Determinants of Offshore Regional Income Outflow and Policy Implications in Korea

Regional development that includes income distribution and qualitative growth is one of the major issues in regional economics. Furthermore, Korean regional governments set regional development as a main goal and strive to improve it. However, regional income-Product(Gross Regional Domestic Product, GRDP) in non-capital area has been flowing out into capital area. Consequently, income-distributed (Gross Regional National Income, GRNI) towards non-capital area residents is lower than income-produced by them. Inter-regional income flow is a natural phenomenon in an open economy where physical constraints are relatively low. Yet it is problematic that the amount of income outflow from certain non-capital regions is gradually increasing. In addition, the regions from which income flows often bear a cost of negative externalities, such as congestion and other environmental disutility, without fully benefitting from economic growth. On the other hand, regions into which income flows benefit economically without paying such costs. There are also rising concerns that income outflow biased toward certain regions is a problem in terms of the equity of income distribution. Offshore regional income outflows are divided into following categories: employee compensation, operating surplus and property income. Among them, employee compensation and operating surplus account for a large proportion of outflows. Fundamentally, employee compensation outflows are caused by a spatial mismatch between workplaces and residences. The outflow of operating surplus is due to a spatial mismatch between corporate headquarters and regional branches (office and factories). Since the direct cause of the outflow of income is apparently evident, it seems easy to solve the problem. However, this phenomenon is intertwined with various factors such as space, industry, human resources, and living environment. This is supported by the fact that offshore regional income outflows in certain regions have intensified, even though such regions have struggled to stem their regressive regional income distribution via a series of policy effort. Thus, it is necessary to analyze various factors of offshore regional income outflows and to set a new initiative to soothe intensification of income leakage in certain regions. This paper aims to analyze the determinants of offshore regional income outflows, especially outflows of employee compensation and operating surplus. The analysis is performed through four dimensions: space, industry, human resources, and living environment.