Korea: KFTC

‘A resilient dynamism’ was the theme of the World Economic Forum held in Davos, Switzerland, in January 2013. As the economic downturn continues and pessimism has become widespread after the 2008 financial crisis, seeking new growth momentum became the biggest matter of concern for all of us. The Park Geun-hye administration was launched in February 2013, proposing ‘a creative economy’ as a key to its economic policy. It is a strategy that allows all the economic players to be creative to the fullest because the previous growth strategy focusing on large businesses has reached its limit in generating additional growth momentum, although it had bolstered the Korean economy for the last half century. Under the new strategy, the government would bring the creativity of each economic unit together to develop it into a new growth engine. That means the economic policy model would be more centred on all economic players rather than focusing on a few businesses.

In this context, the Korea Fair Trade Commission (KFTC) has pushed forward to build up an economic system where the economically vulnerable can realise their full potential by taking part in economic activities. After assuming the position of the KFTC chairman, I have prioritised making a level playing field so that new competitors equipped with creative and innovative ideas can fairly compete in markets. So far in Korea social issues such as large businesses’ rent-seeking for monopolising profits by abusing their market power have arisen. Under these circumstances the economically weak would lose their motivation and opportunity to show their ability, and as a result the chances for social mobility would decrease. In the short term, there would be an economic boom but in the long run the basis for dynamic growth would be weakened, thus hindering sustainable and sound economic growth.

Accomplishments in 2013

Some large businesses’ rent-seeking behaviours, which became a social issue in Korea, have occurred as demand is shrinking worldwide due to the global economic downturn and a decline in entrepreneurship among the third or fourth generations of founders’ families, who are eating into existing domestic markets using the market power built up by parent generations. This is in contrast to their founders, who took risks by advancing into new markets. For instance, the new generations have taken business away from small competitors, including bakeries and supermarkets, by using their market power and distribution channels; they have also misappropriated core technology or stolen human resources of small and medium-sized enterprises. In addition, through intra-group trade, they gave orders and benefits but only to affiliates governed by owner families. In some cases they carried out transactions via certain affiliates (even though the process is unnecessary) with the affiliates earning a commission: a so-called ‘transit duty’.

These unfair practices would reinforce their market power and privilege, thus preventing an the environment in which companies can compete with each other using creative or innovative ideas. The KFTC has thereby been focusing heavily on preventing abnormal practices or unfair activities which may hinder competition or public welfare. The Commission holds that unfair business practices will not make profits that exceed normal levels under an economic system with firm economic principles. We have thus worked hard to introduce a system that strictly enforces competition law and so thwarts those unfair behaviours.

First of all, the Commission amended the Monopoly Regulation and Fair Trade Act (MRFTA) in July 2013, thus providing measures to control the process that allows owner families of large business groups to unfairly accumulate wealth by only allocating orders to affiliates governed by them. The Commission also introduced a system that regulates the practice of paying ‘a transit duty’ for trade. There are three months left before the amendment will be enforced, but already some of large business groups have started to change their behaviours voluntarily, such as conversing intra-group trade into outsourcing and allocating orders – previously given to affiliates whose majority of shares held by owner families – to the other affiliates. It is good to see these positive changes in the market.

The Commission also introduced treble damages for large businesses’ practices such as unfair price cuts in subcontracts or cancellation of orders by using their market power. It expands the scope of punitive damage which applied only to misappropriation of technologies in the past, and we expect that the newly introduced system will have a huge impact in suppressing abuse of market power.

The Commission has proactively detected cartels and sanctioned them. This year leniency applications increased by 55 per cent compared to last year. This is the result of stronger punishments (including heavy surcharges imposed on cartels), greater consistency in the conduct of a criminal complaint for prosecution, and the punishment of individuals as well as corporations. Meanwhile, we have reduced the scope of those who benefit from a leniency programme and it is assumed that, in opposition to initial estimates, this reduction has increased the cost of cartels and therefore works as an incentive to apply for leniency.

We also have increased the deterrent to cartels or other unfair practices by reinforcing criminal prosecution. In order to initiate criminal proceedings against companies involved in unfair business practices, there should be a request for prosecution from the KFTC. Until now, however, the prosecutor’s office has had the exclusive right to request such a complaint from the KFTC. Now, however, this right has been extended to the Board of Audit and Inspection of Korea, the Public Procurement Service, and the Small and Medium-sized Business Administration. We expect that incentives to form cartels will see a dramatic decline, as a result of the increased frequency and levels of criminal punishment.

Policy direction in 2014

In 2013 the KFTC has focused on establishing a policy framework in which a creative economy can thrive. In 2014 the Commission will work to strictly enforce laws against unfair business practices and will also make a serious effort to build a solid foundation for fair competition under the remit of promoting a creative economy. 

To this end, we will rigorously sanction any abuse of a dominant market position by incumbents that prevents or excludes the emergence of new competitors in the IT sector and other new areas of technology. It is important to secure fair levels of competition at an early stage of a digital economy or any other new markets, because winning or losing competition in those markets is determined in a very short period of time; positions are established very quickly.

In 2013 the US and EU antitrust agencies conducted investigations against platform operators such as Google. In Korea, procedures for consent decree have been under way ever since abuse of a dominant market position by Korean platform operators became an issue. In addition, the Commisson will forge a dynamic competition environment by closely monitoring unfair business practices in the embedded software or operating system markets and establishing the best trade practices.

In addition, we will continue to strictly root out cartels. In order to increase the cost of cartels, the KFTC is considering whether to abolish the criteria for a penalty reduction or reduce the scope therefor. It will also expand the scope of those subject to punishment. In the past the punishment was mainly about imposing surcharges on companies violating the law; in future, however, the Commission will lessen incentives to participate in a cartel by expanding criminal complaints against individuals involved in law violations, such as CEOs, executives and employees. In terms of the leniency programme, some have criticised that it indulges cartel organisers; however, it has been very effective in detecting or suppressing cartels, and as such we will continue to employ it.

The Commission will also strengthen law enforcement against transnational M&As and international cartels. In dealing with these, it is important for us to cooperate with other competition authorities in order to enhance the consistency and predictability of law enforcement. We will reinforce law enforcement capacity worldwide by closely cooperating with other competition authorities, not only in countries where we have established successful relations but also in emerging countries.

Moreover, we will do our utmost to converge the regional systems while also spreading competition principles through the expansion and reinforcement of technical assistance.

Conclusion

In order for the Korean economy to continue its economic development by restoring its economic dynamism, more effort should be made to foster a spirit of embracing challenges and of performance-based values. To this end, profit motivation needs to be fully encouraged under conditions of fair and free competition, and this competition needs to be active in all economic sectors.

The Korean government is working hard to lay a foundation that enables us to overcome crises through our creative economy, which is in itself a new model for growth and which allows us to take a major step forward. 

All these efforts made by the Korean government will contribute to the recovery of the sagging world economy. In doing so, the Commission believes that the role played by competition policy is critical; it will oversee the market with rigour, so that price mechanisms and competition orders will not be impeded.