.
       In Chapter 5, we study how digitalization affects labor market outcomes using individual workers’ survey data. In particular, we investigate how individual workers’ digitalization affects the probability of being employed and wages. For this, we produce the survey data of individual workers in Korea and Vietnam. We select Korea, which belongs to the high-income group in the APEC economies and Vietnam, which belongs to the low-income group. We measure the level of individual workers’ digitalization classifying individual workers’ ICT accessibility, ICT use intensity, and interaction between ICT use intensity and human capital. According to the estimation results, workers who use ICT more intensively are more likely to be employed and to receive higher wages for both Korea and Vietnam samples. However, the statistical relationships are weak in the Vietnam sample. The different results between Korea and Vietnam samples may be because there are more ICT skill-related jobs in Korea than in Vietnam. Here, workers’ ICT use intensity is measured by the ratio of working hours spent using the internet (or computer or mobile phone) to total working hours. We also measure ICT use intensity qualitatively by constructing an index based on information about workers’ various ICT-related activities such as obtaining data and information via the internet, looking for and applying for a job via the internet, internet banking experience, etc. We find that workers with higher ICT use quality index are more likely to be employed and have higher wages for the Vietnam sample. These results imply that the variables that measure ICT use intensity qualitatively capture better the labor market impacts rather than quantitative approaches. Regarding the effects of ICT accessibility, we find that the results are different between the two samples. For the Korean sample, ICT accessibility does not much affect labor market outcomes, while ICT accessibility improves the probability of being employed for the Vietnam sample. This result is mainly    due to the difference in ICT accessibility between Korea and Vietnam: Almost all workers in the Korea sample can access ICT-related devices such as mobile phones and computers and the internet.
       The analyzed results above indicate that APEC and its member economies should focus their policy capabilities on digital inclusion to minimize the side effects of the national and individual digital divide which can appear as digitalization progresses. Chapter 6 presents three criteria to be considered when APEC sets the direction to strengthen its function as an international cooperation platform for digital inclusion in the region. First, considering convergence is a prevalent feature of the digital economy, the collaboration within APEC fora should be emphasized in digital inclusion cooperation across various subjects and areas. Second, in consideration of APEC’s economic status as the world's most extensive regional cooperation body, cooperation among the APEC economies should be emphasized so that the different interests of the economies in various economic development stages on digitalization and digital inclusion can be synchronized and balanced. Third, considering APEC has consistently emphasized public-private cooperation, unlike other international organizations and regional councils, the triangular cooperation channel between government, private enterprises, and experts within APEC should be effectively utilized on digital inclusion.
       Under these three principles, in strengthening the APEC’s function as a platform for digital inclusion, we present five cooperation initiatives for Korea, as a leading economy in the digital sector, to establish itself early on in the agenda for digital inclusion within APEC and become a rule-setter in the area. First, we propose that APEC build a collaborative culture among APEC fora by improving project evaluation criteria. Considering the issues have cross-cutting and convergence features, this improvement could induce APEC to address more digital inclusion issues and endorse more joint projects on digital inclusion. Second, Korea could propose a project on discovering effective digital inclusion policies within APEC economies and sharing their success stories. For example, based on its experiences with the Digital New Deal policy, Korea could play a leading role in proposing research projects on holding workshops or publishing books about best policies and practices regarding digital inclusion. Third, Korea can position itself as an early mover in digital inclusion agenda in the healthcare sector by proposing or cooperating with other APEC economies on digital healthcare projects, considering the importance of digital healthcare in the post-pandemic world. For example, building and improving on the “K-Quarantine” online platform in cooperation with other economies interested in the platform could be a promising approach. It would be possible for Korea to beneficially share its strong experience and rich data in combating COVID-19 with other APEC members through the online platform. Fourth, we also suggest that Korea should play a leading role in devising and improving digitalization measurement indexes and indicators, taking into account the stages of economic development and conditions in the APEC region. These could contribute to strengthening research on digital inclusion within the APEC regions by providing essential data to study digital inclusion, such as measuring the impacts of digitalization or digital divide on economic growth or inequality. Fifth, we propose establishing an digitalization integrated data information system for the APEC region to collect and manage data showing the status of digitization of APEC member economies in the long term. To make it possible, as an ICT leader, Korea should play an active role in the process of designing and constructing the system.
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  • 대외부문 거시건전성 정책 10년의 성과와 개선방안
    Korea’s Macroprudential Policies for Cross-border Capital Flows: Accomplishments and Road to Improvement

       Major advanced economies have taken policy measures to strengthen the resilience of the financial system since the 2008 global financial crisis. On that basis, the G20 Coherent Conclusions for the Management of Capita..

    Sungbae An et al. Date 2020.12.30

    Monetary policy, Exchange Rate

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       Major advanced economies have taken policy measures to strengthen the resilience of the financial system since the 2008 global financial crisis. On that basis, the G20 Coherent Conclusions for the Management of Capital Flows Drawing on Country Experiences was established in 2011, followed by discussions among policy circles including the OECD and IMF. Emerging economies have also taken various policy measures to manage systemic risks associated with cross-border capital flows. In 2010, the Korean government and central bank announced foreign exchange-related macroprudential measures (MPMs) aimed at building resilience against external financial shocks. These measures have greatly contributed to limiting systemic risk by curbing excessive capital inflows. Twelve years have passed since the global financial crisis started, and ten years after the introduction of FX-related macroprudential policy measures in Korea. It is now an opportune time to check the performance and effectiveness of these policies. Given the newly heightened risky environment, it is urgent to discuss how to improve macroprudential measures in response to emerging external risks.
       Chapter 2 reviews trends in macroprudential policies from a global perspective, and approaches by several international organizations to cross-border capital flow management measures. The IMF and OECD take different approaches to capital flow management measures to mitigate volatility in capital flows in emerging counties. Such conflicting signals from the OECD and IMF regarding those macroprudential measures make it difficult for emerging counties to implement tools relevant for themselves. Cooperation between the IMF and OECD is essential to enhance the consistency between the IMF’s institutional view and OECD approaches for the management of capital flows.
       Chapter 3 analyzes the determinants of macroprudential policy measures in the external sectors and examines the empirical effects of these measures. As determinants of capital flows, pull factors (private credit, foreign exchange reserves, and economic size) as well as push factors (the VIX index) were significantly associated with cross-border capital flows. An analysis reveals that reinforcement of capital inflow regulations and deregulation of capital outflows were significantly related with a depreciation of domestic currency. We also find that the strengthening regulations on capital inflows had a large effect on scaling down capital inflows, and deregulation on capital outflows also lowered the accumulation of net capital inflows. Further analysis also reveals that deregulation of capital outflows is significantly associated with lower volatility of portfolio investment.
       In Chapter 4, we check the performance and effectiveness of FX-related macroprudential measures in Korea. In 2010, Korea’s authorities introduced three-pronged macroprudential policies ‒ a regulation on the ratio of FX derivatives position, an FX stability levy, and a tax on bond investment by foreigners ‒ in order to mitigate volatility from capital flows. These measures are considered to have contributed greatly to easing vulnerabilities in the FX sector through curtailment of external debt in the banking sector and improvements in maturity structures. In particular, the short-term portion out of total external debt in foreign bank branches has declined greatly. In March 2020, the authorities relaxed FX macroprudential regulations in a flexible manner to cope with external shocks triggered by the Covid-19 pandemic.
       In Chapter 5, we make an effort to identify new types of risks unanticipated by policy authorities and to recognize thin markets usually ignored due to their relatively small business sizes. The Covid-19 pandemic led to globally tighter US dollar funding conditions as the US dollar money market became severely strained. Under these circumstances, it also tightened the local financial conditions in Korea, which remain heavily exposed to US dollar funding risks.
       Finally, based on the analysis outcome, we suggest the following policy implications. Korea’s FX-related macroprudential policies greatly contributed to stabilizing systemic risk by curbing excessive capital inflows to Korea since its 2010 introduction of macroprudential measures. However, it is necessary to note that financial stability is threatened by potential risks not comparable with risks in the past. In particular, the global financial market is now grappling with difficulties in funding the US dollar. This indicates that the Korean authorities should strengthen monitoring of changing trends in the international financial market, while prioritizing to secure enough US dollar liquidity during a crisis. As a result, it is critical to sustain a resilient framework for curbing excessive capital inflow, but to respond with caution to the trend of decreasing capital inflow. In this regard the current macroprudential system in the external sector – introduced to mainly curb excessive capital inflow – should be overhauled.
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  • 글로벌 금융위기 이후 중국의 지역경제구도 변화와 내수시장 진출 전략
    Changes in China’s Regional Economic Structure and Strategies to Enter the Domestic Market after the Global Financial Crisis

       The growth of the Chinese domestic market, in terms of final domestic demand, is an important factor influencing Korea's economic growth. With the progress of so-called “servicification” in the Chinese economy, the ..

    Jihyun Jung et al. Date 2020.12.30

    Economic cooperation China

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       The growth of the Chinese domestic market, in terms of final domestic demand, is an important factor influencing Korea's economic growth. With the progress of so-called “servicification” in the Chinese economy, the influence of Chinese domestic growth on Korean economic growth has decreased to some extent, but the Chinese domestic market still remains important to Korea.  
       On the other hand, as the conflict between the United States and China intensifies in various fields, it has become difficult for Korea to openly publicize strategic economic cooperation or cooperation projects with China as before, as it must balance its traditional focus on the US from a security standpoint and on China in economic aspects. In particular, the Biden administration will further systematize anti-China solidarity centered on allies, and in response to this, China's willingness to cooperate with neighboring countries is expected to grow. In the meantime, there is a concern that the scope of Korea's operations in the area of foreign cooperation will further narrow.
       In this situation, Korea needs to promote economic cooperation with China, centered on regional cooperation, that can minimize the impact of unstable global governance. This is because it will be possible to promote cooperation at each regional level even in the midst of the US-China conflict, and this form of cooperation is much more flexible and practically accessible than cooperation between countries. Companies and associations in the US and Japan are maintaining and expanding cooperation with local governments, including participation in Chinese local government projects, even in the face of poor relations between their countries and China.
       Deciding that the conflict with the US would be prolonged regardless of the results of the US presidential election, in October 2020 China proposed the strategy of “Dual Circulation” as a key economic policy direction up to 2035. This is a mid- to long-term strategy to increase economic independence by expanding the industrial and supply chains in the region and improving the efficiency of economic cycles in the face of increasing external uncertainty. As China is emphasizing the elimination of inefficiencies in domestic demand during the period of the 14th Five-Year Plan (FYP), when the Dual Circulation strategy will be implemented in earnest, China's regional economic and industrial cooperation is expected to become more active than before. Accordingly, participation in the domestic market through expanding economic cooperation with the Chinese region will become more important.
       As such, although the development of China's domestic market is expected to intensify and our demand for cooperation in the regional domestic market is expected to further expand, most of the existing studies on the Chinese domestic market mainly analyze the consumption and import markets. Recognizing this gap, this study expanded the scope of analysis of the domestic market in China to the entire domestic final demand, and analyzed inter-regional trade relations and other economic relations based on the  Inter-Regional Input Output analysis.
       This study analyzed the domestic market in China from various angles. First, an in-depth analysis of China's long-term domestic demand expansion policy was conducted, and changes in the regional structure of the domestic market were analyzed through the Inter-Regional Input Output analysis, which has rarely been attempted in analyses of the Chinese domestic market. In addition, the changes in the regional structure of the Chinese import market and Korea's competitiveness were analyzed using Chinese trade statistics. In particular, by synthesizing the changes after the global financial crisis, a turning point in China's economic structure, we project future changes in the regional structure of China, which emphasizes independence in the domestic economy. In addition, in the era of US-China conflict, the study aimed to select regional markets meaningful to Korea, and to present strategic directions toward China focusing on regional cooperation and approaches into the domestic market.
       Chapter 2 analyzes the changes in China's economic structure after the global financial crisis in terms of industrial structure, trade structure, and competition structure in the Chinese import market.
       Chapter 3 analyzes changes in China's strategy to expand domestic demand by period and region, and reviews the directions of the 14th FYP and mid- to long-term strategies in the area of domestic market policy. China has maintained rapid growth by participating in global value chains based on its low factor costs and export-led strategy after reform and opening, as a result of which its trade dependence climbed to 60% in the mid-2000s. However, following the 2008 global financial crisis the Chinese economy reinforced strategies to expand domestic demand. Immediately after the global financial crisis, domestic demand was boosted mainly by infrastructure investment, but with the advent of the New Normal era accompanied by structural changes in the economy, consumption-oriented policies to expand domestic demand have gained strength. Since then, the domestic policy has shifted toward qualitative improvement while promoting restructuring to improve economic inefficiencies and imbalances caused by excessive investments. However, facing an unprecedented decline in the growth rate due to the COVID-19 shock, the strategy to expand domestic demand is gaining momentum again, and the 14th FYP looks to promote domestic demand expansion in a new direction that combines the quantitative expansion of domestic demand and qualitative enhancement strategies at the same time. By region, the eastern region has accounted for a vast majority of China's domestic demand over the past 20 years and maintains a significant position in the consumption sector. On the other hand, in the investment sector, the status of the western region has elevated mostly due to infrastructure investment and the central region based on manufacturing investment. These changes are closely related to China's regional balanced development policy. The central and western regions have been utilized as strategic areas for investment expansion, and the eastern regions as leading regions of qualitative growth such as high-tech industries and service industries. Even during the period of the 14th FYP, it is predicted that the strategy of having the eastern region lead the digitalization and “smartization” of the economy will continue.
       In Chapter 4, based on China's inter-regional input output table, changes in the regional structure of the Chinese domestic market were analyzed through changes in domestic items and industry structure, changes in the share of imports inherent in domestic import demand, and changes in trade relations between regions. In particular, trade relations between regions were examined in terms of trade in products, movement of imported intermediate goods between regions, and trade based on value-added (TiVA). Following the global financial crisis (GFC), domestic demand in China expanded, centered on investment demand in the central and western regions. In addition, the proportion of imported goods in China's inherent in domestic demand decreased, mainly due to the decrease in the proportion of imported intermediate goods. Just as domestic demand expanded mainly for investment, imports for investment exceeded that for consumption, but imports of final goods for consumption showed the highest growth rate in the post-GFC period.
       The share of trade between regions in China decreased to about 29% compared to pre-GFC levels, signifying that the share of regions satisfying final demand with their own products has increased. After the GFC, the production inducement effect on each region's final demand increased for its own region and decreased for other regions. This means that just as the dependence on domestic demand of countries around the world increased compared to trade dependence after the GFC, the dependence on regional demand between Chinese regions also increased. In the process of decreasing the share of trade between regions after the GFC, the share of output from the midwest region in particular increased and the share of input from Huadong and Huanan areas decreased. This is mainly related to the increase in investment demand in the Chinese Midwest and the contraction of production activities in Huanan and Huadong, where GVC participation is high. Inter-regional trade moves the imported intermediate goods embedded in the trade products to other regions. When we identified the import base of intermediate goods based on the region from which intermediate goods were directly imported, the proportion of the eastern region exceeded 80%. Compared to the eastern region's proportion of imported intermediate goods embedded in domestic demand of about 70%, intermediate goods imported from the eastern region are be produced to the midwest region through regional production activities. This means that in Korea's export of intermediate goods to China, it is necessary to pay more attention to the changes in the base regions for importing intermediate goods than the changes in final demand in each region. Lastly, the characteristics of interregional value-added trade (TiVA) show that the Midwest has a large input of value-added, but the scale of output is even larger, resulting in a negative net input. This is mainly due to differences in trade items. Based on its production networks, the eastern region mainly accounted for production in the manufacturing industry and high-end service industry-related items sent to the midwest region, while the midwest region mainly produced subsistence resource-related items in the areas of mining, agriculture, forestry and fishery, food and beverage manufacturing. This resulted in an increase in added value-added net input in the eastern region. In other words, domestic demand expanded after the GFC, centered on the investment demand in the midwest region, but added value net input increased in the eastern region and decreased in the Midwest.
       Chapter 5 uses China's trade data to classify the structure of the import market by processing stage and industry, to identify changes and causes of regional structure. In addition, the competitive relationship between Korea and major countries in the import market was analyzed using the Market Comparative Advantage (MCA) Index. After the GFC, the import market in China showed a tendency to diversify. Although the eastern region is still in the top ranks, the proportion of other regions such as the western region increased after the crisis (Sichuan, Chongqing, Henan, etc.), and the eastern region also showed signs of diverging to Shandong and Hebei. On the other hand, China's import market for Korean products became more concentrated in traditional top-importing provinces such as Guangdong and Jiangsu, while among other eastern regions Shandong, Tianjin, and Beijing fell significantly after the GFC in terms of their proportion of Korean imports. This is mainly due to the withdrawal of local investment and production decline by Korean companies due to overheated competition in China and rising production costs. Meanwhile, among items such as medical supplies, cosmetics, semiconductors, and automobiles, which are promising import items in the Chinese market, medical supplies and cosmetics are likely to continue to increase in the future due to improved income levels, a preference for imported products, and easing of import restrictions in China. In addition, semiconductor imports are greatly affected by non-economic factors such as the US-China conflict, and competition may intensify in the long run as they are seen as a top priority import replacement item. Among these items, Korea's exports to China accounted for a higher proportion in the area of medical devices than pharmaceuticals among medical supplies and a higher proportion of parts than finished automobile products. In addition, Korean products were more favored in the area of cosmetics imports in Shandong and Henan, and in pharmaceutical imports in Tianjin and other regions. Meanwhile, imports of semiconductors and automobiles were greatly influenced by Korean companies' entry into China.
       The results of our analysis of changes in the competitive structure of China's import market showed a decline in the total share of the import market in the five major countries of Korea, Taiwan, Japan, the United States, and Germany. Of these, only Germany increased its share after the GFC. Japan's share fell the most, while Korea's share of semi-finished products declined, but that of parts and parts rose. In addition, while the market share in the capital and consumer goods market fell, the share of food and beverage semi-finished products, durable goods, semi-durable goods and non-durable goods among specific consumer goods increased. Industries in which Korea showed an increase in market share were non-metallic mineral products, general/special equipment, electronics/computers/communication equipment, electric machinery, and agriculture. In these industries, Japan and Taiwan had a comparative advance in non-metallic mineral products, and Japan, Germany and the United States in general and special facilities, indicating that Korea’s competition with these countries may intensify. As for the area of electronics/ computers/communication equipment, Korea and Taiwan both have industries with competitive advantages, and both are rising in their market share, meaning that competition with Taiwan can be expected to become more intense. Among major promising import items, medical supplies maintain their share and comparative advantage in advanced countries such as Germany and the United States. However, due to the characteristics of medical supplies, which require the accumulation of specialized technology, each specific item has a different competitive structure. In particular, in the import market for dental implants, Korea's market share and comparative advantage have increased significantly. In the case of cosmetics, Korea's market share has increased rapidly since 2014. In addition, the share of semiconductors in Taiwan and Korea exceeded 50%, while Taiwan's share and comparative advantage continued to rise and Korea's share fell slightly. In automobiles, Korea's share of both finished cars and parts fell and comparative advantage was lost in this sector.
       In Chapter 6, based on the above analyses, the characteristics of China's domestic demand expansion strategy and regional economic structure change were synthesized into new models and forecasts produced for the 14th FYP period. In addition, strategies to enter the Chinese domestic market were presented by dividing them into strategic directions, selection of promising regions and industries for cooperation by sector, and formulation of new cooperation models. First of all, it was proposed to strengthen regional economic cooperation to minimize the impact of unstable global governance as a strategy for entering the domestic market in China in the era of US-China conflict.
       Next, promising regions and industries for cooperation were selected for each field related to domestic demand expansion. First, investments in transportation and energy infrastructure and new infrastructure are the initial engines for domestic demand expansion, and cooperation should be expanded in the western and eastern regions, respectively. In particular, in the area of transportation and energy infrastructure, industries such as construction, machinery facilities, transportation facilities, and shale gas development are promising. In the new infrastructure area, industries such as 5G technology, electronics/communication facilities/parts, and digital/ information technology services are promising. Second, investments related to strategic new industries, which are emphasized along with infrastructure investment in the 14th FYP, are expected to be concentrated in cluster locations designated and managed by the central government. The eastern region (Guangdong, Beijing, Shanghai, Jiangsu, Shandong, etc.), where next-generation information technology, advanced equipment, new materials, biopharmaceuticals, and clusters related to environmental protection and energy saving are concentrated, and some central and northeast regions (Hubei, Anhui, Henan, Shanxi, Sichuan, Liaoning, etc.) need to promote cooperation in new industries. Third, expansion of final consumer goods exports and entry into the domestic consumption market through the use of new consumption models should be promoted around the eastern region. As demand for non-face-to-face consumption increases rapidly with COVID-19, development of the consumption market through new consumption models such as online and offline consumption convergence is being urged. In addition, in the process of expanding domestic demand, imports of intermediate goods for investment have slowed, while imports of final consumer goods continue to increase. This trend is expected to continue due to improved income and consumption levels and policy factors. Focusing on promising items where Korea possesses high market share and comparative advantage, such as medical supplies and cosmetics, there is a need to enhance competitiveness and expand entry regions by incorporating new consumption methods. In particular, as the online retail market is concentrated in Huadong and Huanan areas such as Guangdong, Zhejiang, Shanghai, and Jiangsu, and the import of final goods is also concentrated in these regions, these can be used as an entry base into the consumer market. In addition, it is necessary to consider entering the consumption market in some inland areas where the growth of online shopping, education, remote medical care, culture, and leisure services is rapidly growing, as well as pilot zones where tax reductions and license exemptions are applied to some consumer goods.
       Finally, new cooperation models include cooperation using China's key regional development strategies, expansion of service convergence based on technological superiority, expansion of participation in China's domestic value chain, and open application of China's domestic system to Korea- China FTA service and investment agreements.

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  • 인도 스타트업 생태계 분석과 정책 시사점
    The Indian Startup Ecosystem and Policy Implication

       A startup refers to a company with a short period of experience, in many cases with ideas and innovative technologies. Recently, startups are leading the 4th industrial revolution and technological innovation and cont..

    Hyoungmin Han et al. Date 2020.12.30

    Economic cooperation, Industrial policy India and South Asia

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       A startup refers to a company with a short period of experience, in many cases with ideas and innovative technologies. Recently, startups are leading the 4th industrial revolution and technological innovation and contributing to job creation and industrial productivity growth, and as a result their economic importance continues to increase. In particular, India is emerging as a startup powerhouse based on its fast-growing economy and relatively cost-efficient excellent talent pool. Also, global investment into the Indian startup market is increasing. While the number of Korean companies entering the Indian startup market is increasing, only a few have made stable inroads into the market.
       Based on quantitative data, literature analysis, corporate case analysis, online surveys, and in-depth interviews, this study objectively evaluates the Indian startup ecosystem and draws policy implications to increase the accessibility of the Indian market to Korean startups. The startup ecosystem is composed of many elements, such as the founder(s), financial environment, knowledge-related infrastructure, and government system. This report analyzes the Indian start-up ecosystem at the national and state level. Additionally, a survey was conducted on Korean start-ups in the Indian market to identify the policy demand of firms. The main contents of each chapter can be summarized as follows. 
       Chapter 2 analyzes the current status of startups in three East Asian countries, (Korea, China, and Japan), along with the United States, Britain, and India. Quantitative data shows that the Indian startup market has rapid growth compared to other countries in terms of quantity such as the number of startups and investment volume. However, India's startup market is relatively focused on Indian founders, and investment is concentrated on a small number of companies with high growth potential. Also, the proportion of individual investment is relatively high compared to other countries.
       Chapter 3 illustrates the Indian startup ecosystem using quantitative data and literature review, focusing on components such as entrepreneurship, investment environment, knowledge-related infrastructure and human capital, and government policy. As a result of the analysis, India shows a favorable perception of entrepreneurship and an active entrepreneurial atmosphere. It was found that this is based on raising awareness through the growth of the startup ecosystem and their success cases, the multi-cultural characteristics of India, and the spirit of jugaad. The investment ecosystem for Indian startups has been continuously developed since the dot-com boom in the 2000s and funding systems recently introduced by the government, such as the “Fund of Funds for Start-ups” and “Mudra Loan,” have contributed to the rise in funding from domestic and overseas sources. In terms of knowledge-related infrastructure and human capital, India has developed a world-class knowledge infrastructure and excellent manpower pool based on the active R&D and incubation activities of higher education institutions and multinational companies in India. Meanwhile, the Indian government has laid the foundation for startup growth by implementing multifaceted startup promotion policies for many years, such as simplification of administrative procedures for startups, financial support and tax benefits, industry-academia cooperation and incubation support.
       In Chapter 4, we analyze the status and characteristics of startup ecosystems in Bengaluru, Delhi and Mumbai, where startups are the most active in India. Based on the Crunchbase data, this chapter also examines foreign entrepreneurs opening their start-ups in India, the proportion of startups by industry sector, and the investment environment. Each of the local governments to which the three cities belong to are promoting policies such as establishment of a startup-dedicated agency, deregulation, and infrastructure support to foster startups. Meanwhile, we also confirm that startup ecosystems with distinctive characteristics were formed according to major industries and local government policies for each city. Bengaluru, referred to as “India's Silicon Valley,” is the city with the most active startup ecosystem, with abundant human capital centered on a rich pool of engineering talents and startup infrastructure such as Tech Parks. Delhi, which includes the capital of India, offers high access to major institutions, a well-equipped business environment, and a population of more than 16 million, showing the rapid growth of e-commerce startups. Mumbai, one of India's economic centers, has built a high-level startup funding network based on the development of commerce and finance. In addition, Mumbai is the first state in India to announce its Fintech promotion policy and support related startups.
       Chapter 5 provides an analysis of an online survey and in-depth interview conducted to gather the experience of using the Indian startup ecosystem and evaluation from Korean startups that have entered India and to identify the demand for policy support from the Korean government. Among the respondents of startups operating a local subsidiary in India, there were cases where these subsidiaries were co-founded with local partners, or this approach was being considered, to allow more customized local business activities, but many companies replied they prefer to found their startups independently due to reliability issues. Most of the capital raising came from domestic funding sources, not from India. Many respondents lacked sufficient information on financial support provided by the Indian government and hence had little knowledge as to whether startups founded by foreigners are eligible for these supports and services from the Indian government. Moreover, there are few cases of networking activities with Indian universities, multinational companies, and Indian government-run startup support agencies or accelerators. Respondents evaluated that the competitiveness of human resources and knowledge-related infrastructure in the Indian startup ecosystem is relatively high, but the financing and government support are rated as less competitive. The respondents of the survey pointed out the local regulatory and institutional barriers and limited local networks as difficulties in entering the Indian market. The lack of reliable information on local partner companies and insufficient funding were also identified as obstacles. Based on the survey results, government policy support is needed for overseas marketability verification consulting, overseas marketing expenses/education, participation in overseas accelerating programs, working and residential spaces, and incubation opportunities from global companies, to accelerate the entry of Korean startups into India, 
       In Chapter 6 we present policy directions and specific policy tasks to support domestic startups entering India based on the research results and analyses. First of all, it is necessary to continue promoting the New Southern Policy and Korea-India digital cooperation and create an environment amenable to startups advancing into the market. At the macro-level, preemptive efforts to reinforce digital cooperation between the two countries are needed. To this end, this study suggests measures such as upgrading the New Southern Digital International Forum into a regular event and conducting joint research on a Korea-India startup policy roadmap. In addition, taking into account that the entry of Korean startups into India is stagnating due to lack of interest and information on the Indian market, the establishment of the Korea-India Knowledge and Culture Exchange Center and annual Korea-India startup events would increase exchange opportunities between the two countries. In addition, reflecting the difficulties and policy demands of domestic startups entering India, this study recommends practical policy support measures such as operating an Indian business information desk, establishing an investment information network, preparing a pool of reliable and talented local personnel and partners, strengthening expertise in related organizations, and establishing a joint fund for startups.
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  • MERCOSUR와 태평양동맹(PA)의 향후 전개방향 및 시사점
    Economic Integration of MERCOSUR and the Pacific Alliance and Its Implications for Korea

       MERCOSUR and the Pacific Alliance (PA) are the two major trade blocs in Latin America. Currently, Korea is negotiating a trade agreement (TA) with MERCOSUR and PA. The countries that Korea has signed FTAs ​​in Latin A..

    Yeo Joon Yoon et al. Date 2020.12.30

    Economic opening, Economic integration Latin America

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       MERCOSUR and the Pacific Alliance (PA) are the two major trade blocs in Latin America. Currently, Korea is negotiating a trade agreement (TA) with MERCOSUR and PA. The countries that Korea has signed FTAs ​​in Latin America include Chile, Peru, Colombia and six Central American countries. In other words, Korea has signed free trade agreements with most Latin American countries except Brazil, Mexico, and Argentina. Therefore, to have enhanced access to the Latin American market, Korea-MERCOSUR TA and joining the PA as an associate member is important for Korea. 
       In this report we study the nature of internal and external integration of MERCOSUR and PA. For better integration of Korea and these Latin American trade blocs in the future, it would be important to understand their current level and nature of integration. The integration in this study has several facets. First, we take a quantitative approach. To do this an integration index is constructed and analyzed. This index considers integration in trade, value chains and so on. The second approach is more qualitative. Specifically the case of the MERCOSUR-EU Trade Agreement and PA associate member negotiation process are investigated. By doing this, we analyze the factors that hinder the external integration of these blocs.
       In Chapter 2, we study the integration of MERCOSUR. For MERCOSUR, the ongoing conflict between Brazil and Argentina has been a major obstacle to regional integration. It is no exaggeration to say that the history of MERCOSUR is marked by repetitions of conflict and conflict-resolution between Brazil and Argentina. Some cases were serious enough to threaten the existence of MERCOSUR and most of these conflicts stemmed from economic crises. In the second part of Chapter 2, the negotiation process of the MERCOSUR-EU TA is examined. The MERCOSUR-EU TA took such a long period of time to finalize. It is a typical trade agreement negotiation between advanced and developing regions. At the same time, it is the first trade agreement that MERCOSUR signed with a major economy. Another salient characteristic is that higher standards in environment, labor, intellectual property rights, and digital trade were included at the EU’s request.
       Chapter 3 examines the negotiation process between PA and Australia, New Zealand, Canada and Singapore for their associate memberships. At first, it was a multilateral negotiation that involved all the parties. But they realized that it was not easy to reach an agreement with multilateral negotiations. Accordingly, they decided to proceed through bilateral negotiations. In this regard, Singapore and Australia are considering voluntarily excluding sensitive issues in order to advance negotiations. Singapore is considering to exclude IPR and labor rights issues. Australia is considering to withdraw requests for non-discriminatory treatment of digital goods and issues regarding illegal fishing.
       In Chapter 4, the determinants of MERCOSUR and PA’s integration and the effect of internal integration on external integration are analyzed. The results can be summarized into three categories. First is the importance of political and institutional variables that have been relatively overlooked in previous analysis. The improvement of the political and institutional environment promotes both internal and external integration in the region. Second, in the case of PA, the promotion of internal integration also enhances external integration, while for MERCOSUR it was estimated that the promotion of internal integration did not lead to promotion of external integration. Third, the improvement of regional integration in terms of the regional value chain leads to an increase in external integration for PA. This implies that the integration of supply chain within PA would eventually lead to increasing integration with non-member countries such as the U.S. and Canada. 
       Chapter 5 provides implications and discusses Korea’s negotiation strategies with MERCOSUR and PA. With MERCOSUR it is necessary to establish the brand of the trade agreement. For example in the case of the ongoing Canada-MERCOSUR TA negotiations, gender, environment, and labor issues are emphasized and the parties aim for an inclusive trade agreement. With the Korea-MERCOSUR TA, MERCOSUR is very much interested in technical cooperation with Korea. Therefore, these issues need to be branded and emphasized. On the other hand, if the negotiations are prolonged due to the unresolved issues of opening agricultural and industrial product markets, an alternative option would be a ‘Light Trade Agreement’ that excludes sensitive negotiation agenda. Meanwhile it is also necessary to carry out various activities to create a friendly atmosphere in MERCOSUR. It would be ideal to continuously promote the necessity of TA with Korea through joint research and seminars with local economic organizations or think tanks. PA is promoting e-commerce as one of the 23 negotiating agendas. Korea and PA have also confirmed common interest in digital infrastructure and information technology. Accordingly, Korea needs to come up with a strategy to promote cooperation in these areas.
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  • 중국의 대유럽 투자와 유럽의 정책대응
    China’s FDI in Europe and Europe’s Policy Response

       China’s investment in the European Union (EU) increased significantly during the European financial crisis, but has been on the decline in recent years. The surge of Chinese investment has raised concerns and demands..

    Pyoung Seob Yang et al. Date 2020.12.30

    Economic relations, Overseas Direct Investment China Europe

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       China’s investment in the European Union (EU) increased significantly during the European financial crisis, but has been on the decline in recent years. The surge of Chinese investment has raised concerns and demands for analysis on its negative effects on the EU companies and industries. The largest economy in the world, with an advanced capital market and technology, the EU has been China’s most important economic partner in the course of the latter’s rapid growth. In this context, the present study aims to analyze main characteristics of Chinese investment and M&A in Europe, major policy issues between the two sides, the EU’s policy responses, and prospects of Chinese future investment in Europe, going on to draw important lessons for Korea. 
       This study differentiates itself from prior research in that implications are produced for Korea by analyzing main characteristics of the EU’s M&A market and China’s investment. This study further distinguishes itself through its use of primary data to capture indirect Chinese M&As via third countries (e.g. Hong Kong) or Chinese subsidiaries already established in Europe. Until now, existing studies were only able to analyze direct M&As from mainland China due to limitations of available data. Thanks to the new approach, the study presents a more complete picture of Chinese M&A in Europe and captures distinctive features of the two types of M&A. 
       The present study focuses on three key issues, as follows: first, the overall status of China’s investment in Europe and the characteristics of M&A in Europe were examined; second, major investment issues and policy responses in China and the EU were reviewed; and lastly, China’s investment decision-making factors in Europe were analyzed and compared with those of Korea, leading to implications for Korea.
       With regard to the second issue, the study compared policy responses of the EU to the US vis-à-vis Chinese investment. First, the study analyzed China’s investment strategies in the US and the EU respectively. Especially, the study focused on China’s recent investment moves in Eastern Europe, predicting the possibility of future strategic changes. In order to link these analyses to implications for the Korean government and businesses, quantitative analysis techniques such as factor analysis of investment decisions were used to show determinants of Chinese investment compared against that by Korea.
       To summarize the main characteristics of China’s investment in Europe, the study found that the EU’s share of China’s overseas direct investment has continued to increase until recently. Second, investment in the Central and Eastern European Countries (CEECs) is gradually increasing, although it is still insignificant compared to the top five destinations in the EU: Netherlands, Sweden, Germany, Luxembourg and France. Third, China’s investment in the EU is being made in pursuit of innovation in manufacturing and to acquire high-tech technologies.
       Using data from Thomson Reuters information system as primary source, the study collected and analyzed 1,172 M&A cases conducted by China in the EU between 2000 and 2019. The main characteristics identified are as follow. First, the number of China’s M&As in the EU decreased to 113 in 2019 from a maximum of 206 in 2016, showing fluctuation largely in line with China’s overall trend of overseas investment. Second, when compared to overall M&As made in the EU, the proportion of indirect China’s M&As was relatively higher than direct ones. Third, the study found that Chinese investment mainly targeted Western European companies. Investment in Germany, France, and the United Kingdom represents 49.5 percent in terms of number of cases and 74.3 percent in terms of amount invested. Fourth, in the case of CEECs, investment has been in full swing since 2010. Targeted sectors are mainly transportation infrastructure and construction materials such as ports and airports, which seem to be related to China’s Belt and Road Initiative (BRI).
       As there are many companies in the CEECs that are competitive in the high-tech and strategic technology sectors, there is a good possibility that Chinese companies will increase M&A investments in this region, bypassing investment regulations of major Western European countries. Although it is too early to fully confirm this, the study underlines some indirect evidences. First, China’s M&A investment in the CEECs is largely concentrated in the Czech Republic, which is the most advanced in terms of technology. Second, the CEECs are less wary of China’s M&A investment than major Western European countries, and are generally more welcoming to China’s investment.
       Empirical factor analysis of investment shows that China’s investment in the EU is strongly motivated by the pursuit of strategic assets. Other factors such as institutional-level and regulatory variables are found to have no significant impact, or have an effect contrary to expectations. This suggests that China’s investment in the EU is based on the Chinese government’s growth strategy, and accompanies an element of national capitalism. China’s investment is also found to be sensitive to the degree of taxation and openness in investment, which can be attributed to state-run companies leading this investment. When compared to China, Korea’s investment is largely concentrated in the CEECs and more prone to make greenfield investments in the manufacturing sector. The factor analysis also shows that Korea’s investment strategy is more about integrating with Europe’s value chain than acquiring core technologies. 
       It is highly expected that the COVID-19 pandemic will have a reorganizing effect on the global value chain (GVC). Greater fluctuation is expected in major advanced economies, including Europe, as they are strengthening control on foreign investment. To begin with, a post-COVID Europe is expected to gradually increase the proportion of its regional value chain (RVC) within the GVC. Moreover, changes will be centered on smart manufacturing in the era of the fourth industrial revolution. These economies are also expected to further diversify their supply chains in order to hedge against other risks on the global level. 
       Foreign investment regulation in the high-tech sector motivated by national security is emerging as a global issue as the US and the EU are tightening their control. As Korean companies are not free from the risk of falling under such regulations, a thorough and careful response is required. Given that such regulations principally target China, and Korea is known as a traditional ally of the US and the EU, there is not much concern that they will be placed on the list of main regulatory targets. However, it should be noted that major countries have set the high-tech sector as future strategic industries and are highly sensitive to cases of technology leakage and issues of national security.
       For the Korean government, it is necessary to prepare legal and institutional measures regulating foreign investment in reference to the US and the EU. In this regard, the recent revision of the “Act on Prevention of Divulgence and Protection of Industrial Technology” (promulgated on August 20, 2019 and implemented on February 21, 2020) strengthened the basis and effectiveness of foreign M&A regulations. Cases of regulating foreign investment in the name of national security are becoming an important trade issue, particularly in the US and EU, and conflicts are expected to continue. In particular, the scope of national security review is expanding. Korea also needs to respond more actively to these new trade issues. To this end, it is necessary to clearly establish the concept of national security and standards for application in reference to relevant legislation changes in economies such as the US and EU, and to prepare more specific definitions of national core technologies, and their scope and deliberation procedures, to enhance the enforcement capability of the revised law.
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  • 중국의 금융개방 환경 변화와 대응방향
    Changing Environment for Opening of Chinese Financial Sector and Response Measures

       China's financial opening has progressed at a very slow pace, unlike the manufacturing and trade sectors that have pushed for an active opening to the outside world. The Chinese economy has been growing rapidly while ..

    Sang Baek Hyun et al. Date 2020.12.30

    Economic opening, Financial liberalization China

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       China's financial opening has progressed at a very slow pace, unlike the manufacturing and trade sectors that have pushed for an active opening to the outside world. The Chinese economy has been growing rapidly while serving as a global production base, but since 2012, it has become necessary to modify its approaches to achieve growth as it enters the so-called “New Normal (新常態)”, an era of medium-speed growth. Recently, new reform and opening measures have been taken in various fields to improve the quality of the Chinese economy, and the need for reform and opening in the financial sector has also increased. Internally, the financial system centered on China's state-owned commercial banks has focused on indirect financing, which has served as a major obstacle to upgrading China's economy and industry to the next level, further increasing the need for reform and opening of the financial sector. Moreover, externally, the U.S.-China conflict which began in earnest in 2018, is applying strongly pressure toward reform and opening in China’s financial sector. The Chinese government began to show a proactive attitude toward financial opening amid such internal needs and external pressure, and an important development was seen in China’s financial opening when President Xi Jinping declared further opening measures at the Boao Forum in April 2018. The Chinese financial authorities have prepared follow-up measures related to financial opening, and the Chinese government’s efforts toward financial opening in the three years from 2018 to 2020 yielded more results than the ten-year opening period since its accession to the WTO. 

       Against this backdrop, this study examines the main contents of China’s financial opening process, which has been accelerating recently, and derives evaluation and implications. It analyzes environmental changes in internal, external, and industrial and technological aspects encompassing China’s financial opening since 2018. First of all, regarding the internal environment of China’s financial opening, we examined changes in the policy and institutions of Chinese financial opening by dividing these into the two categories of the financial service industry and capital account. Secondly, in terms of external environment, it was analyzed how the intensifying conflict between the U.S. and China affected China’s financial opening and Hong Kong’s status as a financial hub. Finally, the environmental changes in industry and technology were examined by looking at the recent development of China’s digital finance and international cooperation in the area, and their significance for the U.S.-China competition. Through this, we evaluated the financial opening of China and derived policy implications for Korea’s response and direction for financial cooperation with China.

       Chapter 2 analyzes the current status and policies of Chinese financial market openness as a result of internal environmental changes. The Chinese government’s policies and systems in the financial opening were analyzed across two categories: financial services and capital account. Financial services were again divided into banking, securities, and insurance sectors. The capital account was examined by dividing it into the stock market and the bond market. In the case of the financial services sector, the Chinese government has taken the most active measures to ease or remove restrictions on the share ratio and scope of work permitted for foreign financial institutions among all sectors of banking, securities, and insurance. Compared to this, the Chinese government is taking a more cautious approach in the capital market, creating and managing channels for foreign capital to enter the Chinese capital market such as the QFII, RQFII schemes, and Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect, and bond connect programs. The opening of the Chinese capital market is mainly carried out by easing or abolishing investment limits on Chinese stocks and bonds through these channels or facilitating investment.

       Chapter 3 analyzes changes in the financial opening environment in China due to intensifying conflict between the United States and China, which are external environmental changes. We reviewed the demands by the U.S. upon China to open its financial sector since the negotiations for China’s accession to the WTO. The conflict between the two countries has been complicated since the inauguration of the Trump administration, and thus, the environmental change was analyzed from the perspective of intensifying conflict between them. China’s financial opening has been accelerating since 2018 under U.S. pressure, and as a result, U.S. financial firms are actively entering China. On the other hand, however, as the Trump administration is pushing for various measures of U.S.-China financial decoupling after the Covid-19 pandemic, we carried out analyses and predictions for various scenarios according to the direction of future U.S.-China conflict. We also analyzed how Hong Kong’s status as a financial hub would develop, as it has emerged as a battleground for the U.S.-China conflict since the enforcement of the Hong Kong Security Act in July 2020. By analyzing Hong Kong’s foreign exchange and stock markets, and its capital inflow and outflow, we predicted the short- and long-term impact of the U.S.-China conflict on Hong Kong’s status.

       Chapter 4 analyzes the changes in China’s financial opening environment due to the development of China’s digital finance, focusing on industrial and technological aspects. The background and characteristics of the development of digital finance in China, the status of openness and international cooperation were examined, and the competition in the Digital Belt and Road initiative and the U.S.-China digital finance platforms was analyzed. Mobile payment platforms such as Alipay in China are actively entering the mobile payment market in neighboring regions with poor financial systems, such as Southeast Asia, employing QR code payment methods based on the competitiveness accumulated in the Chinese market. The expansion of international cooperation in China’s mobile platforms is expected to be carried out in conjunction with China’s Digital Belt and Road initiative and internationalization of the renminbi, but the competition for hegemony in digital finance between the U.S. and China is also expected to intensify. Therefore, this study examined China’s countermeasures to prepare for U.S. financial sanctions, such as CIPS and QR code-compatible international mobile payment systems.

       Based on the analysis of the previous chapters, Chapter 5 evaluates China’s financial opening and forecasts future developments, going on to present the direction for Korea’s response. Since 2018, foreign companies in the financial service sector have been able to enter the Chinese market with China actively opening its financial services sector, and in the case of the capital market, free flow of foreign capital has been allowed by using channels established by the Chinese government. However, although the recent opening of the Chinese financial market is significant as an institutional opening through the revision of laws and regulations, there could be many non-institutional obstacles for foreign financial companies to enter the Chinese market and actually pursue their businesses. In addition, the Chinese financial opening measures currently remain a one-way opening, focusing on the inbound market. The two-way opening that the Chinese government aims for, especially the opening of the capital account, is expected to be possible only after the capacity of Chinese financial authorities to manage financial risks and the competitiveness of Chinese financial companies have improved.

       It is necessary to watch more closely how the intensifying conflict between the U.S. and China affects China’s financial opening. In particular, we may see different patterns depending on what tools are used after the inauguration of Presiden Biden. China is respon-ding to the U.S.-China decoupling, prompted by changes in the external environment of deepening U.S.-China conflict which has been in full swing since 2018, by expanding its financial opening. For China, the risks of China’s real economy can be shared with the U.S. through the financial opening, and for the U.S., the cooperation between the two countries is likely to continue to expand as the U.S. can earn profits from the development of China’s real economy. Concerns about Hong Kong’s status as a financial hub have been raised due to the U.S.-China conflict, but it looks difficult for global financial companies to move to other regions due to their business with China. However, as China's financial openness expands, competition between Hong Kong and mainland China (Shanghai and Shenzhen) is expected to intensify in the mid-to-long term.

       The development of digital finance in China and overseas expansion of mobile platform companies are being driven by private companies. The Chinese government also places great importance on establishing a mobile international payment system in promoting the Digital Belt and Road initiative, so it is expected to be established in connection with future national strategies. This linkage of China's digital platforms and international payment system is likely to be utilized for the internationalization of digital renminbi in the long term. Looking at the competitive landscape between the US and China, it is expected that the US will intensify checks against China's digital finance internationalization in the future. This is because China's digital international payment system is likely to threaten the current U.S. dollar-centered international currency system.

       In response to China’s financial opening, Korea’s countermeasures are to demonstrate competitive advantage through localization and differentiation in the banking sector, cultivation of its ability to integrate global resources and service transactions in the securities sector, and the establishment of sales networks with local govern-ments in the insurance sector. In the case of stock and bond markets, the risks followed by Chinese authorities' supervision on the foreign exchange market and the volatility in the Chinese stock market should be checked.

       China's financial opening following the U.S.-China conflict is expected to serve as an opportunity for Korean financial companies to enter the Chinese financial market. However, Korea's financial industry will need a differentiation strategy due to a low level of internationalization and global competitiveness. In addition, until China's capital market is opened in both directions, it is necessary to establish a strategy with a long-term perspective and approach it with a 'selection and concentration' strategy. However, as the U.S.-China conflict may intensify, the U.S. may impose sanctions on China through financial means, meaning it will be necessary for Korean financial authorities and companies to closely monitor the expansion of the U.S.-China conflict, and prepare countermeasures for each scenario.

       It is necessary to prepare for the possibility of separate economic blocs forming around the U.S. and China in response to environ-mental changes caused by the development of digital finance in China, and to establish a direction and strategy for our digital platform cooperation. However, prior to this discussion, it was also suggested that efforts to form the Korean digital finance market and enhance its competitiveness should be given priority.

       Lastly, policy implications for Korea-China financial cooperation following the expansion of financial opening in China were derived. In regard to Korea-China financial cooperation, valid suggestions would be: expanding discussions about financial cooperation via Korea-China economic dialogue channels; establishment of a Korea- China financial stability consultative body; discussing follow-up negotiations for the Korea-China FTA and promoting pilot financial cooperation projects; expansion of research to vitalize financial investment of Chinese industries and companies; and training specialized human resources in Korea-China finance.

       

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  • 환율과 경상수지의 구조적 변화와 정책방향
    Structural Factors Behind Foreign Exchange Rate and Current Account Balances And Policy Directions

       The goal of this study is twofold. On the one hand, when the Korean won is weak, we provide an empirical basis and response logic to the pressure of appreciation. On the other hand, when the won is strong, we analyze ..

    Minsoo Han et al. Date 2020.12.30

    Financial policy, Exchange Rate

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       The goal of this study is twofold. On the one hand, when the Korean won is weak, we provide an empirical basis and response logic to the pressure of appreciation. On the other hand, when the won is strong, we analyze the effect of the exchange rate on the competitiveness of Korean exporting firms, thereby providing relevant policy directions. 
       Korea’s current account has generally maintained a surplus since 2000. However, the current account surplus did not immediately lead to an increase in net foreign assets. Indeed, Korea has become a net foreign asset country only since 2014. Korea’s continuous current account surplus and investment in safe but low-return foreign assets can be attributed to the rational choice of Korean investors who take into account that Korea has traditionally been a country with certain characteristics (e.g. the absence of a key currency, relatively less developed domestic financial market, and low accessibility to the international financial market). In Chapter 2, building on the important study by Chinn and Parasad (2003) and considering these additional determinants, we empirically analyze the determinants of current account. Our analysis shows that the more the domestic financial market develops or the access to the international financial market improves, the less the current account surplus tends to be. Therefore, for example, if accessibility to international financial markets is not taken into account, the current account gap—actual current account net of appropriate current account—can be overestimated. Our results imply that if the domestic financial market develops or access to the international financial market is strengthened, the current account imbalance will decline gradually in the long run.
       However, in reports on external statements of the IMF and the US Treasury Department, a country’s current account imbalance is occasionally interpreted as a sign of market distortions that stem from the foreign exchange interventions. Fortunately, according to their recent report, these institutions have assessed that Korea’s current account and exchange rate are generally consistent with economic fundamentals, and that, if any, the Korean policy authorities’ foreign exchange interventions are conducted in both directions to improve the disordered market situation. Nevertheless, in the future, pressures for appreciation of the Korean won will increase. Therefore, it is necessary to show empirically that Korea’s foreign exchange market intervention policy has a limited effect on the exchange rate in order to further reinforce the logic of responding to the pressure of exchange rate appreciation. In Chapter 3 we analyze the impact on exchange rates by explicitly considering the interaction of two policies—monetary policy and foreign exchange market intervention policy—in the model. Our main result is that the foreign exchange interventions have a statistically significant effect only in the short term. We also show that the result is robust even if we use alternative empirical methods. The results imply that the foreign exchange interventions could temporarily stabilize the exchange rate, but could not change the exchange rate level or the long-term trend.
       Furthermore, if the foreign exchange interventions are structurally only having a limited effect on the exchange rate, in order to address the pressure to appreciation the value of the Korean won, it will be useful to empirically identify the factors that determine the exchange rate. The recent empirical studies have already pointed out a weak correlation between the exchange rate between two countries and the economic fundamentals of the two countries, which is as opposed to the predictions of previous theoretical studies. In Chapter 4, observing the co-movement of the exchange rates of many countries, we extract common factors of exchange rate movement and empirically analyze the determinants of exchange rates, using financial and trade variables. First, we find that the dollar’s influence on individual exchange rates is found to be quite large. However, the sensitivity of individual exchange rates to dollar factors differed from country to country, and the sensitivity is highly related to the similarity between the capital inflow and outflow of individual countries and the global financial cycle, but the association with trade variables was not clearly observed. Second, in the exchange rate of most countries, the yuan factor is not statistically significant, whereas in Korea, the response of the won to the yuan is statistically significant. In particular, the yuan factor explains about 10% of the volatility of the won, and we observe a co-movement between the won and the yuan.
       Our above results are of policy significance in that they provide an empirical basis when addressing the pressure to appreciate the won. Meanwhile, an analysis of the effect of exchange rate changes on the Korean economy will have another policy significance. In particular, given the recent situation where the won’s appreciation pressure is expected to persist for the time being, it is necessary to examine the impact of the exchange rate on the competitiveness of the Korean exporting firms. In Chapter 5, we empirically analyze the effect of exchange rate changes on Korean export companies, using microdata on export companies. What differentiates this study from previous studies is that we classify the exporting companies based on size such as capital amount and sales, thereby analyzing how the correlation between exchange rate and the variables related to these companies’ business activities would vary by size. We find that if the won continues to be strong, the negative impact on exports, profitability, investment, and added value of small exporting companies is more pronounced than those of large exporting companies. In addition, we also find that in response to the negative effects caused by the won appreciation, the capital income of small exporting companies is the most sensitive among the factor incomes. Based on our results, we conclude that to strengthen export support for SMEs, it is necessary to pay attention to strengthening the provision of market information and re-establishing the roles of policy finance and trade insurance. In addition, it is a high time to discuss the direction of improvement of the Trade Adjustment Assistance Program to support rapid adjustment of labor and capital.

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  • 국제사회의 온실가스 감축 목표 상향과 한국의 대응방안
    Increasing Global Climate Ambition and Implications for Korea

       Since the adoption of the Paris Agreement in 2015, the international community has been heeding the urgency of responding to climate change and calling for wider and more decisive actions to mitigate GHG emissions. In..

    Jin-Young Moon et al. Date 2020.12.30

    Trade policy, Environmental policy

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       Since the adoption of the Paris Agreement in 2015, the international community has been heeding the urgency of responding to climate change and calling for wider and more decisive actions to mitigate GHG emissions. In particular, 2020 is the year set for review of the nationally determined contributions (NDC) previously submitted by each Party of the Paris Agreement, and for submitting long-term low greenhouse gas emission development strategies (LEDS). In addition, many countries are seeking a sustainable economic recovery plan that reflects climate change and environmental considerations to overcome COVID-19. Also, as major greenhouse gas emitters participate in the declaration of carbon neutrality vision and EU plans to introduce carbon border tax, the issue of greenhouse gas reduction is expected to affect not only domestic economic and industrial policies, but also diplomatic and international trade sectors. Accordingly, this research was carried out to present our policy recommendations by analyzing measures to strengthen greenhouse gas reduction targets and the economic impact of the EU's Carbon Border Adjustment Mechanism (CBAM). 
       Chapter 2 covers recent discussions in the international community on transition to a low-carbon economy and carbon neutrality, and government policies related to GHG reduction in EU, USA, China, Japan and Korea are reviewed. In order to promote the European Green Deal to achieve carbon neutrality in the region by 2050, the EU has established action plans for each sector such as industry, power generation, resource circular economy, and transportation, while also making considerations for financial aid and support for the vulnerable. In the case of the United States, which has been pursuing a rather conservative environmental policy under the Trump administration, as Joe Biden has been elected in the 2020 presidential election, significant changes are expected in policies to respond to climate change. China, the largest greenhouse gas emitter, has shown a somewhat inconsistent policy stance in regulating fossil fuels, but the country also proposes achieving carbon neutrality until 2060. Japan has also announced carbon neutrality by 2050. Korea recently presented the vision of the Green New Deal as part of the Korean New Deal and plans to realize net zero by 2050.
       Chapter 3 examines the status of greenhouse gas emissions in major countries, and analyzes the characteristics of carbon dioxide emissions embodied in international trade, mainly in the EU and Korea. We have found that mainly developed countries were net importers of carbon dioxide embodied in trade as of 2015, while many Asian countries excluding Japan were net exporters. Based on the OECD’s emissions and trade data, we have estimated additional costs assuming that the EU imposes a tax of 30 euros (36 dollars) per ton of carbon dioxide embodied in imported goods from non-EU countries. These results can be considered equivalent to the costs of imposing a certain percentage of tariffs. Among the EU’s major trading partner countries, India would be required to pay extra costs equivalent to the highest tariff rate of 4.6% while China would be faced with the largest cost of over 11.9 billion dollars in scale with a tariff rate of 2.6%. Korea would be charged the same cost as the 1.9% tariff rate. Indeed, the impact of introducing carbon border tariffs or carbon taxes limited to imported goods will be determined by various factors such as the structure of global value chain between countries. Therefore, it is necessary to prepare countermeasures based on the results of objective research.
       The theoretical model in Chapter 4 assumed a political system with a democratic decision-making process. Specifically, this model assumes that there are two groups of economic actors ‒ Group F (Fossil fuels) and Group R (Renewable energy) in the economy under the democratic political system. The difference between these groups is their own production technology, assuming that the Group F has a fossil fuel-based production technology and the Group R has a renewable energy-based production technology. We found that economic actors with fossil fuel-based production technology prefer a relatively low carbon tax rate to those with renewable energy-based production technology. This model derives the political economy equilibrium of a carbon tax policy by analyzing the endogenous decision process of the policy through a political economy approach in which two groups engage in political competition within a macroeconomic model.
       At the end of 2019, the EU announced a blueprint called the European Green Deal to actively respond to climate change, including the introduction of thr CBAM. A public survey was conducted to collect opinions, with the aim of submitting legislation of this mechanism by the first half of 2021. It was found that the EU is considering three implementation plans: the first is to apply a carbon tax to imported goods and products within the EU, the second is to impose carbon customs duties only on imported goods in the form of tariffs, and the third is to apply the EU Emission Trading System (ETS) to goods imported into the EU. In this context, Chapter 5 analyzes the economic impact of the introduction of the CBAM on the trade patterns of Korea and other major trading countries. We used the Computable General Equilibrium (CGE) model with GTAP data, and estimated the impact of imposing taxes derived in Chapter 3 on specific industries in the form of tariffs. Our approach also considered the possibility that the carbon border tax would be preferentially applied to industries such as cement and steel with high carbon emissions. As a result, we found that exports from major trading countries to the EU declined significantly as the EU’s own production increased for industries that imposed a carbon border. In particular, China, India, and Russia, which have high unit carbon emissions, saw the largest decrease in exports to the EU.
       Chapter 6 presents the basic strategies and policy recommendations for effective response to the introduction of the carbon border adjustment system by partner countries including the EU, and to realize Korea’s low-carbon transition and carbon-neutral goals. First, it is necessary to support low-carbon transition efforts in industries that are highly dependent on fossil fuels and are vulnerable to emission regulations. To do this, sufficient discussions with stakeholders have to be preceded. Sharing domestic and foreign policy trends and persuading the industries to reduce emissions are also required. For example, tax incentives can influence companies’ decisions, encouraging them to change their existing diesel trucks to hydrogen electric trucks. It is also necessary to support retraining and re-employment of workers in fossil fuel-related industries.
       Second, in order to respond to climate change, it is also important to support low-carbon technological innovation. The development of these technologies normally takes a long period of more than 10 years, so the slower the investment takes place, the slower the transition proceeds to a low-carbon economy, which may eventually result in a greater financial burden. Therefore, it is necessary to consider practical ways for the private sector that can lead industries to pursue the innovation of low-carbon technologies. Policies providing subsidies, or imposing revenue taxes on the use of existing GHG emission technologies could be considered.
       Third, monitoring and response measures for the carbon border adjustment system should also be prepared. There is a need to continuously monitor regulatory trends in major countries, and promote exchange and cooperation with overseas research institutes. Above all, it is necessary to discuss various policies to prepare countermeasures for the EU’s carbon border adjustment system. The purposes of introducing this system seem to be not only to reduce emissions, but also to protect its domestic enterprises and secure financial resources for the European economic recovery. From Korea’s perspective, efforts to obtain exemption are needed by presenting the effectiveness of its environmental norms and regulations. At the same time, Korea could also consider a more aggressive position of taking similar measures against the EU. It is necessary to establish environmental and trade policies while considering that other partners can introduce carbon border adjustment measures. 
       Fourth, the private sector needs to expand voluntary efforts to mitigate emissions and environmentally sustainable investment. It is clear that the paradigm shift towards a low-carbon economy is an irreversible global trend. The prevalent outlook is that clean energy generation costs will continue to decline, and that fossil fuel regulations and investment restrictions will continue. Business models or corporate activities aimed at reducing carbon emissions are becoming an important condition in evaluating financial value of the company as well as corporate social responsibility. Global companies are already expanding their investments to achieve their own net zero targets or renewable energy use targets, and are changing new business models to suit the low-carbon economy paradigm. Therefore, it will be necessary for Korean industries to make self-sustaining efforts to develop new business models through technological innovation and investment, and to rebuild competitiveness as a responsible global company. As part of these efforts, mainstream considerations for climate change and GHG reduction must be incorporated into the decision-making process of companies.
       Lastly, it is necessary to actively participate in international cooperation from the viewpoint of not only reducing greenhouse gas emissions but also responding to climate change. First, at the level of the government or local governments, policy exchange and cooperation with other countries can be carried out on whether a mitigation target is appropriate, whether all necessary policy measures are considered and how to monitor the achievement of the target. In addition, as the transition to a low-carbon economy requires a comprehensive shift across all areas of society, climate change issues should be set as the main agenda in multilateral consultation system as well as a consultative body specialized in climate change. It is also important for the private sector, which encompasses business, academia, and civil society, to study success cases by utilizing global networks, and to proactively identify and respond to related technologies and policy trends in the international community.
       This study is meaningful in that it preemptively analyzed the CBAM issue raised by the EU while analyzing the recent efforts of the international community to respond to climate change and reduce emissions. However, we expect a more elaborate analysis could be derived when reflecting the EU’s final decision and factoring in segmented industrial items. In addition, conformity of a carbon border tax with WTO norms and a further analysis of the possibility of introducing a carbon border tax in countries and regions outside the EU will also be needed.
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