Current Issues of the KFTC and its Cooperation with the EU
I am very delighted to have an opportunity to talk about some of the current issues and policies taken by the Korea Fair Trade Commission, and also about the cooperation between the KFTC and the EU competition authority.
<Korea-EU Economic Relationship and Diagnosis over the Korean Economy>
Korea and EU have maintained a close economic relationship. EU is Korea’s fourth largest trading partner while Korea is the EU’s 12th largest one, and recently the growth in bilateral investment has truly been nothing short of remarkable. EU’s investment to Korea has continued to increase, and its investment to Korea accumulated to 30.7 billion dollars by 2004, accounting for 29% of total foreign direct investment to Korea. Likewise, Korea’s investment in EU last year reached 711 million dollars, up 210% year on year. Considering the overall growth rate of 37% of Korea’s overseas investment last year, such an increase is very outstanding. As Korea recognizes the significance of the European economy, it is actively striving to expand trade and investment even further. As a result, the future of Korea-EU economic cooperation is brighter than ever.
Although Korea has achieved around 5% growth last year near its potential growth, both consumer and business sentiments still remain low. Domestic demands are sluggish despite record-high growth in export.
The challenges that lie ahead for the Korean economy are neither short-term nor cyclical in nature. Rather, it is about managing a transitional period, shifting from the growth pattern of the past to that of the advanced economies.
Currently, the paradigm for economic growth has changed from input-driven growth led by the government and chaebols to one driven by the increase in total factor productivity based on free market competition. As Korea has already moved beyond the input-driven growth pattern that relies heavily on supply of capital and labor, it needs to adjust to the growth pattern where productivity is enhanced through innovation and greater market efficiencies.
Therefore, the focus of Korea’s economic policy lies in reinforcing the growth potential by increasing productivity through technological innovation, improved market efficiency and expanded market opening.
Sustained productivity growth can be ensured by business innovation, and the strongest motive for companies to be involved in innovation is market competition. Only when market principles are firmly in place to ensure fair and free competition in the market, can efficiency in overall economy be improved.
Therefore, competition policies by the KFTC are one of the most important tasks for the Korean government to address concerning the current economic challenges.
Based on this understanding, the KFTC has stepped up its efforts to improve regulations and to enforce the competition law, all of which aim to establish a transparent and fair market competition environment. The amended Monopoly Regulation and Fair Trade Act, passed in the National Assembly in December last year, can be seen as a result of these efforts. Today, I would like to briefly touch on the major contents of the amendment and the policy direction of this year.
Deterrence of Cartel
Nothing is more important for a competition authority than deterring cartel, which undermines the market price system and gives harm to consumer welfare. As you are aware, the negative impact of cartel on market is so serious that most competition authorities around the world are putting their priority to fighting against cartel.
In 2004, the KFTC decided to step up its activities against cartel, thereby concentrating its capabilities to this end. As a result, a total of 36 cartels were found, out of which surcharges were imposed on 16 cases. (In 2003, 23 cases were identified while 9 were imposed with surcharges). In 2005, the KFTC will continue conducting investigations on cartels in the key industries that has a great influence on the every-day life of ordinary people.
According to the revised Act, the ceiling on surcharges levied on cartels will increase from 5% of related sales to 10%.
In addition, we introduced the grounding provision for enforcing against foreign businesses involved in anti-competitive activities such as international cartels, which have adverse effect on the Korean market.
While there have already been cases where the MRFTA was applied to foreign-based companies involved in international cartels, such as the Graphite Electrodes Case in March 2002 and the Vitamin Case in April 2003, the amendment provides a legal ground for extra-territorial application of the Korean competition law and adds the provision on service of documents to the companies located outside Korea.
The leniency program for those who cooperate in cartel investigations was first introduced in 1997, and has been found to be increasingly effective in deterring cartels. The program applied to 5 cartel cases in 2004. In order to put this leniency program to the greatest use, the KFTC is currently working to revise the Enforcement Decree of the MRFTA, including the measure to increase incentive to the first conspirator to come forward and reveal the inner-working of the cartel.
M&A Review
To prevent the formation of monopolies by reviewing M&As is another important function carried out by the KFTC. In 2004, the KFTC investigated 724 filings of M&As (For your reference, in 2003, 589 cases were investigated), taking corrective measures against 6 anti-competitive cases.
Also included in the revised Act is the improvement of M&A review system. Substantial review over the M&As concerned to formulate monopoly, will be strengthened while companies will be relieved from related procedural burdens. In case of share acquisition of large companies with more than 2 trillion won in assets or sales, the merging parties will be required to make pre-notification instead of post-notification. If either party of an M&A is a small company with less than 3 billion won in assets and sales, it will be exempted from notification requirement.
For your reference, to effectively respond to rising globalization of business activities, since July 2003, the KFTC has required the parties of M&As between foreign businesses to make notification if it is deemed to have an impact on the Korean market where the asset or sales of one party is more than 100 billion won and sales in Korea of each party is more than 3 billion won.
Merging parties are likely to forego significant costs and inconvenience in the process of receiving approvals from various competition authorities. Therefore, efforts are required to relieve such burdens on companies. In this regard, the KFTC has actively participated in international discussions to coordinate and converge standards and procedures associated with M&A reviews.
Policies of Business Conglomerates
As you are well aware, Korea’s competition law stipulates policies of business conglomerate with a view to improving corporate governance and practices of chaebols. By the revised MRFTA, these regulations will be changed in more reasonable way.
I would like to talk about the restriction on total amount of shareholdings in other domestic companies. Under the amended provision, graduation standards will be set to give incentives to the companies with good corporate governance and self-monitoring mechanisms. Such a change is meant to realize our spirit of market reform, shifting from the government’s direct regulation against chaebols to self-regulated monitoring systems.
Secondly, the voting rights of financial affiliates under business conglomerates over their shares in non-financial affiliates will be curtailed from the current 30% to 15% by 2008, down by 5%p each year from 2006 for three years.
Also included in the amendment are provisions to complement the holding company systems and to strengthen disclosure requirement for non-listed and non-registered companies under business conglomerates. Such improvement measures are expected to help the free and fair market competition system to take a firm root by improving corporate governance and encouraging transparent business management.
Improvement of Anti-competitive Regulations
In order to correct market failures, government’s intervention is required to some extent. However, excessive or inappropriate regulation can hamper entrepreneurship and vitality of businesses by forming entry barrier or impeding free competition in the market. Therefore, the KFTC has also made a lot of endeavors to carry out competition advocacy to abolish or improve any regulations, which discourage effective functioning of market, and to prevent formation of such regulations.
For the past year, 56 anti-competitive regulations stipulated under various laws were agreed to be abolished or improved after the KFTC’s consultations with relevant ministries. For example, the collective free contract system, which has been applied to small and medium sized companies for public procurement, and ban on establishing corporate pharmacy came to be abolished.
The KFTC plans to continue its efforts to improve other anti-competitive regulations under various laws that were set aside last year. In addition, we will also work to identify and streamline anti-competitive regulations in the sub-rules, such as guidelines and notifications.
<Korea-EU Cooperation on Competition Policy>
With a progress of economic globalization, the need is growing for international cooperation in competition policy and law enforcement. Last year, the KFTC was active in international cooperation. We successfully hosted the Annual Conference of International Competition Network (ICN), and launched the first OECD Regional Center in the competition field in Seoul. Not only that, but we also speeded up the discussions on bilateral agreements with competition authorities in the U.S. and France.
By recognizing the importance of cooperation with the EU, since 2001, the KFTC has held annual policy consultation meetings with the EU competition authority. This year, we are considering having the 4th Korea-EU Competition Policy Consultation Meeting on the occasion of this June’s ICN conference held in Bonn, Germany.
As some of you might be aware, the MOU signed on October 28th last year laid the official basis for cooperation between the KFTC and EU competition authority. This MOU can be seen as an intensification of bilateral economic relations as mentioned in the Joint Press Statement of the Korea-EU Summit in Hanoi on October 9th. After getting approval from EU member countries, both the competition authorities are to develop this MOU into an agreement including more comprehensive and detailed cooperative measures.
With broad-based cooperation with the EU competition authority, the KFTC is striving to improve effectiveness in competition policy and law enforcement. This will go to give substantial benefits to both consumers and businesses.
<Closing>
Ladies and Gentlemen!
I have touched upon only briefly some of the major issues of concern for the KFTC today.
History has proved that the market economy is the most efficient economic system devised by human being. Under the market economy, businesses are the source of value creation, producing goods and services. The fact that the world could be a global village setting national borders aside is largely attributed to businessmen like you who do not shrink from risk or venture.
There is another reason for me to be grateful today. At the end of 1997, hardly hit by the Financial Crisis, Korea had been in desperate need of overseas investments. At that time, investors like you invested to Korea having strong confidence in Korea’s economy. Thanks to your support, Korea overcame the crisis sooner than anyone had expected. I hope that your investment to Korea will turn out to be not only the right choice, but also the best choice.
Through continuous structural reform, Korea’s environment for business activities and investment has been much improved, though there still remains a way to go. Therefore, the Korean government will continue to make endeavors to provide fair and transparent business environment, meeting global standards, that companies can exert their full potential regardless of their nationalities. In this process, the KFTC will do its utmost to be the most trustworthy government organization. I sincerely wish good luck and blessings in your business ahead.
Thanks for listening.
January 28th 2005
by Chairman Chul-Kyu Kang
of the Korea Fair Trade Commission
웹사이트: http://www.ftc.go.kr
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