The Korea Herald


[Contribution] Korea should prioritize innovation, not misguided platform regulation

By Korea Herald

Published : May 12, 2024 - 17:36

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By Hong Dae-sik & D. Daniel Sokol

Korea rightly aspires to be a tech leader, but misguided regulation threatens its innovation prowess. Korean officials are considering platform legislation modeled after the European Union’s recently implemented Digital Markets Act. But that untested law has been widely criticized and prior European legislation, the General Data Protection Regulation, has hurt European competition -- leading to less AI investment by venture capitalists and one-third fewer apps. Similarly, Chinese platform regulation has led to fewer startups entering regulated markets and less venture capital investment.

Europe chose to regulate heavily for protectionist reasons. It lacks the tech infrastructure, innovative companies, and unicorns that are present in other vibrant economies like Korea. Europe lags far behind countries like the United States, China, the UK, Israel, and Singapore in startups and tech innovation. Indeed, despite its much larger student population, not a single continental European university has more undergraduate alumni among startup founders than Seoul National University, the top-ranked Korean university among universities with unicorn founders. The brand-new and largely untested DMA should not serve as a model for Korea or the rest of the world as a way to promote competition. Indeed, the adoption of this approach may threaten Korea’s relative position in the region. While Korea has approximately three times more unicorns than Japan, despite having a smaller gross domestic product, the adoption of a DMA-like approach may hurt Korea’s innovation advantage.

To evaluate the merits of such burdensome regulation, the government must take into account the important role that regulation plays in providing incentives for venture capital investment and entrepreneurship, and more broadly in driving dynamic innovation. Well-designed competition systems must account for various factors such as a country’s institutions and economic arrangements.

The larger political economy of Europe is vastly different from that of Korea. Unlike in Europe, there are significant Korean tech companies that compete against tech companies from the United States and China in both hardware and software. Korea also has robust enforcement, including against tech companies, under existing competition law.

Nevertheless, Korea's competition authorities are pushing for the introduction of even stronger digital regulations, including the ex-ante regulation that would restrict certain companies regardless of whether their practices are anti-competitive. But there is no need for Korea to become a first mover in such controversial digital regulation. Other countries with strong tech innovation are not seriously pursuing ex-ante regulatory approaches. The United States rejected such a legislative effort and its proponents have come under significant attack by academics and Congress. Likewise, most American courts have rejected this novel approach, and antitrust authorities that have brought lawsuits under such non-traditional legal theories have lost virtually every case, especially when seeking to block corporate mergers.

Additional competition regulations aimed at online platforms are misguided because empirical evidence including from the World Bank demonstrates that platforms promote small business and innovation. The IMF confirms that “SMEs growth prospects can be significantly boosted through enhanced access to … digital platforms to connect businesses with consumers,” and that “empirical studies show that technology can enhance operational efficiencies, innovation, access to international markets and overall productivity (for SMEs).

Significant restrictions on the operations of digital platforms can adversely affect small businesses in particular. Small businesses leverage digital platforms for expansion. Large online platforms help create trust from consumers and connect small businesses with customers who otherwise may never have discovered their products and services. Platforms help SMEs expand their market penetration, including exports to other countries. This is particularly important given that small business growth disproportionately helps underserved socio-economic groups, including women.

The ex-ante platform regulation that resembles the DMA risks unforeseen consequences for the Korean economy. It would raise the costs of doing business in Korea, causing venture capital to flee. Korea’s university system is an important draw for talent and an important incubator of innovation and entrepreneurship. Having a collection of prestigious institutions of higher education serves to attract and maintain significant talent in Korea, helping create comprehensive entrepreneurial ecosystems. Such ecosystems may be threatened with overly harsh regulation that would cause the next generation of talented Koreans to move to the United States, Canada, Singapore or elsewhere in search of a more hospitable environment for innovation.

The flight of financial and human capital is especially problematic in a world where AI increasingly matters for national security as well as economic development. National security itself may also be implicated by the potential ex-ante regulation in Korea that targets American and Korean companies but that does not seem to target Chinese giants like Alibaba, Temu and TikTok, given the Chinese Communist Party’s efforts to exert political influence through economic entwining with Chinese firms including by imposing legal requirements to share sensitive data with Communist Party officials.

Korean tech regulation should not disadvantage domestic companies and privilege Chinese competitors. But the very fact that fast-growing Chinese firms are shaking up the digital space disproves the narrative that these markets are entrenched and lack competition. But if the idea of the proposed regulation is to deal with the perception of entrenched power, it is odd that the regulation narrowly addresses only digital markets where some traditional Korean industries have faced entrenchment for generations. There are many ways to make Korea more prosperous and competitive globally but this ex-ante competition regulation does not seem to be the right approach.

Advocates of bringing the ex-ante platform regulation to Korea make broad generalizations that misrepresent antitrust history and antitrust law. This includes characterizations that overstate the causal impact of antitrust enforcement on competition in certain markets.

For example, if the goal of breaking up Standard Oil was to reduce monopoly power, the net worth of Rockefeller tripled after the breakup. This is hardly effective antitrust. Similarly, there is no empirical evidence that confirms IBM’s decline in the US was directly related to antitrust enforcement, or even the threat of enforcement, as opposed to legitimate competition with Microsoft and other entrants. Overall, the relationship between monopoly power and innovation is unclear and goes back to a fundamental difference between Schumpeter and Arrow as to whether more or less concentration is better for innovation. Moreover, recent empirical work specifically on platforms includes many papers showing value creation and other benefits from platforms. The empirical reality shows that nuance and careful case-by-case analysis allow for a better calibration of enforcement to a policy that encourages innovation and value creation, as opposed to a blanket ex-ante approach that may often result in the opposite.

South Korea faces a critical choice. It can promote competition using existing tools wisely in a way that allows for innovation and economic growth, or it can blindly follow an untested European regulatory model that seems likely to lead to stagnation and economic decay.

Hong Dae-sik is a law professor at Sogang University Law School and D. Daniel Sokol is a law professor at the University of Southern California. The views expressed in this column are their own. -- Ed.