Economic Effect of Zoning Regulations on Korea's Small and Medium‐Sized Retailers*

• Author: Jinhwa Chung,Hahn Shik Lee,Woohyoung Kim
• DOI: http://doi.org/10.1111/asej.12208
• Published date: 01 June 2020
• Date: 01 June 2020

Economic Effect of Zoning Regulations on

Korea’s Small and Medium-Sized Retailers*

Hahn Shik Lee, Jinhwa Chung and Woohyoung Kim

Received 24 April 2017; Accepted 1 April 2020

In this paper, we investigated the economic effects of zoning regulations on the

retail industry in Korea. Weestimated the changes in the number of sales for retail

stores using a panel regression analysis for stores in traditional markets. This analy-

sis was conducted to examine the benefit of zoning regulationson retail stores. Our

results show that the zoning regulations (called Traditional Commercial Activity

Protection Zones)have contributed to an improvement in the actual business perfor-

mance of small independent retailers. We found that the amount of sales for each

store clearly increased on average in the areas designated as Traditional Commercial

Activity Protection Zones where there was no market entry of mega supermarket

chains (called SSM inKorea). We also present evidence thatthe effects of this pol-

icy differ geographically: the effects were stronger for smalland medium cities than

for large metropolitan cities. These results suggest that zoning regulations enacted

by the government to protect traditionalmarkets and small retailers should alsocon-

sider regional differences when assessingpolicy effectiveness.

Keywords: large discount store, mega supermarkets, TCAPZ, traditional market,

zoning regulations.

JEL classification codes: L51, L81, C23.

doi: 10.1111/asej.12208

I. Introduction

Zoning regulations are often used to restrict the entry of large retail stores,

known as ‘big-boxes’. These regulations find their justification in the need to

protect the survival of smaller retailers from large retail chains such as Tesco

and Walmart. However, there is little empirical evidence that zoning regulations

have contributed to an improvement in the business performance of small

*Chung (corresponding author): Department Economics and Finance, Keimyung University,

Korea. Email: jhchung@kmu.ac.kr, Lee: Department of Economics, Sogang University, Korea, Kim:

Small Enterprise and Market Service and Graduate School of Technology Management, Kyunghee

University, Korea. The first and second authors gratefully acknowledge the financial support from

the Ministry of Education of the Republic of Korea and the National Research Foundation of Korea

(NRF-2016S1A3A2923769).

© 2020 East Asian Economic Association and John Wiley & Sons Australia, Ltd

Asian Economic Journal 2020, Vol.34 No. 2, 185–211 185

independent retailers. Instead, zoning regulations have been criticized for their

negative effects on the efficiency of the retail sector.

In this paper, we analyze the effects of zoning regulations on small indepen-

dent retailers in Korea exploiting a recent enforcement that induced significant

heterogeneity in the entry regulations faced by large retail chains. The Korean

retail industry has been dominated by big-boxes, the so-called ‘Big 3’, Lotte

Mart, Sinsegae E-Mart and Homeplus; they were established and operated by

conglomerate parent companies.

1

Super-supermarkets (SSM) have also spread to

neighborhood grocery markets. SSM refer to Korean mega supermarket chains,

which are operated through the headquarters of the Big 3 or their affiliated firms

in Korea.

2

The dominance of conglomerates in the retail industry may eventually

lead to a decline in small independent retailers.

3

The conflict between the new and incumbent retailers and the consistent

demise of small and medium retailers have become political and social issues

along with the structural changes in the Korean retail industry. To protect small

retailers from conglomerates, the Korean Government has enforced retail zoning

restrictions since 2010, which include regulations for big-boxes and SSM. Regu-

lation of large retailers is aimed at protecting and revitalizing small independent

retailers in traditional markets and small supermarkets.

4

Most Korean local gov-

ernments have enforced retail zoning regulations, called ‘Traditional Commer-

cial Activity Protection Zones’(TCAPZ), which can restrain the registration of

large stores within 1 km of traditional shopping districts.

This study conducts an empirical analysis of the economic effects of TCAPZ

and evaluates the effectiveness of this regulation. We first constructed panel data

classified by each store in a traditional market before and after the zoning regu-

lations. We then estimated the effects of TCAPZ on the sales of small retailers

in traditional markets by adopting the difference-in-differences (DID) approach,

which has been often used in the empirical assessment of policy effects. Based

on the analysis presented here, we quantitatively evaluated whether TCAPZ con-

tributed to the improvement of business performance of small retailers and tradi-

tional markets. Zoning regulations implemented through legislation in TCAPZ

can cause changes in consumer behavior. Our results show that the zoning regu-

lations have contributed to an improvement in the actual business performance

of small retailers. In particular, we found that the amount of sales for each store

1

In Korea, transnational corporations such as Walmart and Carrefour have been shut down due to

the heavy competition with Korean companies (Lotte Mart and Sinsegae E-Mart), and Tesco has

been totally localized with the name Homeplus in Korea. The ‘big 3’are referred to as the ‘big-

boxes’in the Korean retail market. They are also transnational corporations that originated in Korea.

2

Super-supermarkets range in size from 165 to 3000 m

2

, making the average store smaller than a

typical big-box retailer but larger than most convenience or small independent retailers (mom-and-

pop stores).

3

This result can be verified through various statistics (Kim and Hallsworth, 2013)

4

A“traditional market”is a type of retail outlet that opened before the modern retail facility in

Korea. These traditional markets preceded the modern retail facilities in Korea.

ASIAN ECONOMIC JOURNAL 186