Executive Summary

Contributors

Introduction

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

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

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

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

Appendix

References 

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

 

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

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

Executive Summary

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

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

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

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

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

References

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

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

 

- 

Executive Summary

1. Introduction

2. Literature review

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

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

5. Conclusion

References 

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

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

 

 

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

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

   China is pursuing the 'Internet Plus' Internet convergence strategy to create a future new industry ecosystem in which various economic and social sectors converge with the Internet through an Internet platform and ICT technology. Along with “Made in China 2025,” China’s Internet convergence strategy is an important strategy to realize innovation as a new growth engine for China. The strategy will be responsible for promoting industrial advancement and formulating an effective response to the 4th Industrial Revolution. It is expected to serve as a catalyst for China’s economic growth and an important factor that will transform Korea’s business model with China, as new industries through Internet convergence are growing along with the development of the Internet economy. With the development of the Internet economy, the market size of the new economy related to Internet finance (FinTech), online education, smart facilities, app-based business and smart city is rapidly growing in China. In addition, the country is promoting the innovation of software in the 4th Industrial Revolution and the transition toward “smart” processes in existing industries such as distribution, logistics, and manufacturing. In light of these developments, it is necessary to identify significant changes in Korea's future cooperation with China, particularly in relation to ICT manufacturing and Internet-related industries, an area where Korea is particularly strong.
   The Internet convergence strategy covers all areas of the economy and society and is having a great impact on China’s economic and industrial structure, production and consumption trends, business models, urbanization and regional development. This means an in-depth analysis is needed to establish a strategy for economic cooperation with China that is well suited to recent developments. In particular, each region of China has announced policies in accordance with the economic base or strategic goals of the region and implemented practical projects in order to promote the central government’s Internet convergence strategy. In some regions experiments are already underway to pioneer platform technologies of the 4th Industrial Revolution in the field of Internet convergence, which is already incorporating new ICT technologies.
   Based on this perception and background, this study examines China’s Internet convergence strategy to enable a preemptive response to changes caused by the 4th Industrial Revolution, and identifies relevant policies, technology and industry demands and related risks unfolding in some sectors and regions. The study then goes on to present new approaches to advance into new areas of the Chinese market and promote cooperation between Korea and China. In particular, we analyze the present status, nurturing policies, and local cases of smart healthcare, smart city, and artificial intelligence projects, which have a large impact on the economy and industry and generate high added value in 11 major fields related to Internet convergence.
   In Chapter 2, we analyze the background of the Internet convergence strategy in China, the main contents of the strategy, and the current state of infrastructure related to Internet convergence. In particular, the analysis was focused on the fact that China’s 'Internet Plus' strategy is more than just a policy to connect various sectors to the Internet, and should be understood as a very broad strategy to actively respond to the 4th Industrial Revolution being pursued in coordination with China's long-term development strategy. In November 2017 the Korean government announced I-KOREA 4.0, its plan to actively respond to the 4th Industrial Revolution. After the response plan was announced, specific strategies have been announced in each sector as well. These are sectors which have a large economic impact and areas where the Korean government intends to focus on. Current areas where detailed strategies have been announced are smart cities, smart healthcare and artificial intelligence. These three areas are also included in the Internet convergence strategy, which the Chinese government is focusing on. As such, we analyze each of these areas in Chapters 3 to 5.
   In Chapter 3, we analyze the status and policy of artificial intelligence development in China, and examine cases of promoting artificial intelligence-related projects by the city government of Beijing and major companies. China is in close pursuit of the United States, which has an unrivaled level of competitiveness in the global artificial intelligence market. In particular, China leads the world in accumulated number of AI-related papers and patent applications over the past 20 years, and ranks second in the world in terms of the number of companies and personnel in the field. In China, a large number of start-ups have been established around the Internet giant BAT, which owns a large amount of data, thus forming an organic artificial intelligence ecosystem. Leading companies are rushing to pioneer artificial intelligence core technologies and platforms. In particular, they are actively utilizing measures to secure core technologies by promoting investment and cooperation in artificial intelligence startups. They are also expanding their business areas and creating their own ecosystem in related fields through the establishment of an open artificial intelligence platform. As such, the development of artificial intelligence in China is led by the market, and the government’s policy support plays a facilitating role. Since the Chinese government set up a long-term development plan for artificial intelligence in 2017, about 20 local governments have announced policies for development of artificial intelligence suitable for their respective regions. Of these, Beijing is highly regarded as one of the most developed regions of artificial intelligence in China because of its excellent policy environment, research capacity, human resources and information technology related to artificial intelligence. In particular, Beijing has been analyzed as possessing strengths in the area of autonomous driving vehicles, and the city government is solidifying its development base by implementing systematic measures and pilot projects, such as establishing self-driving related norms, building test roads and pilot operation bases, and establishing innovation centers.
   In Chapter 4, we examine China’s Smart City development policies with a focus on the case of Hangzhou City in Zhejiang Province. First, we briefly review the development of global smart cities and current situation in China, after which we summarize the main policies and implementation system of China for the development of smart cities. The global smart city market is expected to grow to a $2 trillion market in 2025, with China in particular expected to drive fast growth. Approximately 500 cities in China are implementing policies to construct smart city projects, among which Hangzhou City is the most active and at a high level of development. The city of Hangzhou is pursuing a transition toward 'smart' processes in various fields, including transportation, administration, policing, environment and finance, among which the smart transportation sector is already evaluated as having succeeded in practical application. The Hangzhou model is being applied to other regions of China and overseas. Hangzhou City optimized its signal system through real-time collection, analysis and application of traffic data to facilitate traffic flow. In addition, it has been rapidly promoting the use of smart technology in all areas of traffic including parking, traffic accidents, and policing of traffic violations. The achievements of the Hangzhou City Brain Project can be attributed to an ecological system where each actor carries out its own role effectively to create a virtuous cycle structure. The central government of China has presented general directions for the development of smart cities, while creating an institutional environment favorable to the development of new industries, including the integration and sharing of public data and the comprehensive implementation of the personal information protection system. Hangzhou’s municipal government directly created demand in the field by commissioning the technologies and services needed to create smart cities in the form of government procurement orders. Hangzou has also designated certain regions as test beds for the new technology, encouraging companies to actively participate. Alibaba has supplied the government with city operating systems through its cloud and artificial intelligence platforms, while providing the platforms needed to implement services to small start-ups with detailed technologies needed to run the cities. Small- and medium-sized startups seek to innovate technology and improve quality based on the test bed projects provided by the government and technology platform created by Alibaba, and in this manner contribute to improving the quality of citizens' lives.
   Chapter 5 examines the development status of the smart healthcare market, which represents a convergence between the Internet and public services, the policy and implementation system of central and local governments, and the industrial ecosystem and regional applications, going on to analyze the characteristics and issues of the industry. Currently, the global smart healthcare market is developing in the U.S., Germany, and other advanced countries. In the future, the Chinese market is also expected to see high growth, focusing on online trading of drugs and online medical treatment. Due to limitations in statistical data, there is a limit to understanding the market by region, but the market size of the eastern coastal region is large. In 2018, China’s central government announced a comprehensive guideline on smart healthcare services. This was followed by the release of local government documents reflecting the central government's guidelines. In addition, the policy implementation system was formed with the National Health and Health Commission at the center, and government projects for health care data were carried out at the national level through state-owned enterprises. In addition, an industrial federation was formed and is being operated under the supervision of the National Health and Health Commission and the Institute of Information and Communication. An industrial ecosystem encompassing companies in various fields, including Internet hospitals, data analysis and artificial intelligence, and genetic analysis, creating an online treatment platform in China. The business expansion of Tencent, an IT company representing dual Guangdong Province, and Ping An, a financial company, is proceeding quite actively. The local hub hospital in Guangdong Province and IT companies in the region have jointly established an Internet-based medical treatment platform, and local governments and IT companies are collaborating to develop big data projects in the health care sector. The unique environment in China, such as the lagging state of medical services, acts as a positive factor when it comes to embracing new technologies in China and establishing a self-sufficient ecosystem. Also, in terms of the institutional infrastructure that must be established to provide services, China has been undergoing trial and error and is now in the process of revising relevant laws and regulations.
   In Chapter 6, we drew implications for Korean companies and the government, based on the results of our analysis of major regional cases. For the development of the artificial intelligence (AI) sector, the Korean government should establish long-term and sustainable artificial intelligence development policies, among other things, and come up with support measures to ensure that the artificial intelligence-related ecosystem is smoothly established. Major Chinese enterprises and global AI firms are striving to build their own ecosystem and expand their market dominance through an open artificial intelligence platform. In response, the Chinese government has designated leading companies to create artificial intelligence ecosystems in key areas, seen in projects such as  the Baidu autonomous driving, Tencent medical care and video imaging, and  iFLYTEK voice recognition projects, and has implemented the National Next Generation AI Open Innovation Platform to provide various forms of support. It will be necessary for the Korean government to actively support the establishment of the artificial intelligence open platform for Korean companies. In addition, Korean companies need to establish a strategy to build an ecosystem in relevant areas by offering an open platform and expanding their market presence. At the same time, it could be worthwhile to consider entering into the alliance ecosystem by participating in the National Next Generation Artificial Intelligent Open Innovation Platform, which is receiving the policy support of the Chinese central government and leading the market in each field, as a partner company.
   In the Smart City sector, as seen in the case of Hangzhou City in Zhejiang Province, government-led demand generation and corporate technological prowess have emerged as important development factors. The government needs to propose a specialized and mid-to long-term roadmap for smart city development and actively promote projects to directly generate market demand. It is also important to provide a test bed where the new technologies and services of an enterprise can be directly applied to the lives of the citizens. Institutional innovation and support within the space are essential elements as well. As of yet, the current projects in progress within Korea remain limited in scale and slow to develop, while the numerous institutional regulations blocking the utilization of data are pointed out as major obstacles. In addition, smart city projects have important implications for the lives of citizens and are very public in their nature, meaning private companies could struggle with various disadvantages in terms of short-term profit. At the same time, however, companies can enjoy promotional effects such as raising corporate awareness and improving their image by participating in public services that are certified by the government and directly used by city residents, and feedback and data from the service process will also have a positive effect on improving their product quality.
   Finally, in the smart healthcare sector, the implications for the Korean government and corporations are as follows. First, the Korean government needs to introduce and nurture smart healthcare service as a way to solve problems in medical service. At this time, it is necessary to identify priority areas where improvement is urgent, and to form a market and mitigate the impact on existing industries. Also, flexible policies should be applied to companies participating in new businesses that require deregulation. Finally, effective data integration management methods suitable for the Korean medical system should be considered in relation to data, which is a key element of smart health care innovation. While Korean companies can expect to see enormous business opportunities in China, even Chinese companies are still facing challenges in generating profits, so Korean companies must carefully design their own profit model in advance. Other tasks to consider in advance will be to gain an understanding for the characteristics of Chinese policy operations and policy-related risks, and to consider cooperation with large Chinese enterprises in order to mitigate the related risks. It is necessary to carry out localized strategies in line with China's rapidly changing industrial ecology and market changes, and actively utilize local government policies and domestic business support institutions when planning to directly enter the market. Last but not least, while location selection may not be a crucial factor when it comes to the smart healthcare industry, the cases we examined in Guangdong Province show a good example of collaboration between local anchor companies and central hospitals, government agencies and startups in the initial stages of business implementation. Therefore, companies looking to advance into the local market should first understand and make considerations for the local and regional industrial ecosystems in which their cooperation partners operate within.

 

   President Moon Jae-In proposed the three principles and eight ways of cooperation for new economic cooperation strategy with China. The three principles and eight ways of cooperation are the basic directions and guidelines for the Korean government to develop economic cooperation with China in the future. This study puts forward detailed measures for cooperation in major areas, taking full consideration of changes in internal and external conditions surrounding the Korean and Chinese economies.
   First of all, there is a need to enhance the stability and substantiality of bilateral cooperation by improving and consolidating the existing institutional frameworks in order to secure the stability and substantiality of the Korea-China economic cooperation. It will be necessary to maintain a two-way dialogue channel that requires the government to push forward future-oriented cooperation through a Korea-China economic ministers’ meeting centering on the Ministry of Strategy and Finance, and that sensitive trade issues be raised through a joint committee on the Korea-China FTA. In addition, working-level consultations will have to be continued so that cooperation can be materialized in the direction of achieving substantial results. In order to do this, it is necessary to actively utilize Korean, Chinese experts and provide a communication platform for spreading consensus and securing trust through public diplomacy.
   To suggest ways for enhancing the quality of trade between Korea and China, we analyze the participation in GVC at the national- industrial level and examine whether such participation contributed to upgrading the economic and industrial structure. We use data on 18 manufacturing industries in 43 countries from 2000 to 2014, and analyze whether forward participation and backward participation contributed to the value-added generation of industries.
   In addition, the results of our analysis on Korean and Chinese industries are similar to those of the rest of the world. Particularly, it is shown that forward participation has a relatively greater positive effect on the creation of value added in the industry compared to reward participation. In the context of GVC proliferation, measures to enhance the quality of trade between the two countries through industrial development and upgrading of economic structures can be summarized as GVC participation and upgrading.
   In the face of the 4th Industrial Revolution era, Korea and China have also proposed ways to cooperate in new industrial sectors. Witnessing the changes caused by the 4th Industrial Revolution, the status of development of new industries in China was analyzed with a focus on artificial intelligence (AI). Major analysis items related to new industries include promoting strategies, size and characteristics of investments, analysis of major business cases, problems and limitations, major AI technology applications (AI+), and comparison with major countries. Considering the limitations of government statistical data, we compare the competitiveness of Korea and China, such as global market share, revealed comparative advantage index and trade complement index, focusing on six new industries (intelligent robots, system semiconductors, electric vehicles, aviation- space, advanced medical devices, lithium). The cooperative cases of the New Industrial Sector in China were largely classified into three types: first, they were classified into vertical integration types, in which relatively recent leading companies led investment; secondly, global cooperation; and thirdly, government-led types that cooperated with foreign companies in the form of strategic alliances, etc. Considering each type of the cooperation cases, we propose the cooperation plans as follows: first, to develop a system for fostering and supporting start-up companies with vertical integration with major Chinese large companies; second, to support small and medium- sized enterprises with technological superiority and to establish an innovation system with which core components and intermediate goods can be supplied; and third, to target the Chinese market and overseas markets through strategic alliances with leading Chinese companies in the AI field.
   The Korean government emphasizes the importance of revitalizing start-up ventures in order to secure future growth engines and create jobs for young people, meaning there is a need for cooperation with China. China has also started to popularize startups and innovations under the banner of 'popularization of startups, human innovation' . The background of the Chinese government's start-up venture started from the increasingly high level of inflation, the elimination of real unemployment, and a desperate measure to upgrade the economic development centered on small- and medium-sized venture businesses and the Chinese-style innovation model through startups. We analyze the changes and growth contents of the startup venture ecosystem of China, which led to innovation and job creation in China and examined the direction of government-led core platform innovation, and based on this we propose the methodology of mutual win-win through open innovation cooperation and joint fund-raising between Korea and China.

   With regard to cooperation in the energy sector between South Korea and China, the two countries are facing a difficult situation after the global financial crisis. In the renewable energy sector, energy cooperation between Korea and China is not as easy as it used to be due to the capital increase of local Chinese companies, advances in domestic and overseas markets based on mass production and sales of cheap products, and the support of the central government and policy financial institutions for major domestic and overseas projects. In order to reflect the demand for energy cooperation between the two countries, the central governments of Korea and China have already made efforts for energy cooperation, but to further boost cooperation, they have proposed the nationwide spread of carbon emission trading by the Chinese central government, the process of promoting new energy generation outside of GEI, solar and wind power, and the development of new energy technologies and the use of opportunities for building energy infrastructure in China. In addition, Korea and China should reduce their reliance on thermal power, increase the proportion of renewable energy centered on solar and wind power, and emphasize the institutionalization of cooperation measures.
   Environmental cooperation between Korea and China has greatly expanded over the past few years. However, the lack of detailed information on the areas concerned, together with the systems implementation and methods of work in place at the Ministry of Environmental Protection, Forestry, National Development and Reform Commission and its affiliates, which are the main departments responsible for China’s environmental policy, has been a source of distress in the process of promoting cooperation. China is rapidly changing its environmental policies for the implementation of the Environmental Protection Act, the Air Pollution Prevention Act, and the announcement of action plans to improve air and water quality. This change in China’s environmental policy means a change in China’s policy demand in Korea-China environmental cooperation, and will pose challenges and provide new opportunities for environmental cooperation between Korea and China. Impacts from environmental pollution among countries are expected to increase from economic growth with pattern in resource use. It is necessary to review the environmental policies of China and Korea in order to enhance the efficiency and effectiveness of environmental cooperation between Korea and China to overcome environmental issues. As a solution to the environmental problems that the two countries can jointly strive for, the government has proposed to improve the constitution of eco-industrial development, which increases the efficiency of resource use and minimizes environmental pollution by reusing unused or by-products as raw materials or energy of other companies. It will be necessary to share the experience of implementing programs such as China’s circular economic complex (CIP) and domestic ecological industrial complex and analyze the transition to a clean production system through the efforts of various technological development and information exchange. We also emphasize the need for environmental cooperation between Korea, China, and also Japan to address current environmental issues including air quality. Other proposals include cooperative measures for sharing technologies, experiences and policies for building eco-friendly cities.
   The joint entry into infrastructure projects in third countries was analyzed based on China's one-to-one policy. The one-to-one policy aims to expand logistics networks through infrastructure investment in areas of economic interest by China, develop China's borders and expand its influence on neighboring countries. Since then, the Chinese government has signed agreements with more than 30 countries to materialize the one-on-one policy implementation. International cooperation is ongoing, including Indonesia's Bandung High Speed Railway, Hungary-Serbia Connecting Railway, China-Russia Natural Gas Eastern Line Corporation, Pakistan's Gwadar Port development and Kazakhstan's Yanun River Logistics Base. South Korea has been lacking in connectivity with one-to-one policy, but the recent improvement in the North Korean nuclear issue has caused a sharp rise in the Korean Peninsula's logistics program. Accordingly, we expect the necessity for three north-eastern provinces cooperation in international logistics policy, including Russia, Mongolia and South Korea. We review the three country’s pilot projects of joint advancement between China-Japan and analyze its major issues, also going on to seek a strategy of joint advancement and ways of cooperation between Korea and China for infrastructure projects.
   Lastly, in the area of promoting human-centered private exchanges and cooperation, we discuss the Chinese people’s current expectations of Korea, and the needs and necessities felt by the Chinese people. If the Korean and Chinese people could together resolve the deficiencies and dissatisfaction they commonly feel, the friendly relations between the two countries will continue to grow in the future. For this, first, this study analyzed the limitations and problems shown in the private exchanges between Korea and China, and suggested improvement measures. As an example of a ‘human- centered private exchange’ project, this study suggested projects to resolve environmental issues and cultivate talent, mainly because environmental issues have recently had the largest negative impact on mutual perceptions due to keen public interest in both countries. The Korean government should establish a system to raise the level of active exchange in the private level, and also futher develop its dialogues with the Chinese government to compose a platform that could spread the outcomes of individual projects. Human-centered private exchanges could be finally accomplished by introducing the process of solving realistic problems in which the people of both countries share great interest through private exchanges.