Annex A4. Progress in structural reform

Improve universities and expand their co-operation with the business sector in R&D, while increasing the contribution of government research institutes.

The number of technology transfers from 30 major universities (through the Technology Licensing Offices funded by the government) to the business sector increased from 1 605 in 2014 to more than 1 800 in 2015, while the value rose from KRW 40.1 billion to more than KRW 46 billion (USD 40 million). The budget of government-funded research institutes that support SMEs increased from KRW 114.6 billion in 2014 to KRW 147.2 billion (USD 129 million) in 2016.

Expand Korea’s international linkages in science and innovation from their current low level.

Government policies to promote joint research with overseas research institutes helped raise the share of R&D in Korea that was financed from abroad from 0.3% in 2013 to 0.7% in 2014.

Liberalise product market regulations and reduce obstacles to international competition to promote an efficient allocation of resources in favour of innovative firms.

Around 10% of economic regulations were abolished during the year to January 2015 and a “cost-in, cost-out” system was launched to cap the regulatory burden on firms. Nearly a third of the more than 10 000 regulatory reform suggestions made through the Shinmungo since March 2014 have been accepted for consideration, leading to the amendment of laws underpinning 2 377 regulations. The Thorn under the Nails, Regulatory Guillotine, and Regulatory Reform Ministerial Meeting have examined 796 regulations.

Enhance labour market flexibility to expand the ability of innovative firms to grow and implement their ideas.

The government is encouraging the shift from seniority-based wage systems to job- or performance-based ones. It is also creating and improving systems to promote flexible work arrangements.

Make the new KONEX a key player in funding start-ups, while ensuring adequate investor protection in KONEX and for crowd-funding.

The government launched a strategy in 2015 to revitalise KONEX by expanding incentives for individual investors, other than professional investors, strengthening investor protection through designated advisors, and easing listing requirements for SMEs by replacing quantitative standards with qualitative indicators.

The government allowed equity crowdfunding in January 2016. Firms are allowed to raise up to KRW 0.7 billion (USD 611 000) through crowdfunding. Limits for non-professional investors are set at KRW 2 million per company (USD 1 747) and KRW 5 million in total.

Activate the market for M&As by addressing the obstacles that have kept it small.

Restrictions on private equity funds’ M&A activities were relaxed and the M&A fund in the Growth Ladder Fund is being expanded to meet the M&A needs of mid-sized firms. The criteria for tax support for M&As aimed at acquiring technology were relaxed and the deadline extended from 2015 to 2018. The number of M&As rose from 73 in 2013 to 97 in 2014.

Avoid excessive public funding of venture capital investment that would crowd out private investment, rely on a “fund-of-funds” approach and focus public support on the early stage of a firm’s development when attracting private investors is most difficult.

The government launched an “Expert Angel Designation System” in July 2014 and increased the income tax deduction for angel investment from 50% of an investment less than KRW 50 million to 100% for one less than KRW 15 million. The government allocated KRW 269.3 billion in 2015 for investment in early-stage firms through a fund-of-funds approach. The share of fund-of-funds investment in firms at an early stage of development was 44.8%.

Develop the demand side of the venture capital market, in part by using public institutions to enhance the quality of investment projects.

To increase the number of technology-based start-ups, the government in 2014 launched the Tech Incubator Programme for Start-ups, which was modelled after Israel’s Technological Incubator. It provides start-ups with R&D grants from the private and public sectors. R&D grants for promising start-ups with high-level technologies increased from KRW 141.4 billion in 2014 to KRW 188.8 billion (USD 165 million) in 2016.

Foster an environment that allows failed entrepreneurs to have second chances to launch start-ups.

The government established measures for failed entrepreneurs in 2015, including an improved joint guarantee system, expanded consultation procedures, and measures to facilitate access to loans.

Target public loans and credit guarantees on young firms and start-ups, which struggle to obtain market financing, introduce a graduation system to prevent firms from receiving long-term support and reduce public credit guarantees to firms with a credit rating high enough to obtain market financing by themselves.

In the new directions announced in late 2015, the government expanded funding support for start-ups, with assistance limited to firms with a credit rating of over BB and listed firms. At the same time, support for firms more than five years old is being limited. For example, firms over five years old cannot receive government policy funds more than twice in one year.

Strengthen the market orientation of SME programmes by: i) raising interest rates on public SME loans closer to market levels; ii) lowering the coverage ratio of the guarantees; and iii) more clearly differentiating the price of guarantees based on their length and size.

In 2015, the government decided that in the case of companies that have received guarantees for more than ten years, banks (rather than the guarantee institution) are to set the guarantee ratio, which should be 50%-85%. The rate for early-stage firms was raised from 85% to 90%.

Improve the selection of SMEs that receive public support by focusing on firms with the potential to upgrade their performance by analysing their competitiveness and technological capacity.

The 2015 plan to foster Korean “hidden champions” to transform “high potential enterprises” into globalised enterprises chooses firms based on their competitiveness and technological capacity.

Use the government’s expertise to enhance the infrastructure for credit evaluation of SMEs by private financial institutions. Develop the infrastructure for using non-tangible collateral, including intellectual property, for private-sector loans.

The government launched an initiative in July 2014 to promote loans based on technology for start-ups without collateral. Four institutions designated as Technology Credit Bureaus launched a technology database service. Technology-based lending was KRW 51.5 trillion (6.7% of bank lending to the corporate sector) in the fourth quarter of 2015.

Encourage a larger role for local non-bank financial institutions, such as saving banks and credit unions, in lending to viable SMEs.

Eligibility requirements to act as a financial intermediary for Korea Development Bank’s on-lending scheme have been expanded to include non-bank financial institutions.

Reduce the generosity of SME support to weaken the disincentives for small firms to grow out of the SME category, thereby increasing their productivity through economies of scale.

The government is promoting the growth of SMEs into “high potential enterprises” by providing support for exports, financing, R&D, etc. Their growth into globalised enterprises is promoted through a 2015 plan to foster Korean “hidden champions”. The plan, “Implementing World Class 300 Project”, included 186 firms in 2015.

Gradually reduce the number of SME programmes through stronger ex post evaluation of programmes to focus the budget on those that are most effective and expand prior consultations among ministries before introducing new programmes.

A task force in the Office for Government Policy Coordination abolished 10 projects and merged 13 over 2014-15, resulting in savings of KRW 55 billion (USD 48 million).

Use the “Comprehensive Management System” to co-ordinate SME programmes between ministries and prevent SMEs from benefiting from multiple programmes.

In 2014, the Ministry of Interior launched an indicator in its evaluation of local governments to prevent SMEs from benefiting from multiple programmes.

Improve SMEs’ human resources by reducing labour market mismatches through greater emphasis on vocational education.

The number of Meister school was increased from 35 in 2014 to 41 in 2015 and six more are planned for 2016-17 and the fields of study have been expanded. The Work-Study Dual System launched in 2013 now includes more than 2 000 firms and nearly 13 000 students. The 887 National Competency Standards (NCS) are being used to set the curriculum for vocational education and training.

Facilitate the use of the Internet to enhance the growth of SMEs by ensuring an appropriate regulatory framework and ICT skills.

The “Production Digitalisation System” is promoting manufacturing and process management based on IT for small firms dependent on manual labour. The government spent about KRW 8 billion (USD 7 million) in both 2014 and 2015 to assist around 145 SMEs.

Enforce fair trading rules to avoid unfair treatment of SMEs by chaebols and improve chaebols’ corporate governance, while phasing out restrictions that reserve certain sectors to SMEs.

A 2016 amendment to the Fair Transactions and Subcontracting Act introduced a system that rewards an informant who reports unfair practices against mid-sized companies that are subcontractors and the KFTC stepped up its monitoring against unfair subcontracting behaviour. The Monopoly Regulation and Fair Trade Act was amended in 2014 to prohibit new circular Investment among chaebol-affiliated firms.

Break down dualism by reducing effective employment protection for regular workers, by expanding the coverage of non-regular workers through the social safety net and by increasing their access to vocational training.

Public subsidies for non-regular workers who are currently employed and participating in government-provided training increased from KRW 75 billion in 2014 to KRW 83 billion in 2015 (USD 73 million).

Extend the time limit on fixed-term contracts from two years.

In September 2015, the government proposed an amendment to the labour law that would allow fixed-term contracts to be extended by another two years for employees aged 35 or older and wanting an extension.

Boost employment, particularly for women, youth and the elderly by breaking down dualism, reducing labour market mismatches, especially for youth through improved vocational education and training, and by extending older workers’ careers in firms.

The “Stepping-stone-to-employment programme”, in which major firms offer education and training in promising areas to 15-34 year-olds, was launched in January 2016 and is to be expanded.

The government expanded the subsidy programme for the wage peak system and launched consulting services to encourage companies to adopt it and thereby increase employment of older workers. The number of Job Hope Centres, which provide specialised employment services to middle-aged and older people, was increased from 28 in 2014 to 31 in 2015.

Co-operation between Local Job Centres (run by the Ministry of Employment and Labour) and New Job Centres (Ministry of Gender Equality and Family) was strengthened from January 2016.

Expand the Basic Livelihood Security Programme (BLSP) by further easing eligibility criteria and enforcing work requirements.

In July 2015, the Customised Benefit System, which sets different eligibility criteria for livelihood, medical services, housing and education benefits under the BLSP, was introduced and the criteria for persons with support obligations were relaxed.

Make the EITC more effective in reducing poverty by extending its coverage to more self-employed, as transparency about their income increases, and extending the phase-out range to avoid reducing work incentives.

The restriction that limited the coverage of the self-employed to certain types of businesses was repealed and the upper-limit of the phase-out range for a couple with one child was increased from KRW 17 million to KRW 21 million (USD 18 000).

Raise the quality of childcare to ensure that households at all income levels have access to high-quality pre-school education.

Childcare centres were provided with assistant teachers in 2015 and teacher training was reformed in 2016.

Reduce reliance on private tutoring by developing the “school record system” for university admission, raising the quality and diversity of secondary schools and reducing the over-emphasis on higher education by improving vocational education.

The use of the “school record system” increased by 54.9% in 2015 and 57.4% in 2016. A law was enacted in September 2014 to prevent private tutoring institutions from introducing subjects ahead of the school curriculum. The curriculum for vocational high schools was revised in line with National Competency Standards in 2016. The Work-Study Dual System now includes more than 2 000 firms and nearly 13 000 students.

Target the Basic Old-Age Pension on lowest-income elderly to ensure that they escape from absolute poverty.

Following the introduction of the Basic Pension in July 2014, 70% of the elderly continue to receive the Basic Pension. It doubled the amount paid by the Basic Old-Age Pension from KRW 99 000 per month to KRW 200 000 (USD 175). The share of the elderly in absolute poverty (an income below the minimum cost of living) fell from 34% in 2013Q4 to 30% in 2014Q4, while the share in relative poverty declined from 48% to 44%.

Use the Basic Livelihood Security Programme (BLSP) to top up the income of the recipients of the Basic Pension by further relaxing eligibility requirements.

The introduction of the Customised Benefit System in 2015 and the relaxation of eligibility criteria increased BLSP payments across all age groups.

Make the NPS more effective in reducing poverty by expanding its coverage, focusing on improved compliance among non-regular and self-employed workers, lengthening average contribution periods and maintaining the NPS replacement at around 50%, keeping it close to the OECD average.

In 2015, 390 000 non-regular workers (6% of the total) were enrolled in the NPS by their employers, based on income documents shared by the National Tax Service and the Ministry of Employment and Labour. Two programmes were launched in 2016 to increase NPS enrolment among people with unstable employment status: i) firms will enrol their part-time workers; and ii) the pension contributions of persons who become unemployed will be paid for up to one year.

Begin as soon as possible to raise the NPS contribution rate to a level sufficient to ensure its long-run sustainability

In 2015, the National Assembly Special Committee on Public Pension and Social Organisation was established to discuss the contribution and benefit levels for the NPS. In 2016, a Committee on Establishing the Long-Term Financial Goals for the NPS will be formed to start discussions on such issues.

Accelerate the introduction of company pensions, in part by further revising the tax treatment of the lump-sum retirement allowance.

Following the tax code revision in 2015, if a person receives the amount of money deposited in his/her individual retirement pension account in the form of an annuity, the tax is 30% less than if it were received as a lump-sum payment.

Make Individual Pension Accounts a more important source of retirement income by measures to discourage their premature termination and develop the market for reverse mortgages.

The government is increasing the retention rate by permitting tax deferment when transferring money between private pension accounts and giving discounts for long-term pension holders.

Ensure the long-run viability of preferential loan programmes by granting loans only to those who are capable and willing to service their loans. For others, replace preferential loans with an expanded social safety net.

Loan assessment criteria have been further enhanced recently to make these programmes sustainable. For example, the debt-to-income ratio is now applied to all Sunshine loans rather than just those above KRW 10 million (USD 8 250). In addition, contingent livelihood loans are given to those who had been faithfully making repayments.

Avoid additional programmes offering large write-offs of principal and interest so as to avoid moral hazard.

No such programmes are under consideration at present.

Discourage excessive lending to households by financial institutions through appropriate prudential supervision and promote financial education for households to prevent over-borrowing.

“Measures for Enhancing Financial Education” were announced in October 2015 to provide expanded opportunities for financial education to consumers and improve the quality of financial education programmes.