Rare diseases suffer from low marketability and high development hurdles, leading to a heavy reliance on imports and a severe shortage of orphan drugs. This study aims to propose institutional improvements to stimulate the domestic market via a comparative analysis of designation regulations and incentive policies in the US, Japan, and South Korea. While sharing similar incentive policies, significant differences exist in their specific criteria and procedures. Over the past decade, the US consistently recorded 300–500 orphan drug designations annually. By December 2025, cumulative US designations reached roughly 7,600, compared to 706 in Japan and 400 in South Korea. This remarkably high US performance is linked to key institutional features: comprehensive criteria evaluating both disease rarity and market feasibility, flexible application timing across development stages, and an expedited 90-day review process. These findings indicate that market-sensitive criteria and efficient administrative procedures significantly drive designation activity. Consequently, South Korea would benefit from adopting more flexible designation requirements and strengthening administrative support to improve its domestic orphan drug development ecosystem. However, further empirical research remains necessary to definitively verify the causal relationship between these institutional factors and final designation outcomes.