November 24, 2004

1. Policy Issues for Promoting and Facilitating International Trade by SMEs: the Case of Korean e-Trade November 24, 2004 Yoo Soo Hong Chaired Research Fellow Korea Institute for International Economic Policy

2. Introduction • E-Trade in Korea • Strategy for e-Trade Development • Policies for e-Trade Development • V. Implications

3. I. Introduction ƌ Definition of e-Trade • The trade activity that performs international trade of • goods and services by electronic and information-intensive • method with IT including the Internet • E-Trade is a process combining IT infrastructure, related • industries, supporting laws and institutions, enterprises, trade-related organizations, etc.

4. ƌ Importance of e-Trade • A core Strategy for enhancing national competitiveness • through structural innovation of trade which is the • backbone of the Korean economy ƌ Vision of the e-Trade in Korea • Achieving a leading e-trade nation in 21c through • “e-Trade Korea” by offering the environment and services • for all enterprises to trade by efficient and effective • methods using the Internet any time any where

5. ƌ Expected Results • o Become one of world e-trade leaders within a few • years • Establish the national brand value of a good trade • partner through active promotion of e-trade • o Industrial innovation and improvement of trade • environment and competitiveness • Improve enterprises, organizations and the economy • for productive and efficient structure and process

6. - Enhance the productivity of trade-related industries and • their performance • - Strengthen international competitiveness of enterprises • o Targets • Establish an Internal trade system for “24 hour-365 days” • Complete a global e-Trade network • Increase SMEs’ e-Trade participation up to 50% • Increase e-Trade up to 40% of the total of Korean trade

7. II. E-Trade in Korea ƌ Programs and Systems • o Market survey and exploring trade partners • E-General Trading Companies (EC21, ECPlaza, Tpage) • Trade information portal (KOTIS) • o Consulting • Electronic mail • Credit survey portal (D&B)

8. o Contract • Electronic contract • Electronic certification • o Business and foreign exchange • E-C/O • Trade network (L/C, I/P) • o Logistics • Shipping and port transport network (KLNET) • Goods tracing system (E-logistrame frame, MFCS) • E-L/G, e-B/L

9. o Custom process • Custom process network (KTNET) • E-Customs • o Payment • TradCard • Bolero • VISA • CTB, MP&T

10. Process Task/Activity Progress*(%) Market survey/partner search - E-general trading company operation - Trade information portal system - Overseas correspondence system 30 40 10 Consulting/credit survey - Linking credit information 5 Contract - International mutual recognition system - Revision of laws for electronic contract 5 5 Business/exchanges - E-L/C system - Electronic civil service - E-C/O issuing system 5 40 20 Logistics - E-L/G circulation system - E-B/L circulation system - Logistics transport status system - Logistics partner solution development 70 10 10 10 Evaluation of Korean e-Trade Progress by Process (I) Note: *: Progress assessment in regard to the target set by the e-Trade Korea strategy as of 2004. Source: Korea International Trade Association

11. Process Task/Activity Progress*(%) Customs process - Customs process on the basis of the Internet 30 Payment - Electronic payment system for extra export expenditures - Solution and certification monitoring of international payment - Q/A payment system usage 10 5 15 Platform - Integrated e-trade platform - Dissemination of integrated trade solution - Global e-trade network link - Standardization of e-trade documents - Domestic platforms link 10 30 10 10 5 • - Trade BPR and ISP establishment • Improvement of commercial laws, regulation of financial • documents, etc 25 5 Evaluation of Korean e-Trade Progress by Process (II) Laws/ institutions

12. ƌ Programs in e-Trade in Korea • In the last 10 years, the e-Trade base has been • established by the coordinated efforts of the government, • related public organizations, and enterprises. • Trade digitization network has been established through • the efforts in commercial business, foreign exchange • management, custom process, logistics, etc. since 1992. • (E.g. KTNET, Korea-Japan/PAA network)

13. Internet marketing and Trade information search system • have been well developed. (Silk road 21, KOTIS). • However, previous efforts concentrated on trade digitization • rather than the development of the entire e-Trade system • at the national level. • The low level of e-business of SMEs and weak inter-firm • cooperation are problems (E.g. 80% of SMEs do not • actively use e-Trade).

14. III. Strategy for e-Trade Development • ƌ Benefits of e-Trade • Improvement of high-cost trade structure by substantially • reducing transaction costs through innovation of trade • process ƌ Enhancing Export Competitiveness • Through creation of new markets and new products, • e-Trade enhances export competitiveness and expands • export bases.

15. Especially it plays the core role in expansion of digital • goods and knowledge services. • ƌ Enhancing National Competitiveness • Combining e-business efforts of enterprises and the • government, e-Trade increases exports, and achieves • high value-added trade structure.

16. ȴ Strategy 1: Construction of e-Trade Infrastructure on the Basis of the Internet • Any time, any where, trading enterprises can use the • Internet system for the whole trade process • Establish a system for “single window”, an integrated • e-Trade Platform • All the government administrative services for trade • business will be done on line • - Establish e-payment and e-banking systems

17. Establish the EIPP (Electronic Invoice Presentation & • Payment) system • ȴ Strategy 2: Establish the Base for SMEs’ • e-Trade Utilization • Promote e-general trading companies for assisting • searching and matching trade partners, consulting, • contracting, transactions, etc. on behalf of SMEs • Strengthen SMEs’ international marketing by combi- • ning on- and off- line activities

18. Develop “Silkroad 21” as the Korea’s representative • national trade site • Support SMEs’ trade digitization • Support the development of new export items for • global markets such as digital products (game, • animation, etc.), S/W, DB, knowledge-based services

19. ȴ Strategy 3: Establish Global e-Trade Network • Complete the Korea-Japan/East Asia e-Trade Network • (Pan Asia ec Alliance: PAA). KNET will be the center • of Korea. • Apply the result and experience of the Korea-Japan • e-Trade Network to PAA, which is expected to operate • from the end of 2005 • PAA was formed in 2000 and consists of Korea, Japan, • China, Chinese Taipei (Taiwan), Hong Kong, Singapore • and Malaysia.

20. Participate in paperless trade project of APEC and • ASEM • ȴ Strategy 4: Reform of Laws and Institutions • for e-Trade Friendly Business Environment • Create an effective e-Trade process through a com- • prehensive BPR (Business Process Reengineering) • Establish a system for electronic circulation of • securities such as B/L and insurance securities

21. Remove legal and institutional bottlenecks in • e-documents circulation • - Reform the law on trade digitization • ȴ Strategy 5: Establishing Efficient Organiza- • tional System for the Implementation of • e-Trade Strategy • Establish “e-Trade Committee” under the Prime Minister • as a public-private joint coordinating organization

22. The committee consists of related ministers, • representatives of related industrial associations and • private organizations • Under the committee, “e-Trade Working Group” is • formed in order to implement projects by industry and • by functional process

23. IV. Policies for e-Trade Development • ƌ SMEs in Korea have many constraints for participating • in e-Trade. Some of these are as follows: • Since SMEs do not have sufficient internal digital • capability in terms of manpower, they should depend upon outsourcing when they make and investment in information system. • 2) SMEs tend to passively implement B-to-B, or e-commerce by the guide of large customer companies. This may constrain SMEs’ business opportunities with other large firms.

24. Weak infrastructure Distribution System Payment means Laws& institutions Others Total Ratio(%) 30.4 20.1 18.7 10.1 20.8 100.0 3) Many managers or CEOs of SMEs do not understand digital-based management and technologies. 4) Korean SMEs are lacking in experience of electronic transactions and international trade. Bottlenecks in e-Commerce of SMEs Source: SMBA, May, 2002.

25. ƌ The policy aimed at informatization of businesses is • being implemented in accordance with the Industry • Informatization Promotion Plan. • The Ministry of commerce, Industry and Energy (MOCIE) • is at the center of the Industry Informatization Promotion • Plan, in cooperation with the Ministry of Information and • Communication and the Small and Medium Business • Administration.

26. MOCIE’s industry Informatization Subcommittee • coordinates the policies in e-commerce, informatization • through sectoral plans, international trade and national • resource management, and tries to maximize the synergy • effects of the policies.

27. Among the organizations, the SMBA plays a central role • in SME informatization in Korea. The SMBA is now • leading several projects to spread IT to Korean SMES. • ƌ Organizational Structure for the Informatization of SMEs • SMBA prepares and implements strategies for SME • informatization, overseeing the SME Informatization Promotion • Committee, which sets up comprehensive plans to support • informatization of SMEs, coordinates roles of relevant • organizations and evaluates their performances.

28. SME Informatization Promotion System Informatization Promotion Committee Industrial Informatization Council (6 Industries) Local Informatization Council (12 Regions) Project Performing Organizations (SBC, KIMI, IT companies, Universities, etc)

29. ƌ Government Organizations for SME Informatization • - The Ministry of commerce, Industry, and Energy (MOCIE) • sets up basic strategies for industry informatization and • promotes e-commerce. • MOCIE is undertaking three major projects: promoting • e-commerce in industries; building e-commerce infrastructure; • and globalizing e-commerce.

30. As for the first project, MOCIE promotes e-transformation • of manufacturing businesses and supports SME • informatization. • - The second project, “Building e-Commerce Infrastructure,” • aims at building and implementing national strategies for • e-commerce promotion as well as reforming laws and • regulations, and supporting standardization. • The third “Globalizing e-Commerce” project is designed • to establish infrastructure for e-trade and expands • multilateral and bilateral e-business cooperation.

31. DŽ Supporting & Organizations • The Korea Institute for Electronic commerce, the Korea • CALS/EC Association, and the Electronic commerce Resource • Center are sub-organizations of MOCIE. • The Korea Institute for Electronic Commerce supports • projects for e-commerce promotion, including developing • and distributing e-commerce standards, managing the • e-Commerce Dispute Settlement Committee and training • workforce.

32. The Korea CALS/EC Association promotes informatization • by networking suppliers and consumers of e-commerce • with the Korea E-Trade Association (under MOCIE), which • promotes e-business from consumer perspective, and the • Korea E-Trade/Technical Association (under MIC), which • provides technologies from the supplier perspective. • The association manages the e-CEO Consultative Body, • supports the Golden Card System, which aims to attract • leading e-business workers from overseas. The association • is carrying out projects for B-to-B networks and e-catalog.

33. The Electronic Commerce Resource Center promotes • e-commerce and builds national capacity. Around 40 • ECRCs were established nationwide by MOCIE. • The main responsibilities of the center are to develop • human resources through local training tours, corporate • training programs, school for start-ups, spread • technology by developing and distributing technologies • for SME-specific IT systems.

34. <Table> The Status of e-Commerce Development in Six Key Industries Industry E-Commerce Progress/Stage Core Tasks 2000 2003 Electronics 8.5%(Early Growing) 30.3% (Entrenched) - Share standardization - Cooperate with leading companies Automobile 2.4% (Starting) 14.0% (Growing) - Build an industry-wide network (KNX) - Enhance competitiveness of parts industry Shipbuilding 2.5% (Spreading) 15% (Early entrenched) • Build collaborative system for design and • production industries • Entrench a culture of inter-company collaboration Steel 2.3% (Steel) 14% (Growing) - Led by POSCO - Early establishment of e-commerce system Machinery 2.0% (Starting) 12.5% (Growing) - Standardize classification and codes - Digitize parts industry Textiles 2.0% (Starting) 15% (Early entrenched) - Entrench digital transactions - Build co-infrastructure The Status of e-Commerce Development in Six Key Industries Source: MOCIE Source: MOCIE

35. Project Major Project Features Organization Supporting SME informatization Supports informatization in SMEs (informatization of unit work, distribution of ERP, building SCM, support building e-learning) Small Business Corporation E-commerce promotion project Develops and distributes e-commerce standards, nurtures e-commerce workforce, and makes statistical reports and analysis Korea Institute for Electronic Commerce Building a digital industry area Digitalizes national industrial area to provide on-line administrative service comprehensively to the residence companies Korea Industrial Complex Corp. Building B-to-B network Develops e-commerce model appropriate for each company’s feature Korea CALS/EC Association Operating e-commerce support centers Designating 40 ECRCs nationwide, nurtures workforce and provides consulting, technological support, develops and distributes technologies for e-commerce Electronic Commerce Resource Center Informatization Projects of Ministry of Commerce, Industry and Energy Source: MOCIE

36. Project Main Points Digitalizing production information of SMEs Supports informatization utilizing computers and IT at workplace Supporting SME informatization innovation consortium Supports consulting service by forming a consortium with universities, SI companies and related organizations Building IT infrastructure in SME-concentrated areas Supports building informatization infrastructure for regional information hub in SME-concentrated areas Building IT infrastructure for industry association Builds e-commerce infrastructure for association-centered community Training of acquiring informatization management system certificates Directs acquiring informatization management system certificate to transform management into informatization management Operating informatization supporting group Operates informatization supporting group in order to break the difficulties of SME informatization Survey of current status of SME informatization Performs researches on the actual condition of SME informatization to estimate the level of SME informatization Supporting TIMPs (dedicated to innovative informatization of SMEs) Seeks SMEs in excellence of informatization to spread excellent cases to other SMEs Developing standardized model of work process Spreads and distributes standardized work process by every industry SME IT education Provides informatization education for SME workers and CEOs Projects of the Small and Medium Business Administration Source: SMBA

37. ͨ Export Promotion • Exports by SMEs account for 43% of total exports and are • growing at a faster rate than that of large corporation. • However, the recent slowdown in the global economy and • increasing competition are posing challenges for SMEs’ • to expand exports. SMEs are also facing a sluggish • domestic demand as a result of the slowing domestic • economy.

38. The SMBA is also working toward expanding the export • base for SMEs and providing active assistance in their • overseas marketing. This takes the form of expanding • opportunities for cooperatives and organizations to • attend overseas exhibitions, and dispatching talented • resources from SMEs to overseas countries to nurture • them into trade professionals through on-site training • in the local market.

39. As a step toward consolidating the base for cyber trade • among SMEs, the ASEAN+3 SME Network was launched • in March 2003, laying the groundwork for stronger • cooperation among the member countries. • The Small and Medium Business Administration (SMBA) • and Small Business Corporation (SBC) have combined to • designate 38 overseas assistance centers to provide • comprehensive trade-related services like market survey, • investment guidance, etc. to Korea’s venture enterprises.

40. The centers are in established markets like China (12 • locations), United States (6), Japan (4), and Germany and • Russia (3 each), as well as in newly emerging markets like • Brazil, Kenya and India.

41.  Customs and Other Trade-Related Procedures • Informatization of customs services has shortened the • procession time (for exports, from more than a day to • less than two minutes; for imports, from more than two • days to less than two and half hours), and has reduced • logistic costs by at least 500 billion won a year.

42.  Policy Plans for Advancing B-to-B e-Commerce - Providing detailed information regarding foreign e-marketplaces: The government is planning to provide information concerning document and catalogue standards, commodity standards of each e-marketplace. In addition, the government will also provide specialized services that can help resolve possible disputes from international trades.

43. Providing an environment for paperless international • trade through the establishment of an integrated system • of international trade automation suitable for the • Internet: The government distributes EDI systems to all • exporters, and remove possible obstacles to • international trade automation. • The government implements a global e-trade network • project to handle all processes associated to • international trades, including intermediation, contracts, • payment, and logistics.

44. The trade network will be linked to the international trade • automation systems of other Asian and European countries. • As a result, a trade environment will be provided in which • any international trader can utilize e-trade.

45. V. Implications • ƌ Implications for Korea • Despite the active policies of the government, efforts of • related organizations and firms, the e-Trade in Korea • has not been sufficiently developed yet. • Week areas are found in: low utilization of the e- • General Trading Companies, low profitability of e-Trade • service providers, low level of digitization (of SMEs in • particular), insufficient infrastructure.

46. Since e-Trade is a part of overall e-business, the mindset • of the firms for e-business and overall development of • e-business is a necessary condition for e-Trade develop- • ment. Most of all, Korea needs to establish more efficient • e-business infrastructure. • In particular, SMEs need to actively utilize those suppor- • tive measures and policies. However, they do not have the • capacity to do so. Thus, the role of e-General Trading • Company should be strengthened.

47. ƌ Implications for Other Developing Economies • Although Korea may not have achieved an ideal progress • in e-Trade development yet, the achievement so far may • seem to be impressive to some outside observers. • The active role of the Korean government in e-Trade • development through various policy measures confirms • that the role of government is crucial, especially for the • construction of needed infrastructure and legal arrange- • ment.

48. International cooperation through such organizations as • UNDP, APEC, ASEAN, etc. is also helpful for international • networking. • Incentives for SMEs to utilize e-business in general and • e-Trade in particular are also vital. Dissemination of • success cases of SME e-Trade will be helpful and teaching • the benefits of e-Trade are helpful. • “ You can bring a cow to the river, but you cannot let • the cow to drink the water!”