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Study of Competition Policies for Inclusive and Innovative Growth competition policy, industrial policy

Author Minsoo Han, Yungshin Jang, Sang-Ha Yoon, Taehyun Oh, and Subin Kim Series 21-19 Language Korean Date 2021.12.30

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The share of income possessed by the top 1% in major countries is increasing, together with a rise in the inequality index. Previous studies have pointed out globalization, skill-biased technological progress, and digital transformation as factors for deepening inequality. More recently, however, weakening market competition and deepening industrial concentration along with these factors have been noted as major factors in deepening inequality. In the same context, the role of competitive policies in promoting market competition should also be considered as a countermeasure against deepening inequality beyond the traditional view. Against this backdrop, this study conducts case studies and empirical analysis of major countries and proposes a competitive policy direction to achieve inclusive and innovative growth pursued by the Korean government.

First, in Chapter 2, we looked at changes in the industry concentration of the US and the EU—the former which enacted the Sherman Act, the first antitrust law in the world, and the latter another pillar in the history of global competition policy—then examined recent trends of policies in both regions. In both the US and the EU, industrial concentration has generally increased along with the recent proliferation of the digital economy. In addition, as the enforcement of competition laws in these regions is strengthened, the direction of competition policy is changing toward regulating not only anti-competitive actions that directly affect consumer welfare but also actions that can indirectly affect consumer welfare. For example, the US has issued an Executive Order on Promotion Competition in the American Economy, calling for a whole-of-government effort to prevent damage to workers, entrepreneurs, and consumers across the industry, promote profits, and promote competition. The EU has also proposed legislation to strengthen regulations, including regulating corporate unions, restricting participation in public procurement, and initiating ex officio investigations in order to block various circumventive attempts to distort market competition. We can also see a more proactive response to the expansion of the digital economy in the US, which proposed the “Stronger Online Economy: Opportunity, Innovation, Choice” bill, while the EU also introduced a regulatory bill that strengthens fair competition for digital platforms in the EU. 

In Chapter 3, the impact of deepening industrial concentration on inclusive innovation growth was empirically analyzed through national and industry-specific panel data. Here, we used the labor income share as an estimate representing inclusiveness and the total factor productivity as an estimate representing innovation. Also using the methodology of Battiati et al.(2021), we estimated the national and industrial markup, using the estimated markup as an estimate of the concentration of industry. On the other hand, estimates of trade dependence, R&D costs, foreign direct investment, financial openness, etc. were also utilized as other control variables. According to the results of empirical analysis using data from EU Klems from 1995 to 2017, the deepening of industrial concentrations increases total factor productivity, but it has been shown to statistically significantly reduce the labor income share. Based on the results of this empirical analysis, it can be interpreted that the deepening of industrial concentration has a negative effect on inclusive innovative growth.

In the first part of Chapter 4, we divided Korea’s competition policy into four areas: traditional competition promotion policies, economic power concentration suppression policies, consumer policies, and fair trade policies for small and medium-sized enterprises, and found the following three major changes.

First, the number of high-level sanctions tended to decrease in the field of measures to curb economic concentration, while law enforcement performance itself decreased in traditional competition promotion policies. This change can be interpreted as the concentration of human resources and capabilities of policy authorities in other areas, such as the fair trade policy of small and medium-sized enterprises. In addition, the reduction in enforcement in the field of traditional competition promotion policy appears to be due to the complexity of the incident itself and the difficulty of demonstrating economic effectiveness, rather than due to the reduction in unfair practices. Second, there is also a tendency to focus more on handling large-scale cases with large market ripple effects. This can be interpreted as the policy authorities trying to efficiently utilize limited human and physical resources. Finally, in the field of fair trade policy for small and medium-sized enterprises, we can see a tendency to strengthen both institutional discipline and law enforcement. More specifically, the number of measures in this area tended to increase mainly on subcontracting and affiliated business laws, and the highest level of sanctions, fines, and accusations, were taken against law-breakers.

In the second part of Chapter 4, the impact of changes in the current status of Korea’s competition policy enforcement in the above four areas was examined from the perspective of inclusive innovation growth. The “inclusive innovative growth index” demonstrates the impact of the enforcement of competition laws by index by selecting three indices: the Industrial Concentration Index, the Factor Income Distribution Index, and the Future Growth Engine Index. The results of our empirical analysis are as follows.

First, regarding the effect of easing industrial concentration, only fair trade policy on small and medium-sized enterprises was consistently effective. In addition, it was found that only this policy statistically significantly reduced all profitability-related estimates (net return on capital, net profit, and operating profit) of large companies. These results show that law enforcement in the field of fair trade policy for small and medium-sized enterprises has further achieved the same benefits as easing concentration.

Second, as with the results of the first empirical analysis, strengthening law enforcement in the field of fair trade policy for small and medium-sized enterprises statistically significantly reduces total factor income, labor income, and capital income of large enterprises compared to SMEs. These results suggest that competition policies can contribute to strengthening inclusion by narrowing the gap by company size in income earned in return for supplying production factors. On the other hand, the traditional competition promotion policy was also weak, but it was found to contribute to strengthening inclusion at the 10% significance level. 

Lastly, with respect to the future growth engine index, the effect of competition policies on investment by company size was not evident. However, it was found that the majority of average companies’ R&D expenditure was increasing. However, our analysis does not support the claim that only law enforcement in the field of SME fair trade policy is effective. For example, in the case of traditional competition promotion policies, there is a possibility that the defined market itself is narrower than the industry classification in our study, so the effect may not have been shown. Also, in the case of the policy to suppress the concentration of economic power, it was not directly subject to verification in our analysis in that it is a system that regulates the concentration of ownership. Furthermore, the policy goals pursued by individual policies and the pathways of their influence may differ for each policy field. Therefore, although our study found that only in the field of SMEs fair trade policies had a statistically significant effect on inclusiveness, it is worth noting that these results do not mean that other policies have no effect on inclusiveness.

Based on the above research results, our research suggests the following policy suggestions for contributing to the sustainable, inclusive, and innovative growth of Korea’s fair trade policy. 

First, the direction of competition policy must be re-established at the government-wide level. For example, it is necessary to expand the scope of Korea’s competition policy and expand it in a direction that values industrial policy and macroeconomic effects by more actively considering values such as fairness, inclusion, and social welfare along with existing micro-competition restrictions. To this end, we judge it necessary to reexamine the importance of competition policy at the pan-government level, using the competition authority as the control tower, and to re-establish a new direction for competition policy in domestic economic policy.

Second, policy capabilities should be focused more on improving competition-restricting regulations to alleviate the monopoly and oligopoly market structure. Of course, there is currently a legal basis for the Fair Trade Act in Korea, and about 20 regulatory improvement tasks are discovered every year to prepare improvement measures. However, there is a limit to discovering and improving regulations that have a great impact on the market due to the non-cooperation of related ministries with regulatory authority. Therefore, at the national economic level, it is necessary to focus on inclusive innovative growth and make efforts to improve the monopoly and oligopoly market structure while empowering competition authorities.

Finally, in response to the transition to the digital economy, the paradigm of competition policy must be reestablished. First, excessive substantive pre-regulations that impede the innovation, scalability and development potential of the platform business should be avoided, but structural measures beyond behavioral measures should be taken against acts that distort market competition. In addition, in situations where the effects of regulations are unclear, it is reasonable to consider introducing additional regulations after first introducing indirect regulations based on a market-based approach and analyzing their effects. Second, it is also possible to consider introducing and operating the “shift of the burden of proof” in the digital field, which allows business operators to prove the competition-friendly effect first in determining whether or not competition laws have been violated in the review of a business combination. Third, it is important to continuously discover competition law issues in the digital economy field through the expansion of human and material resources of the competition authorities. For example, institutionalizing the collection of filing fees could be considered, as in other nations such as the United States, allowing the competition authority in Korea to secure financial resources, and through this, recruit human resources and reinforce its research capabilities to enhance professionalism. Lastly, research on the gig economy issue in the platform labor market, which is newly emerging in the digital economy field, and active competition policy enforcement should also be conducted.

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