This study aims to identify the reason Korean construction companies are increasingly making inroads into emerging countries, to review major risks that Korean companies could face in these markets and to make suggestions for managing those risks.
   In the second chapter, the study examines the changing conditions for the foreign market entry of Korean construction companies. The recent fall in oil prices has caused the financial aggravation of major oil producing countries in which Korean construction companies are concentrated in, leading to a cease in new construction orders or payment delays on completed construction projects. Furthermore, major oil producing countries are increasing their share of PPP (public?private partnership) investment projects in the place of government-funded construction projects, due to the recent decline in government revenues caused by lower oil prices. It seems inevitable that Korean companies, which mostly obtained orders through contracts with foreign companies, will have to expand their share of investment development projects. In
this case, the risks they must consider are likely to jump dramatically compared to EPC (engineering, procurement, and construction management) contracts. Such changes brought about by low oil prices and the consequent higher risks will be unavoidable, especially since Korean companies are seeking more aggressive entry into the construction markets of emerging countries in line with the shrinking Europe and U.S. market shares in the world construction market, and the growing share of emerging countries in Asia, the Middle East and Latin America in the wake of the 2008 financial crisis.
   Amid this changing climate, the study reviews the various risks presented by emerging countries in the third chapter. In emerging countries, certain domestic laws differ from global standards, and the rule of power often holds dominance over the rule of law. Governments are quick to overturn their policies. Such risk can be classified as country risk, which can be handled in various ways. The ISDS (Investor State Dispute Settlement) system is the most effective and powerful tool that can be used, compared with domestic courts, the WTO dispute settlement system, and the international commercial arbitration system. This is because investors have a choice of their own arbitrators with knowledge in the construction industry, can stand on their own, and can argue against the host country’s measures directly. In fact, most of the ISDS is concentrated on emerging countries and construction industries in the broad sense. With 152 countries parties to the convention and equipped with a powerful self-contained implementation system, the ICSID(International Centre for Settlement of Investment Disputes) has handled more than 75% of all ISDS cases.
   In the fourth chapter, this study analyzes leading cases which contain legal issues directly related to country risk. In Chevron vs Ecuador, denial of justice can be more easily handled if there are relevant articles in the BIT (Bilateral Investment Treaties). The arbitrators viewed the BIT articles as special laws to international customary law. In Saipem vs Bangladesh, international commercial arbitration can be turned into a cause of ISDS, if the ward of the international commercial arbitration is annulled by the host country without legal grounds. In Quiborax vs Bolivia, even nationalization or expropriation with public purposes can be illegal if the public purposes are disguised. In Fraport vs Phillippines, it was confirmed that the investor can be protected by provisional measures if the host country commences groundless criminal procedures. With these findings, this study makes a number of proposals for both Korean oversea construction companies and the government. As for companies, more attention must be paid when drawing up contracts, for the place of arbitration is crucial in the case of annulments. Construction companies should also prepare in advance for disputes, by collecting evidence and setting up action plans. As for the government, it is important to provide companies with the lessons of the ISDS awards in a timely manner. Given their limited resources, special attention has to be paid to SMEs. The government should also update existing BITs, as up-to-date BIT articles are the key to winning ISDS cases.
 

 

   This research aims to call attention to the astonishing growth of the Japanese e-commerce market, which has grown to become the 4th biggest in the world in 2014, and propose policy suggestions for increasing Korea’s e-commerce exports to Japan.
   To achieve this end, this research analyzes Japan’s e-commerce market and the statistical data on Korea’s e-commerce exports to Japan, and conducts a survey of Korean companies exporting to Japan through e-commerce platforms.
   The findings of the research are as follow: First, the Japanese e-commerce market, presently the 4th largest in the world, is expected to continue to grow in the future. Particular growth is expected in the digital market, which includes online games, e-publishing, etc.
   Second, one of the reasons Korea’s e-commerce exports in 2015 increased more than threefold compared to the year before is because the Korean government started to include goods for list-clearance in its export statistics; since list-clearance does not require information such as company size or item name, the value of trade classified under “others” or “no sorting” has increased significantly.
   Third, according to export statistics, Korean e-commerce exports to Japan depend heavily on items that belong to the two fields of fashion and beauty (comprising 61.6% of the total).
   Fourth, a survey of Korean companies exporting to Japan using the e-commerce platform shows that the companies find factors such as promotion & marketing, complicated export declaration process, etc. as the most serious bottlenecks in e-commerce exports.
   Fifth, the survey results revealed that there is a need for the Korean government to primarily focus on the three tasks of simplifying the export declaration process, supporting companies’ marketing and PR activity, and providing one-stop support through export promotion organizations.
   In terms of policy suggestions for boosting Korean e-commerce exports to Japan, this paper proposes three recommendations: creating a one-stop export system, diversifying export products, and simplifying the export declaration process.
   First, an e-commerce export support center could perform a general range of services?from acting as a substitutionary CSS (Customer Service System) for foreigners, translation services, to providing information on overseas marketing and customs clearance?and ultimately serve as a base camp for expanding exports.
   Second, export products should be more diverse. When it comes to diversifying export products, qualities such as “marketability” in the Japanese retail market need to be considered. Products that match the needs of Japan’s increasingly aging e-commerce population have emerged as a promising catalyst to increasing exports, and thus should also be considered. Diversifying sales channels (such as through supporting individual online shopping malls) will be necessary as a measure to diversify export products.
   Third and finally, it will be necessary to address the growing need to simplify the export declaration process. To achieve this end, the “Simplified Export Declaration System for E-Commerce,” introduced in July 2014 with the purpose of expanding e-commerce trade, should continue to be publicized. At the same time, further inquiries should be made to identify which parts of the export declaration process need to be simplified. Another issue to be addressed is the use of lump-sumvaluation, a problem created by the decision to include the list-clearance in export statistics. One possible solution could be to introduce an ICT- or AI-based technology that, upon entering the company name and the item name, automatically adds in the corresponding company size and the HS code.
 

 

  Although the judgment on the legitimacy of SPS measures fell completely under the state's sovereign rights in the past, it has been placed under international trade regulations due to increased trade liberalization. The WTO agreement judges the legitimacy of SPS measures based on The Agreement on the Application of Sanitary and Phytosanitary Measures (the “SPS agreement”). However, the ambiguous regulations of the SPS Agreement make it difficult to identify its original meaning. As the WTO DSB has defined and clarified the meaning of the SPS agreement recently, it would be important to prepare for possible SPS disputes through research on established SPS dispute cases.
  This study briefly explains the contents of the SPS agreement and dispute settlement procedures of the WTO SPS, reviews SPS dispute cases handled by the WTO DSB (Dispute Settlement Body), and analyzes the interpretation and application of WTO SPS regulations. Furthermore, it investigates various issues related to SPS measures and identifies the policy implications of the SPS Agreement. The study also intends to provide a reference for Korea's sanitary quarantine policies and to build the basic data for future academic research.
  This study deals with the EC-Hormones case (1998), Australia-Salmon case (1998), Japan-Agricultural Products case (1999), Australia-Salmon (21.5) case (2000), Japan-Apples case (2003), Japan-Apples (21.5) case (2005), EC-Biotech Products (“GMOs”) case (2006), Canada/U.S.-Hormones Suspension case (2008), U.S.-Poultry case (2010), Australia？Apples case (2010), India-Agricultural Products case (2015), U.S.-Animals case (2015), and Russia-Pigs case (2016).
  The major issue in the SPS dispute cases so far has been whether the measures are based on risk assessments (§5.1). Additionally, whether the measures are more trade-restrictive than required (§5.6) and whether there are arbitrary or unjustifiable distinctions (§5.5) were often checked too. In recent cases, the WTO DSB reviewed whether the measures are based on international standards (§3.1) and whether the Members recognize the concepts of pest- or disease-free areas and areas of low pest or disease prevalence (§6.2) and ensure that their SPS measures are adapted to the SPS characteristics of the area (§6.1).
  The implications that this research holds for Korea are as follow.
Firstly, Korea will try to conduct comprehensive and specific risk assessments to obtain sufficient scientific evidence that demonstrates the measures are based on rigorous and scientific principles. Secondly, it will be necessary to prepare for newly-arising issues such as adaptation to regional conditions and equivalence. Third, there is a need to promote interest and understanding about international standards. Beginning with the publishing and updating of Korean translations for major international standards, it will also be important to actively contribute toward the establishment of proper international standards throughout negotiations, and to ensure that Korea's SPS policies develop in a manner that is in line with these international standards, thus reducing potential trade conflicts with our trade partners. Lastly, as Mega FTAs stipulate similar provisions to the guidelines of the SPS committee and recent decisions of the WTO DSB, it is important to keep an eye on the recent Mega FTAs' SPS Agreement.
  The SPS agreement does indeed contribute to the elimination of unreasonable sanitary standards. However, the SPS agreement is overly dependent on the concept of “scientia vincit omnia (scientific panacea),” as the purpose of the SPS agreement is to prevent SPS measures from being used as disguised protectionism. Therefore thorough preparation with respect to scientific evidence is required to introduce and maintain the sanitary-quarantine system. We expect Korea to take objective and proper SPS measures that fully protect human, animal or plant life or health by developing and improving the quarantine system. 

 

   Vietnam has taken the spotlight as a representative low-wage production base in Southeast Asia. Recently, very high estimates were made regarding Vietnam’s growth potential due to the favorable economic conditions such as stable inflation, robust economic growth, increase in FDI inflow, multi/bilateral FTAs, AEC(ASEAN Economic Community) and so on. As abundant low-wage workers, political stability, large scale population became positive factors attracting investment to Vietnam, FDI inflow to Vietnam is increasing rapidly. Recently, with Korean companies eyeing Vietnam as a strategic production base, Vietnam has emerged as a major investment destination which accounted for 40% of Korea’s investment to Southeast Asia. Therefore, the time has come to review Korea’s investment strategy to Vietnam, considering the country’s increasing strategic importance. That requires us to make reference to cases of investment strategies of the major investors such as USA and Japan, and revise the investment strategy to suit Korean Companies.
   Although the Vietnamese economy has been sluggish during the global finance crisis, internal and external economic conditions such as inflation, trade, investment, and industrial structure have improved and economic growth rate returned to the pre-crisis level (6.68%) in 2015. Recent robust economic growth of Vietnam is due to the surge of FDI inflow, which reached an all time high of 14.5 billion USD. In terms of trade, China and USA account for the biggest shares in Vietnam’s trade; yet as the amount of trade between Korea and Vietnam increased, Korea also emerged as the 4th largest export and 2nd largest import destination of Vietnam. Vietnam’s potential as a global production base will only get bigger due to recent favorable internal and external economic condition, but there are a few negative factors as well; such as corruption, lack of skilled workers, and inefficiency of SOE (State Owned Enterprises). According to the Doing Business Index of the World Bank Group, which analyzes the business environment across economies, Vietnam ranked 90th out of 189 economies. Among 10 indicators for business environment analysis, Vietnam scored relatively high in dealing with construction permits, registering property, and acquisition of credit; but low in payment of taxes, protecting minority investors and resolving insolvency. Recently, investment environment of Vietnam has become more favorable due to improvement in FDI and employment terms by the revision of foreign investment laws and labor regulations.
   Vietnam’s economic growth and industrialization began with a program of economic reform called ‘Doi-Moi’ in 1986. Since the lifting of US trade sanction on Vietnam in 1994, Vietnam started to attract large scale FDI projects. Based on FDI, Vietnam was able to achieve industrialization and rapid economic growth. In the 1990s, investment in labor-intensive industries from major Asian investors such as Japan, Korea, and Taiwan accounted for the major share of FDI in Vietnam. However, as the main FDI sectors changed from labor-intensive to technology and capital-intensive industry, Vietnam’s industrial structure has been transitioning to include more high value-added industries. Before the global financial crisis, Korea’s direct investment to Vietnam had mainly focused on labor-intensive industries, with large scale investments in electric-electronic industries by MNCs starting to increase following the global financial crisis. While initial investment represented the major share in Korea’s total investment in Vietnam, the share of extension investment began to increase and FDI sectors also diversified since 2014. Japan’s direct investment started to increase since Vietnam’s accession to the WTO in 2007, and the Vietnam-Japan EPA in 2009. Japan has operated a consultative group organized by economic units, and also improved the business environment by establishing exclusive industrial parks for Japanese investors. Meanwhile, US-Vietnam economic relations mainly focused on trade rather than large scale FDI. Bilateral trade and investment environment are expected to improve as a result of the conclusion of the TPP in 2015. The US also had a summit meeting with Vietnam on important agendas such as effectuation of TPP, and dispute-settlement in the South China Sea as a part of its rebalancing strategy to Asia. Based on large-scale FDI attraction, Vietnam is pursuing to take part in GPN(Global Production Network) corresponding to the entry of major investors into the Vietnam market. However, there are still lingering problems such as lack of infrastructure and skilled workers which remain as barriers to GPN. The Vietnamese government is promoting physical and institutional improvement by operating a variety of consultative working groups.
   Vietnam became a major investment destination for Japan through the latter’s ‘Thailand plus one’ strategy, enacted in order to reduce the risk associated with Japan’s high dependency on the Thai market. In addition to the traditional type of FDI, there has also been rapid increases recently in Japanese M&A investment in the Vietnam market. Entry modes of Japanese companies in Vietnam market are diverse, and includes cluster strategy based on anchor companies, local partnerships like OEM, licensing, joint venture, and partnership with Japanese investors that have entered previously such as Line Gari and Nokisaki. These modes of entry are intended to minimize the risk in the initial stage, and share the infrastructure and know-how with accompanying firms or companies that entered previously. Japanese companies also tend to take advantage of large scale ODA projects and the supporting policies of government or related agencies. Meanwhile, US companies started to enter the Vietnam market since the US lifted its trade sanction on Vietnam in 1994. Then the large scale investment projects began to be carried out following Vietnam’s accession to the WTO in 2007. However, US-Vietnam bilateral economic exchange is still focused on the improvement of trade relations rather than investment issues. US companies have a tendency to establish their own investment strategies rather than take advantage of the support from government or related agencies. There are several supporting policies by government or related agencies for US companies, but AmCham usually acts as the interest group for US companies in Vietnam.
   Based on case studies on investment strategies of US and Japanese companies in the Vietnam market, a series of implications for Korean government and companies can be suggested as follows. First, the Korean government should pay attention to establishment of industrial parks to encourage investments by Korean companies to create clusters. In order to do this, Korean government also needs to prepare financial support as well as elicit cooperation from the Vietnamese government. Second, Korean companies need to arrange a compensation system which promotes sharing of experience accumulated by already-established Korean companies in Vietnam with the new-comers, while providing incentives to established companies in return. Third, a capacity building program should be prepared for Korean SMEs, especially for the analysis of local regulations and business environment. Fourth, Korean companies need to build cooperative relations to share production facilities, as Japanese companies have done. This could be a good solution for reducing the burden of fixed capital investment and lack of information at the initial stage. Fifth, Korean government and investors should establish a consultative group with the Vietnamese government to facilitate the improvement of the business environment. Sixth, the Korean government need to make efforts to minimize external risk by considering the entire Southeast Asia region as a single production base for Korea, and should build linkages between Vietnam and neighboring countries as part of a ‘Vietnam plus one’ strategy.
 

 

  This research intends to suggest countermeasures and strategies in response to mega-FTAs, based on a comparative analysis of the Technical Barriers to Trade (TBT) chapters of Korea’s FTAs and the TPP Agreement. A particular focus is placed on the impact that mega-FTAs such as the TPP and RCEP would have on Korea in terms of technical policy and institutions, based on an analysis of the key articles of Korea’s existing FTA TBT agreements. We also examine what stance Korea should take, and what strategies the country should choose, if and when Korea joins mega-FTAs including the TPP.
  Among the 15 FTAs Korea has signed, 11 lay down TBT agreements in a separate chapter. This study compares and analyses the main articles of existing FTA TBT agreements, especially those on technical regulations, standards, conformity assessment procedures and transparency.
In the following chapter, based on the main features of Korea's existing TBT agreements, we take a look at the TBT chapter of the TPP, in which Korea may possibly participate. Overall, the TPP regulates TBT articles at a level similar to the WTO agreement or Korea's existing TBT agreements. However, some new regulations that were previously unseen are adopted in certain articles, including those on conformity assessment, transparency, grace period, cooperation and the Annex. In this respect, the TPP can be said to have the strictest regulations of all FTAs or RTAs concluded up until present.
  As the TPP is mostly based on the WTO Agreement, TPP accession is expected to have a limited affect on domestic industries. However, several articles related to specific products, as well as the WTO plus and TBT plus articles, require the improvement of the domestic system or the enactment and amendment of domestic law. It will be necessary for Korea to review agendas related to (1) the testing, inspection and certification industry, (2) improving the competitiveness of certain industries such as the medical device and pharmaceutical industries, and (3) the elimination of local presence requirements (adjustment of requirement levels).
  Based on the outcomes of the analyses conducted above, we suggest domestic and external policy directions, as well as negotiation strategies to be used for future mega-FTAs, with consideration to current technical regulation policies and systems. First, in terms of domestic policy, we propose (1) reviewing and activating domestic technical regulation policy, (2) monitoring the regulatory reform of other countries, (3) gathering the opinions of interested small and medium-sized businesses, (4) adopting and enforcing a TBT expert training system, and (5) actively participating in international conferences held by the WTO TBT Committee. Next, in terms of external policy, we make suggestions for future mega-FTA negotiations, including the TPP and RCEP, for example (1) introducing a policy on regulatory mitigation to expand market-opening, (2) promoting a single agreement for certain products, and (3) introducing, adopting and applying new regulations by improving the existing system.
 

 

 Small and medium-sized enterprises (SMEs) in Korea and Taiwan share very similar problems; both suffer from relatively small domestic markets and limited positions in the respective markets.
Therefore, the survival of SMEs in both Korea and Taiwan-which take up the largest portion in both economies-depends on their capacity for increased overseas expansion. In today’s world where the production cycle of companies is becoming increasingly internationalized, the SMEs’ overseas expansion through participation in the global value chains (GVCs) becomes all the more important.
 Due to the economic recession, the direct exports of SMEs in proportion to the total direct exports are decreasing in both economies. But the complex production cycle of companies indicates that this does not necessarily point to a decrease in SMEs’ overseas competitiveness. This research focused on the fact that actually, many SMEs engage in indirect exporting by participating in value chains of major companies, and compared the total exports(including both the direct and indirect exports) of SMEs in Korea and Taiwan. The results showed that while the proportion of indirect exports to total exports in Taiwan SMEs has greatly increased over time, that of Korean SMEs has shown little difference.
This has led the total exports of Taiwanese companies to increase while the total exports of Korean SMEs decreased. This phenomenon can be explained by two factors: the changes in the industry structures in the two countries and the changes in the participation rate of SMEs and major companies in GVCs. In the 2000s, the proportion of major companies in the Taiwanese economies grew rapidly, intensifying the relationship between major companies and SMEs, under which SMEs provided for the intermediate goods for exports to major companies. This practice increased indirect exports of Taiwanese SMEs. On the other hand, in Korea, major company-oriented export structure and vertical integration structure persisted, with no progress in the GVC relations between major companies and SMEs.
This meant that the increase in Korea’s total exports in the 2000s did not lead to an increase in the total exports of Korean SMEs.
 These characteristics are clearly visible in the two countries’ cellular phone industry. The GVC structure in Korea and Taiwan differs very much in that for Taiwan, SMEs are more directly involved in the GVC than Korea. For SMEs in Korea, where major companies mostly internalized the value chains and are involved directly in the final brand production process, it is not easy for SMEs to engage in GVCs, or participate in the global market or a high value-added industry.
 Looking into the cases of SMEs that have successfully integrated into GVC in both Taiwan and Korea, we can derive several implications.
First, although there exist multiple ways to enter GVCs such as supplying parts and components to a multinational company or procuring overseas contracts as OEM or ODM, in order for such trials to succeed, the SME in question must have a solid technological base. Long-term investment in R&D and research personnel are essential. Second, an active response to the demand is also integral for the company’s success. The SMEs who did succeed in entering overseas markets, actively respond to the foreign buyers’ needs.
Third, active overseas investment strategy is also essential. Another common trait that these SMEs shared was that they all actively sought to build production factories or sales networks in China or Southeast Asia, where they can enjoy multiple benefits including obtaining a new market and low-cost factors of production.
 Taiwanese cases of SMEs who have successfully integrated into GVCs show that the government’s role in the beginning stage of industrialization is to attract multinational companies by utilizing measures like FDI. Many Taiwanese SME personnel learned technology and garnered experience working at multinational companies, and by utilizing the international network formed during this initial stage, was able to continue the OEM, ODM relations with multinational companies. Also, Taiwan’s government organizations such as Department of Industrial Technology and Ministry of Economic Affairs, actively supported SMEs to develop and construct hightechnology production management systems, and supported companies to enhance R&D capacity and application technology by sharing the results of government-led research projects on basic science. For Korean SMEs, the factors for success also included continued R&D investment, an adequate prediction of the market demand and quick response to the changes, global networking, etc.
 The policy supports for SMEs’ overseas expansion in both Korea and Taiwan overlap in many areas: both include SME capacity development, operating SME export support center, support for building and utilizing overseas sales network, operating export incubation centers, overseas marketing, etc. But within this broad context of similarities, there are also some differences as well; we evaluated Taiwan’s policy supports as focusing more on nurturing SMEs’ self-sufficiency, when compared to that of Korea.
 First is regarding the operation of SME incubation centers. In Korea’s case, the government builds export incubators in major trading bases and provides financial support for their operation. On the other hand, the Taiwanese government operates domestic incubation centers, nurturing SMEs while at the same time designates a key industry each year to provide intensive consulting and mentoring service, financial support and even a chance to participate in a major company’s supply network. They especially focus on strengthening international cooperation with overseas counterparts by focusing on the connection with the overseas incubation network.
Second, the Taiwanese government is actively supporting the companies for entry into overseas markets. The MVP (the Project to Promote Most-Valued Products in Emerging Markets) program, a type of SME exports supports program, has been in operation for 17 years, much longer than Korea’s. Third, Taiwan provides a matching service with overseas companies to selected venture companies in order to derive more specific results. In Korea’s case, the country provides a matching service between major companies and SMEs, encouraging overseas expansion by supporting their collaboration.
But Taiwan has adopted a more direct approach that directly matches domestic SMEs with overseas companies. Fourth, in terms of creating SME industry clusters, Korea has constructed regional Center for Creative Economy and Innovation, encouraging collaboration between major companies and regional SMEs; while Taiwan has built industry clusters around regional SMEs, supporting collaboration among SMEs and creating synergy by encouraging common technology development, branding and global marketing.
 This research analyzed the Taiwanese government’s policy supports for Taiwanese SMEs, its successful cases of integration into GVCs, and challenges for the overseas expansion of Korean SMEs, proposing several measures to support their overseas expansion and integration into GVCs.
 The measures to support SMEs’ overseas expansion include: integrating departments related to supporting SMEs and increasing their accessibility, selective supports, providing information on the emerging markets and the importance of expanding supporting services, and providing suggestions on benchmarking Taiwan’s exports support programs that target the emerging market.
The measures to increase SMEs’ GVC participation include: creating SME clusters, encouraging SMEs’ participation in overseas production network through the FDI, utilizing business matching and global marketing.
 

About KIEP

Infographics

Highlight 2015

Bright 2015

Flight 2016

Appendix 

In 2015, the Korean economy was exposed to a range of variables that caused rapid global economic changes such as falling oil prices, interest rate hikes in the US, and the conclusion of the Trans-Pacific Partnership (TPP) Agreement. Amidst the whirlwind of drastic global economic change, Korea has successfully served its function as an axis of the global economy - as a member of the Organisation for Economic Co-operation and Development (OECD) and G20 - and has become a more influential donor as part of the OECD Development Assistance Committee.

The Korea Institute for International Economic Policy (KIEP) has conducted preemptive research and responded promptly to government agendas to help the country overcome the external challenge of a rapidly changing world economy. We selected key agendas for preemptive research, such as analysis of major global economic issues, including those for emerging countries, and the development of corresponding cooperation measures; analysis of bilateral and multilateral trade issues; capacity-building for economic partnerships, such as official development assistance; response to climate change, including greenhouse gas emission reduction; and practical preparation for reunification through capacity-building.

As a result of our strenuous efforts to swiftly analyze global economic shifts and present economic policy plans and mid？ to long-term strategies at a global level, KIEP ranked 33rd on the 2015 Global Go To Think Tank Index compiled by the Think Tanks and Civil Societies Program (TTCSP) at the University of Pennsylvania, and has been selected as the top domestic policy research institute for four consecutive years. As seen in such acknowledgements, KIEP continues to build its status as a world-class research institute.

This annual report is a compilation of the outcomes of specialized, in-depth studies and research we have conducted on a wide range of subjects over the course of 2015. The report contains an introduction to the institute, an overview of KIEP, outstanding research projects of 2015, research achievements of 2015, and settlement of accounts for 2015. In addition to outlining KIEP's key achievements and activities, this report includes research plans for 2016.

We will continue to exert our utmost efforts to become the world’s best globalized research institute, enhancing Korea’s standing and becoming a trusted partner of groups with policy demands as well as the public. We extend our heartfelt gratitude to all for the support and keen interest in KIEP’s growth and development.
 

 

 

Executive Summary

1. Introduction

2. Literature Review

3. The Structural Changes of the Chinese Economy

3-1. The Compositional Change in China’s GDP
3-2. China’s Import Intensity-Adjusted Demand
3-3. The Evolution of Korea？China Trade

4. Empirical Analysis: VAR Approach

4-1. Model Specification
4-2. Empirical Results
4-3. Export by Type of Goods

5. Conclusion and Implications

Referemces 

This paper examines the structural changes of the Chinese economy and how they have affected Korea’s exports to China. Focusing on the evolution of China’s role in the global value chain, we estimate the impact of China’s external demand and domestic demand. We also shed light on the effect of compositional changes in China’s GDP on Korea’s exports to China. The results of the VAR analysis suggest that external demand had a significant impact on Korea’s exports to China prior to 2008, while Chinese domestic demand became more important afterwards. Moreover, Chinese investment is the most important factor in determining Korea’s exports to China, and Chinese private consumption has recently been gaining relevance.
 

1. Introduction

2. Overview of the Conventional Productive Regression

3. Model Specification

3-1 Comparison with a Conventional Predictive Regression
3-2 Why Does the Predictive System Produce Better Forecasting Performance?

 

4. Estimation Procedure

4-1 A State-Space Representation
4-2 Forecasting Evaluation

5. Empirical Application

5-1 Data
5-2 The Predictability of the Export Growth Rate
5-3 The Predictability of the Import Growth Rate

6. Conclusion and Policy Implications

References 

The objective of this paper is to suggest a new predictive system for international trade, based on an unobserved component model. We employ the predictive system developed by Pastor and Stambaugh (2009), which is unlike other conventional predictive regression models. This paper derives an equivalent linear predictive regression from the predictive system, and explains why the proposed predictive system is able to achieve superior out-of-sample predictive power. When predictors are imperfect in an estimated equation, the equation fails to utilize all information from the predictors’ past history, and unexplained variations are captured by residuals in the estimated equation. With the use of the predictive system, we can more effectively deal with the dynamics of imperfect predictors.
For empirical illustration, we show that, in the case of Korea’s export and import growth rates, the predictive system has better out-of-sample predictive powers than the conventional regressions based on Root Mean Squares Error(RMSE). Results from an out-of-sample analysis show that, compared to the benchmark model, the predictive system improves forecast precision by 18.90% for the export growth rate, and by 7.95% for the import growth rate.