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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.
 

Executive Summary
1. Introduction
2. Theoretical Backgrounds
3. Empirical Strategy and Data
4. Results
5. Conclusion
References 

This paper examines the impact of labor market regulations on FDI and employment and production of the foreign firms using an index on employment protection along with a number of employees and establishments, and production of foreign affiliates provided by the OECD. The empirical results show that strict employment protection discourages initial entry of foreign firms as well as the employment and production of foreign firms. The result is robust to various specifications in which the strictness of the labor market is measured by the unionization rate and severance pay for redundancy dismissal. Therefore, the attention of policymakers should not be limited to tax incentives, cash grants, and relaxation of market regulations but extend also to labor market deregulation and non-wage cost, to attract more foreign firms into their countries.
 

Executive Summary

1. Introduction

2. Related Literature

3. Econometric Methodology

3-1. Data and Variables
3-2. Empirical Model Specification
3-3. Estimated Coefficients and Interpretation

4. Empirical Results

5. RobustnessTests

6. Conclusions

Reference 

One of the major changes in the current global business environment is that the global value chains (GVCs) of just a few multinational enterprises (MNEs) conduct most of the global business activities. These GVCs are structurally subdivided and regionally dispersed as a result of these MNEs’ new strategies, which are influenced by the globalization, liberalization and deregulation of nations and enterprises, the development of transportation and telecommunication technologies, and the growth of emerging market economies. The process of such globalization is further accelerated by the decreasing costs of coordinating international division of labor activities and simultaneously provides threats and opportunities not only for multinational enterprises, but also for small and medium enterprises (SMEs).
Small and medium enterprises (SMEs) can secure financial stability, increase productivity and enter the global market by participating in GVCs of the MNEs. However, SMEs require higher levels of financial and managerial resources and face more global competition to successfully participate in GVCs. Due to the many opportunities and threats to SMEs that come with participating in GVCs, appropriate government policies providing protection and support are needed for SMEs in developing, emerging, as well as developed markets (OECD 2007; UNCTAD 2010).
The purpose of this study is to examine the political and strategic implications of supporting the participation of Korean SMEs in GVCs through detailed analyses of the current global competitiveness and industrial revealed comparative advantages (RCAs) of Korean SMEs.
While previous studies on this topic exist, this study differentiates itself in three main ways. (1) This is the first time trade in value added (TiVA) is used to analyze Korean SMEs’ industrial competitiveness. (2) The methods of Korean SME participation in GVCs are classified by domestic and foreign production, of which competitiveness is measured by domestic value added and foreign direct investment, respectively. (3) This study proposes the linkage strategy between Korean MNEs and SMEs based on the evaluation of their industrial competitiveness. 

Executive Summary

I. Introduction

II. Literature Review

III. Access to Credit and the Educational System in Vietnam
1. Credit Market in Vietnam
2. Educational System in Vietnam

IV. Empirical Analysis
1. Data
2. Propensity Score Matching
3. Results

V. Concluding Remarks

References

Appendix 

This paper tries to determine the relationship between two of growth engines in Vietnam: access to credit and education. To avoid potential bias due to the endogeneity of access to credit variable, this paper utilizes the propensity score matching. This paper takes advantage of the Young Lives Survey of Vietnam that collected information on children of various ages to observe the effect of credit access in different stage of childhood. The result of propensity score matching analysis shows that the quality of education, measured by test scores, is impacted significantly by access to credit when the child is young and household income is low. However, when the child is older, most of the input to enhance the quality of education comes from outside of household resources, such as school, friends, and teachers, and the access to credit status of the household does not have significant effects on the quality of education.
 

The Korea Institute for International Economic Policy (KIEP) was founded in 1989 as a government-funded economic research institute. It is a leading institute concerning the international economy and its relationship with Korea. KIEP advises the government on all major international economic policy issues and serves as a warehouse of information on Korea’s international economic policies. Further, KIEP carries out research by request from outside institutions and organizations on all areas of the Korean and international economies by request.