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The Effect of Social Regulation on Economic Performance: Implications for Industrial Policy

Author Song Danbee et al Date 2020.12.16 Page

 Recently, the dominant social paradigm has come to emphasize inclusive and sustainable growth over quantitative growth. This is reflected by the increased importance placed on achieving noneconomic goals in fields such as the environment, labor and safety in government policy. In addition, new technology development has spurred the emergence of new industries and the structural changes caused by the convergence between different industries, which has expanded the economic impact and scope of social (non-economic) regulations. 


 In this sense, this study focuses on the effects of social regulation on a firm’s economic performance and discusses the role of industrial policy that could ameliorate the economic constraints caused by social regulation. First, using a theoretical model, we analyze the negative relationship between social regulation and economic outcomes, and discuss how the relationship can be improved as significant innovation occurs within a dynamic process. Second, we empirically examine the economic impact of social purpose regulation by analyzing a law (the Chemical Substances Control Act and Act on Registration and Evaluation of Chemicals) using the regression discontinuity in time method. The results show a negative impact on a firm’s profitability, productivity and investment in the South Korean manufacturing industry. The effect is more pronounced for small and medium-sized firms and firms in chemical sectors. Third, we conduct an online survey and focus group interviews (FGI) to determine the actual economic impact of social regulation and the underlying mechanism. The survey results are consistent with those of theoretical and empirical results. Firms report increasing costs and greater future risks when faced with stricter regulations on labor, the environment and safety, leading to decreased profits and deterring investment. In sum, this study provides theoretical, empirical, and anecdotal evidence that social regulation negatively affects firm profitability via cost increases and freezes investment by creating resource shortages and exacerbating volatility, which may diminish a firm’s long-term competitiveness.


 Finally, to mitigate the negative economic impact of social regulations described throughout the study, we suggest industrial policies to implement prior to and after social regulation enforcement. The first among which is the proactive implementation of industrial policy. For instance, measures to estimate the economic impact of regulations, such as an evaluation of industrial competitiveness, can be considered a proactive industrial policy response. We also recommend a policy response to support significant innovation by considering firm- and industry-level characteristics (for example, tax exemption, R&D support, and so on).