Assimilating Tech

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IMPLEMENTATION OF SCIENCE ANDTECHNOLOGY POLICIES FOR GLOBALCOMPETITION: KOREA'S ELECTRONICS

AND TELECOMMUNICATIONSINDUSTRIES

ROY W. SHIN*

School of Public and Environmental Aairs, Indiana University, USA

INTRODUCTION

This study examines the process of industrial transformation from the system

institutional perspective. This paper cortically evaluates current proposals to targetindustries with trade and industrial policies. Industrial transformation is the process

in which an industry changes its production technology, product scope, market

distribution and location due to changes in internal and external factors, and also

involves a continuous, interactive decision-making process by industry and the

government in response to information and capability constraints. Both the market

mechanism and the institutional interaction between the public and the private sector

are important to successful industrial transformation, especially in the context of

developing countries. The major feature of the Korean technological path was the

fostering of indigenous technology through research centres established in both

public and private sectors. Thus Korea's industrialization success has actually beenderived from how well imported technologies were absorbed into its own indigenous

R&D eorts. Korea's electronic industries are attributable not only to the enormous

capital invested, but also to heavy reliance on imported technology.

A case study of South Korea's (hereafter called Korea) electronics and telecom-

munications industries illustrates how government and industry can interact to

overcome the common problems in industrial transformation faced by many

developing countries. Many studies have been done to analyse how and why an

industry transformed from the strategic perspective of business. For example, Porter

(1990, pp. 67) analyses the mechanism of transformation and suggests that the

pressure of new entrants, product substitution, suppliers' power, buyers' power, andthe rivalry between competitors are the driving forces for industrial transformation.

CCC 09541748/98/06071517$17.50#1998 John Wiley & Sons, Ltd.

Journal of International Development

J. Int. Dev. 10, 715731 (1998)

* Correspondence to: Prof. Roy W. Shin, School of Public and Environmental Aairs, Indiana University,Bloomington, Indiana, USA.


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This paper, on the other hand, focuses on the institutional interaction between

industry and the government in maintaining industrial competitiveness. The study

illustrates how the active interaction between the private and the public sector can

help overcome the problems of externalities, risk bias against infant industries, and

capability constraints in developing countries.

STRATEGIC CHOICES FOR GLOBAL COMPETITION

The mode of interaction between industry and the government is subject to the

inuence of contextual changes in society and the economy. As an industry becomes

more mature and the legitimacy of state leadership is eroded, as in the Korean case,

the interaction between the government and industry also changes, and the govern-

ment has to assume dierent roles to build the competitiveness of a domestic industry

in the world market.To maintain competitiveness in the world market, domestic industries need to

transform their production technology, market foci, product quality and location

continuously. Table 1 illustrates the process of industrial transformation from the

systeminstitutional perspective in which, industry and the government are the actors

in the model. Both actors make strategic choices that tailor a particular sector to best

t the social, economic and political situations in the external environment. There are

two categories of inputs in the decision-making process: capability constraints and

information inputs. According to standard economic theories, all production is

subject to possible frontier constraints. By understanding the existing capability

constraints, an industry continues to try stretching the limit by utilizing various

strategies, such as performance monitoring, new investment, and technological

innovation to break down production bottlenecks.

Lawrence and Dyer (1983, p. 297) suggest several elements of resource constraints

that are important in the process of industrial adaption: human resources, physical

resources, nancial resources, information/decision ows and energy/matter ows.

These constraints can be generalized as factor supply constraints. In addition to these

Table 1. Model of continuous industrial transformation.

Inputs Process Output

Social Economic, Political, and Industrial Contexts:

A. Information

Domestic demand Industry/market assesses: Investment decisions

Foreign demand (a) protiability (a) no investment

Factor supply (b) risks (b) development

Technological requirements (c) new investment

j

A j A

B. Capability Constraints

Factor supply capability Government assesses: Policy options:Market demand capability (a) social benets & costs (a) non-intervention

Technological capability (b) political benets & risks (b) incentive policies

(c) regulatory policies

(d) scal policies

# 1998 John Wiley & Sons, Ltd. J. Int. Dev. 10, 715731 (1998)

716 R. W. Shin


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constraints, an industry faces market demand and technological constraints. Market

demand constraints, such as limitations in the consumption power of domestic and

foreign buyers, export quotas taris, and price controls by governments, can signi-

cantly inuence the development of an industrial sector. Technological capability

constraints also alter the performance of an industry. There are three types oftechnology capabilities. The rst concerns investment capability, which is important

when identifying feasible investment projects. A second type is production capability,

which is needed for the operation and improvement of a plant. The third type, linkage

capabilities, concerns maintaining connections with other rms and institutions. By

releasing the constraints on technological capabilities, mainly through education and

R&D, an industry has a stronger transformation capability to maintain competi-

tiveness in the market.

All the capability constraints are subject to direct inuence of many domestic and

foreign factors within the social, political, and economic context of a country.

Changes in living standard, income level, government regulations on factor supply(capital, land, manpower education and training), industrial structure, and the

willingness of foreign investors to invest and transfer technology are some factors that

directly aect the capability constraints (Dahlman, 1991, p. 53).

The other category inputs concerns information. Lawrence and Dyer (1982, p. 300)

suggest ve elements of information complexities that are vital to organizational

adaption: competitive variations, technical variations, customer variations, product

variations and government regulatory variations. From a more generalized

perspective, these variations aect three information concerns of industries regarding

information: market demand, factor supply and technological requirements of the

market. These information concerns are important to a rm's strategic planning and

the process of industrial transformation. For example, Stiglitz (1989, p. 198) suggests

that the appropriation and utilization of information determines the willingness of

rms to invest in research and development. Kim (1993, p. 3) suggests that prior

knowledge increases the absorptive capability of an organization and stimulates faster

and smoother transformation of an industry. Besley and Case (1993, p. 399) also

suggest that lack of information about technology protability leads to hesitation in

technology adoption, which implies a stickier process of industrial transformation.

Both industry and government respond to capability constraints and information

inputs by making various investment and policy decisions. The key concern of anindustry in this process is the protability as well as the extent of risks involved when

an industry determines a particular investment's feasibility. Given the considerations

of protability and risk, an industry basically has three options. It can make no

investment, which may lead to a gradual decline of the industry, continue to upgrade

the existing production technology, or make new investments to explore dierent

alternatives.

The government, on the other hand, has dierent concerns. Its major concern is to

oversee public interests and ensure that there are net social benets from the process

of industrial transformation. The model assumes that social costs and benets are

dened by the institutional setting of the government. If the government is operatedunder a democratic system, social costs and benets are dened by elected repre-

sentatives in the process of legislative formulation. If the government is operated

under an authoritarian system, social benets and costs are dened by political

leaders and the bureaucratic system with limited inputs from the general public.


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Political risks and benets are also considered by the government in assessing the

information inputs and capability constraints. If it takes heavy political risks to

impose certain policies to alter the transformation process, the government will

hesitate to implement such policies.

There are four kinds of industrial policies available to government. The rst one isnon-intervention, which implies the absence of any direct intervention by the govern-

ment to alter the production technology, factor supply, location, and market focus

of the industry. The second policy option is to oer direct subsidies to the industry,

such as low-interest loans and free land allotment. The third policy option includes

such regulatory measures as export performance targets, environmental regulations

and product standard requirements. Finally, the government can use tax incentives

(e.g., tax holidays and tax exemption) and direct expenditures on R&D and education

to alter the process of industrial transformation.

The government and industry are interdependent in the model, and can be closely

interlocked in the institutional decision-making process to an extent that an industrymay have its own members in the government representing its interests. Regular

meetings, circulation of reports, and policy conferences between business leaders and

politicians can also enhance the communication and understanding between govern-

ment and the industry. Through these institutional linkages, the government's assess-

ment of social benets and costs is inuenced by the interests of business, and

conversely, business' evaluation of benets and costs is altered by government ocials.

The impact of these policies and investment decisions is re-evaluated by industry and

government through an interactive, institutional decision-making process.

THE PROBLEMS OF INDUSTRIAL TRANSFORMATION

IN DEVELOPING COUNTRIES

Market versus Government

The systeminstitutional model suggests that industrial transformation is the result of

a continuous decision-making process by industry and the government, given the

information and capability constraints. This model may help us to understand the

nature of industrial transformation in developing countries. For the past decade,there has been much debate as to whether the market mechanism is sucient, or

whether the government intervention is necessary to secure successful industrial

transformation (Haque, 1991, pp. 10 12). The debate is especially controversial

within the study of the rising economies in East Asia, where the approach centres

around a strong state inuence on economic development. From the system

institutional perspective discussed above, the debate surrounds one particular

issue whether the government is needed to facilitate the decision-making process

by industry. As Ranis (1991, p. 72) points out, the answer depends on the context of

industrial transformation of a particular country. If the government can facilitate

information ows and alleviate some capability constraints on industry, interventionis desirable. On the other hand, if the government does not have the institutional

capability to reduce the constraints for its industries, and its policies will confuse and

degenerate the information ows in the market, government intervention should be

kept to a minimum.


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In the context of most developing countries, government intervention is necessary

for several reasons. Due to market uncertainties, a limited capital supply, the in-

adequate understanding of technological requirements and political instability,

investors may be reluctant to make continuous investments to upgrade an industry.

Such risk barriers lead to limited entries of rms into the technology- and capital-intensive sectors. The vicious cycle of under-investment constrains the potential

learning externalities (Stiglitz, 1989, p. 200) which are important in the process of

industrial transformation. Hence, state-created rents are necessary to lessen the risk

burden, thereby stimulating private investment (Chang, 1993, pp. 144 145).

A second justication for government intervention concerns the nature of informa-

tion concerning technology. As technology information exhibits characteristics of

publicness and non-appropriateness, private investors may under-invest in obtaining

such information (Besley and Case, 1993, p. 399). The disincentive to seek more

information apparently hinders the process of industrial transformation. This

problem can be reduced by: (i) having a legal-contractual system that protectsinformation property; (ii) gaining advantages of a head start in the market; (iii) reduc-

ing the asset requirements necessary to gain information; and (iv) maintaining

secrecy (Teece, 1992, p. 195). However, these conditions usually do not exist in

developing countries. Often insucient resources create a barrier to the enforcement

of intellectual property. Obtaining a head start does not give much advantage to

developing countries because the domestic market is small and as latecomers, are

poorly positioned in the world market. Private investors may also need to commit a

huge irreversible investment to develop an information infrastructure because the

existing public infrastructure is poor. As a result, secrecy is usually the only means

to resolve the problem of information non-appropriateness. However, this implies

the loss of learning externalities. Therefore, without any non-market intervention,

problems of inadequate information are severe in most developing countries.

Stiglitz (1989, p. 202) points out that the ultimate remedies to the problem are

improving the industrial organization of developing countries. Non-market institu-

tional remedies are needed to compliment the market mechanism to appropriate

information to the industry. The third reason for desiring government intervention is

that the government can alleviate the stringency of capability constraints on an

industry through various subsidies, taxation, expenditure and regulatory policies.

Governments may be in a better position to alleviate capability constraints due totheir ability to use long-term debt nancing with lower interest costs, and help an

industry to invest in projects that have high publicness and yield small, short-run

prots.

Even though government intervention may be desirable for developing countries,

what form the interaction between the government and the private sector takes, still

depends on the institutional, social, economic and political context of a specic

country. In particular, the institutional arrangement between government and

business depends a lot on the structure of an industry and the political leadership of

the government. The extent of government control varies with the institutional

capabilities and the legitimacy of the government. The study shows that in the late1970s and the 1980s, the Korean government helped the electronics industry to

overcome the problem of information externalities and capability constraints success-

fully by establishing close linkages between the public and the private sector for

industrial upgrading.




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GROWTH AND STRUCTURE OF THE KOREA'S INDUSTRY

The Rise of the Electronics Industry

In the late 1960s, Korea began to develop its electronics industry. However, mostKorean manufactures at that time were operated under American companies or had

joint ventures with them to assemble low value-added products for exports. In 1968,

for example, foreign companies were responsible for 71 per cent of the electronics

exports from Korea. 97 per cent of Korea's integrated circuits and transistor exports

were made by American companies or their venture partners (Bloom, 1992,

pp. 27 28). The industry was highly labour-intensive and limited in technological

sophistication. It wasn't until the early 1980s that the country suddenly emerged in

the world electronics market. For example, electronics exports grew at an annual

average of 30 per cent. The products were no longer predominantly integrated circuits

or transistors, but consumer electronics products which had higher values. Theproduction of solor TVS for example, rose from 2 million units in 1982 to 13 million

in 1991. VCR production also increased from only 50 thousand units in 1982 to

9 million units in 1991. By the end of the 1980s, Korea had become the second largest

producer of VCRs, microwave ovens and video cassettes, and the third largest

producer of color TVS and telephones in the world. They were also becoming an

increasingly signicant producer of some industrial electronics products, such as

microcircuits and digital computers. By 1990, they had about 4 per cent of total world

exports in digital computers and 9 per cent in electronic microcircuits.

Although some scholars suggest that Korea's success in its industrialization stems

more from entrepreneurial saving and investment than from government policy

directives, this paper argues that it is the institutional arrangement between the

Korean government and the electronics industry that made the rise in the world

market possible. First, we compare Korea with several developing areas which had a

more established electronics industry in the late 1960s and the early 1970s. If Korea

outperformed most of them in the world market during the 1980s, it will

demonstrate that Korea was more competitive in the world market than most

developing countries. The dierences in growth leads to the second question why

was Korea more successful (or less successful?) The answer lies in whether Korea

was better able to utilize the market mechanism to maintain its competitiveness, orit had other non-market mechanisms to achieve its remarkable performance in

exports. Therefore we will then examine the development of the electronics industry

in Korea, Hong Kong and Singapore. All three countries were characterized as

export-oriented economies. However, Hong Kong adopted the laissez-faire policies

in economic development, while Singapore and Korea maintained active state

intervention in industrial development. If we are able to show that Singapore and

Korea were more successful than Hong Kong, we can support that state

intervention was important to the export growth of Singapore and Korea, and

may be desirable under certain contexts for other developing countries. The major

electronic producers are mainly operating divisions of the Korean Chaebol. Withthe support of the parent group these rms usually take a long-term view, and when

necessary, can sacrice immediate prots for a perceived advantage for some years.

They can also utilize the trading arms of the parent group to market their products

overseas.


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Cross-National Comparison of Export Performance

According to the International Trade Statistics Yearbook, the export value of major

consumer electronics products by Korea in 1969 was only $7 million, which was less

than 0.2 percent of the world total. The amount was substantially lower than that ofHong Kong ($150 million), Mexico ($21 million) and other developed countries.

However, by 1992, Korea's export value rose to $6,536 million, which was 5.6 per cent

of the world total. The amount was higher than that of Brazil ($371 million) and

Mexico ($114 million), and was close to Hong Kong ($8,886 million) and Singapore

($7,307 million). Tables 2 and 3 give additional evidence that the growth of the

Korean electronics industry was more stable than Brazil's, Mexico's and Argentina's,

and was more successful in maintaining a continuous growth of exports. On average,

the annual export growth of major consumer electronics and telecommunications

products by Korea was 19.3 per cent in 197792. That of major industrial and oce

Table 2. Trade statistics of selected electronics products. Source: International TradeStatistics Yearbook, various years (19701977).

Export from: 1969 73Growth

197377Growth

197783Growth

198387Growth

198792Growth

Korea 111% 34% 18% 34% 6%

Other Asian developing areas:

Hong Kong 27% 15% 13% 24% 21%

Singapore 121% 33% 23% 22% 21%

Other developing countries:Brazil 246% 9% 2% 43% 6%

Mexico 47% 47% 99% 1% 34%

Import to:

United States 22% 17% 1% 16% 4%

Developed Europe 15% 5% 20% 10%

World Market 19% 9% 15% 12%

Table 3. Trade statistics in selected electronics products. Source: International TradeStatistics Yearbook, various years (19701977).

Export From: 1969 73Growth

197377Growth

197783Growth

198387Growth

198792Growth

Korea 122% 75% 77% 13%

Other Asian developing areas:

Hong Kong 39% 19%

Singapore 51% 118% 67% 33%

Other developing countries:

Brazil 47% 10% 12% 1% 6%

Mexico 120% 12%

Argentina 14% 21% 2% 1%

Import to:

United States 39% 26%

Developed Europe 19% 19% 24% 10%

World Market 25% 28% 23% 15%




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electronics products was 55 per cent in the same period. Hence, we conclude that

Korea outperformed many developing countries in the electronics industry during the

1980s despite its late start in 1969.

Next we compare Hong Kong's electronics industry to those of Korea and

Singapore to contrast laissez-faire oriented policies with more state interventionistones. We nd that Singapore and Korea, in general, performed better than Hong

Kong. For example, the annual average growth of consumer and telecommunications

electronics exports by Hong Kong in 197792 was 19.3 per cent, which was lower

than Singapore's 22 per cent and the same as Korea's 19.3 per cent. The annual

average growth of industrial and oce electronics exports of Hong Kong in 198392

was 29 per cent, which was also lower than Singapore's 50 per cent and Korea's

45 per cent. Let us just compare the import percentages (import relative to domestic

production) of the electronics sectors of the three countries. Korea was apparently

better able to develop its domestic capabilities to support the industrial and con-

sumption needs for electronics products than Singapore and Hong Kong. Comparedwith Taiwan, Korea is still signicantly better than Taiwan in terms of import

percentage. For example, Taiwan's electronics imports was 46.6 per cent of its total

electronics production in 1986, and 123.7 per cent in 1988. That of Korea was only

36.9 per cent in 1986 and 30.2 per cent in 1988. In the sector of industrial control and

electronic components, which are the more advanced sectors in the electronics

industry, the import ratios were 91.2 per cent and 55.1 per cent in 1988, respectively.

The numbers were also lower than the import percentages for Taiwan, which were

95 per cent and 97.6 per cent, respectively. From the above cross-area comparisons, it

can be observed that Korea has been relatively more successful than most developing

countries in the development of the electronics industry. It was not only able to catch

up with the earlier starters in the industry and attain continuous export growth

throughout the 1970s and the 1980s, but also developed successfully the domestic

capability to support its consumption and industrial needs. By the cross-area

comparison with Hong Kong, Singapore and Taiwan, we conclude that the success of

Korea cannot solely be attributed to the market force. This is congruent with some

past studies which suggest that the Korean government had important contributions

in stimulating rapid industrialization and export growth (Pietrobelli, 1994, p. 131;

Kim, 1993, pp. 9 10).

Reaction to Trade Barriers: The Case of Foreign Direct Investment

The rising trade barriers and anti-dumping regulations in the United States were

adversely aecting Korean electronics manufacturers. Faced with growing trade

protectionism, the electronics industry looked for a new way to approach market

access. Technological improvement, shifting to higher quality, and the establishment

of assembly plants in the United States are major eorts the Korean industry has

exerted over the years. In particular, Korean manufacturers have consistently

expanded their R&D investments. The major feature of the Korean technologicalpath was the fostering of indigenous technology through research centres established

in both public and private sectors.

The policy scope also included support for scientic research and education,

product innovation and development, technology transfer and diusion of


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technology. In the mid-1970s, the Korean government began to focus its science and

technology policies to advance the capacity of the electronics industry (Bloom, 1992,

pp. 5558). For instance, the Law for Promotion of Industrial Technology Develop-

ment, enacted in 1973 and amended in 1977, stressed publicprivate co-operation as a

means of stimulating R&D eorts in Korea. These eorts by the government laid thefoundation for Korea's emergence in the world electronics market during the 1980s.

Another endeavor to note is the liberalized foreign investment policy of the Korean

government. Particularly in technology intensive industries, Korea has beneted from

advanced technologies embedded in foreign investment. The industries had also

actively recruited Korean-national scientists residing abroad.

In the following section, we will show that the success of these policies depends on

the following factors: (i) the close institutional linkage between the government and

the industry, which increased learning externalities and reduced information gaps;

(ii) mandates and incentives for private R&D (iii) publicprivate collaboration

and direct public investment in R&D and (iv) encouragement of the acquisition oftechnology from abroad so as to be infused and to generate incremental improvement

as its competitive weapon.

GOVERNMENT POLICIES DIRECTED AT INDUSTRIAL

TRANSFORMATION

Institutional Linkage Between Government and Industry

An important contribution of the Korean government in facilitating the transforma-

tion of the electronics industry was the establishment of close linkages between rms

and the government as well as within the business community (Leipziger and Petri,

1993, p. 35). Inadequate market information and information non-appropriateness

hinder entrepreneurs to seek continuous upgrading of an industry. At the outset, the

Ministry of Science and Technology carried out two types of research. One was

government-funded projects, which mainly dealt with high-risk research. The other

was industry-initiated projects, which involved core industrial technologies that

individual companies could not develop alone owing to the scarcity of investment

funds and R&D capabilities. They were jointly funded by the government andparticipating companies on an equal basis. One of the major R&D programmes

initiated by the government is the Strategic National R&D Project that supports the

development of core industrial technology and research on science, in order to

improve national competitiveness over the long term. To overcome such problems,

the Korean government established an institutional network that linked the public

and the private sector closely together (Chang, 1993, p. 146).

To reinforce the linkage with industry, the Korean government established a

number of organizations to target the needs of various electronics sectors. For

instance, under the Ministry of Science and Technology, there were the Information

and System Development Bureau and the Electronics and TelecommunicationsResearch Institute. They not only co-operated with private business to execute special

research projects, but also facilitated technology transfer from foreign companies and

promoted the exchange of ideas with foreign nations. Another eort that facilitated

communication between the government and the private sector in R&D was the




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establishment of the Technology Transfer Center of the Korean Advanced Institute of

Science and Technology.

The Korean government maintained close communication with the private sector

through intermediate associations. The Korea Electronics Industry Promotion

Society (KEIPS) was an example. It was an important link between the governmentand private industry (Shin, 1993, pp. 117 120). It not only reported to the govern-

ment necessary industry information for policy formulation, but also communicated

industry concerns to the government. KEIPS has successfully galvanized the co-

operation eorts between the government, science and technology experts, and the

business community to create a positive framework for continued government

support in science and technology.

Market information was appropriated more eciently through the network to all

major rms. With the government as the co-ordinator and mediator, the network

reduced costs of communication and strategic behavior (Watkins, 1991, p. 95).

A reciprocal relationship in information exchange was also assured by the involve-ment of the government, which increased the eciency of technological information

sharing among all rms. Moreover, rms were put into more equal-based competition

in product development, and as a result, faced stronger impetus to compete and

upgrade their production technology continuously. For instance, the entry of the

private sector into the telecommunications industry (once monopolized by the

government) has telecommunications services changed from public goods to private

goods. The blurring of dierent technologies and networks will make the old type of

regulation regime virtually obsolete. Mobile networks can easily substitute wired

basic telephone service, and on the other hand, networks can be extended with

wireless features (Min, 1996, p. 28). Eventually, the digitization of network tech-

nology is outstripping regulator's ability to enforce formerly stringent rules and

regulations. Digital voice and data trac on the same line have rendered once clear-

cut regulatory distinctions outdated and ineective. Thus, in order for the govern-

ment to adapt to these newly created environments, its roles need to be changed from

a regulator/service provider to a promoter/catalyst, and co-ordinator in the future.

Role and Direction of S&T Policy in Industrialization

From the early stages of economic development in the 1960s, S&T was recognized by

policy makers as an essential element of industrialization. However, in relation to

industrial policy, S&T policy played an extremely limited role during the take-o and

development stages. The technological capability needed for labour-intensive export

industries in the 1960s and for heavy industry and chemicals in the 1970s could be

easily acquired from foreign sources. Technology transfer was obtained through

imports of capital goods, reverse engineering, foreign direct investment, and tech-

nology licensing. Domestic technological capability building was mainly for adoption

and assimilation of imported foreign technology.

Signicant changes occurred in the late 1980s. Many Korean export industriesshifted from producing for original equipment manufacturers (OEM) and began to

market internationally under own brand names (e.g., Goldstar and Samsung).

Although price was the key component in their competitive strategy, Korean rms

realized the importance of product dierentiation and quality improvement as they


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matured in their product development. This transition called for in-house R&D

capability. Changes in rms' competitive strategy created new challenges for S&T

policy. In the past, S&T policy had been supply-oriented, and this suggested that the

objectives of S&T policy were to strengthen S&T education, reinforce the S&T

infrastructure, and provide foundations for adopting foreign technology. Since thelate 1980s, however, the direction of S&T policy has turned towards encouraging

domestic R&D activities. National R&D programmes, inaugurated in the 1980s,

were designed to meet the new demands of industry, and attempts were made to

redene the role and status of the major R&D players. As the globalization process

expands and intensies, it is believed that the future of Korean S&T depends on the

eective co-ordination and implementation of policy measures for S&T development

and research functions. As industrial policy becomes more industry-neutral and

technology-oriented, however, S&T policy seeks a new model for institutional

innovations and an optimal solution.

Absorptive Capacity and Adaptation of Technology: Telecom Inc's Strategy

Korea assimilated imported technologies and upgraded its technological capabilities,

with emphasis on consumer goods for expanding exports. For instance, as Korea

embraced Code Division Multiple Access technology (CDMA) for its mobile tele-

phone system in 1993, albeit advanced but unproved technology invented in the U.S.,

it is poised to compete with global heavyweights Lucent Technologies Inc. and

Motorola Inc. in the development of advanced digital communication. CDMA is a

type of digital transmission technology that converts voice into the computer

language of ones and zeros so it can be compressed, greatly increasing the number of

voice channels carried on a cellular network.

Much as Korea's industrial policy had previously helped create world leaders in

industries such as shipbuilding, the development of CDMA shows how Korea Inc.

Works. Adopting CDMA had a key advantage for Korea: a chance to lead in a

technology rather than follow; if they could commercialize CDMA ahead of others,

they could solidify their hold on the rapidly expanding domestic market and

strengthen their ability to compete internationally.

In 1992, the government-run Electronics and Telecommunications ResearchInstitute and Qualcomm Inc. of the US which developed the technology signed a

technology-transfer agreement. It provides for a CDMA system that could handle a

handful of phone calls. About 150 of the above research institute's engineers joined by

cohorts from Korea's three largest business groups Samsung Electronics, Hyundai

Electronics Industries Co. and LG Information & Communications Ltd went to

work trying to develop a commercially viable system. By 1994, the institute devised a

prototype system and tested it; three companies then used this research to develop

their own systems. In early 1996, SK Telecom in Korea its CDMA cellular-phone

service, and today it runs the largest CDMA network in the world, with 2.5 million

subscribers expected by 1997 (Ministry of Trade, Industry and Energy, 1997). TheKorean companies were among the rst in the world to build and launch a CDMA

system. Having succeeded in the development of next-generation telecommunication

technology, the three Chaebols endeavour to muscle into world mobile communica-

tion markets.




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Mandates and Incentives for Private R&D

Another role of the Korean government in facilitating the transformation of the

electronics industry was to pull technological development by the industry through

encouraging and mandating private R&D (Szyliowicz, 1981). Under the Law for thePromotion of Industrial Technology Development, the Korean government required

large companies to set up research centres, and encouraged small and medium-size

companies to establish research consortia. In the mid-1980s, Korea had 129 private

research institutes and 18 research consortia in operation. Technological and nancial

assistance were given to private research centres by government research institutes,

the National Council for Science and Technology, and the Korea Technology

Development Corporation.

In addition to R&D mandates, the government oered various incentives to

companies for conducting private R&D. Thus companies investing in high-tech and

large-scale production techniques received tax benets and other nancial incentiveslike policy loans. New industries secured tax breaks for the rst ve years and reduced

tax rates in the following three years. Reserve funds that were used for R&D, capital

investment, and training expenses were all tax exempt. Foreign R&D personnel could

enjoy exemption from individual income tax, and patent payment could receive tax

credits. Furthermore, the government established the Small and Medium Industry

Promotion Corporation in 1980 and the Korea Technology Development Corpora-

tion in 1981 to assist private R&D. The former was a public organization that gave

long-term loans for R&D to small and medium-sized businesses. The latter was a

privately operated, government invested, nance corporation which provided loans

and venture capital for small research projects, such as software development.

Both R&D mandates and incentive policies helped to reduce the problems of

publicness in R&D information. The mandates ensured that no rms could free-ride

other companies' R&D eorts, thus reducing the strategic behaviour of rms leading

to under-investment. Various subsidies and assistance further reduced the costs of

R&D. Technical assistance and coordination by public research institutes also

strengthened the innovative capabilities of private companies. All these policies

stimulated the industry to invest in R&D, so that it could improve its technological

level continuously to stay competitive in the world market. The mandate and

incentives policies seemed quite successful. According to the annual report on R&Dactivities by the Ministry of Science and Technology (1996), private R&D expend-

itures rose signicantly in the past decade, from 165,200 million won in 1981, to

6,500,000 million won in 1996. In 1996, the private sector contributed over 82 per cent

of Korea's national R&D expenditures, compared with only 45 per cent in 1981.

PrivatePublic Collaboration in R&D and Public Investment

The third reason for the success of the Korean government's policies is that they

resolved the problem of public goods in R&D through publicprivate collaborationin R&D and public investment in research and education. It may be argued that in

Korea, R&D investment, facilities, and manpower are not evenly distributed among

industry, academia and research institutes. Universities' emphasis has been on

education rather than research. Industries have primarily depended on technology


726 R. W. Shin


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transfer or reverse engineering rather than in-house innovation. In light of this

imbalance, the government has tried to maximize national R&D capabilities by

exchanging or sharing complementary assets among major actors.

Under the S&T Promotion Law of 1991, the government supports industrial tech-

nology research consortia by purchasing products manufactured by them and by taxcredits. A major eort to facilitate privatepublic collaboration was the establishment

of the Daeduk Science Town. The government oered a low-cost site for many high-

tech rms and research institutes to facilitate exchange of technological information

and research co-operation. The government-run Korea Advanced Institute of Science

and Technology also organized advanced research activities and trained top-quality

scientists and researchers to serve industrial needs, and promoted pure research and

mission-oriented basic research.

The education policies of the Korean government was another contributing factor

to the remarkable growth rate of the value-added product industrialization. In the

1980s, the government realized the pressing need to provide more competent tech-nicians and researchers for industrial upgrading. As a result, the government directed

more resources to enhance national science education. Science and technology

education as well as vocational training at both the public school and university levels

were reinforced to meet the requirements of industrial development. The Korean

government targeted more than 80 graduate-centered universities for developing S&T

personnel and conducting basic research. The number of graduate students in these

universities was designated to be more than the number of undergraduates, and the

professorstudent ratio was kept at 1:10 (Ministry of Education, 1988). This elitist

approach, coupled with return and utilization of many overseas trained scientists and

engineers, was successful in supplying the necessary manpower for R&D within a

short time. As a result of the policies, the number of personnel engaged in R&D

activities in Korea jumped from 29,578 in 1975 to 141, 257 in 1995. The number of

scientists and engineers engaged in R&D for the productive sector also increased

signicantly, from 10,275 in 1975 to 80,345 in 1995.

Encouragement of Technology Co-operation with Foreign Firms

The fourth reason for the success in the policies to assist the electronics industry isthat the Korean government encouraged the utilization of foreign technology and

investment to shorten the learning curve of the domestic industry. As Enos and Park

(1988) point out, the Korean government was highly successful in incorporating and

diusing foreign technology for domestic industrial development. Various strategies

to incorporate foreign technology, such as acquisition of foreign production system,

encouragement of OEM, subsidies for the Chaebols to enter technological coopera-

tion with foreign companies, and inviting foreign direct investment in Korea, helped

to reduce the capability constraints as well as enhance the eciency and quality of

technology information ows.

The Korean government shifted its development policies from highly inter-ventionists to more liberal in the early 1980s. The liberal policy reected a change in

Korea's comparative advantage being shifted from labour-intensive goods to capital-

intensive goods. Because Korea's future competitiveness depends on technological

advancement, the issue of FDI plays an important role in the improvement and




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application of the new technology. In the 1980s, the Korean government oered

many incentives for foreign investment and technology transfer. For example, it

modied its restrictions on foreign direct investment and created a negative-list system

in 1984. The system listed the industries which were protected against foreign invest-

ment. Potential investment which was not on the list was automatically approved.Data available from the Ministry of Finance (1990) suggests that electrical/electronics

absorbed the single largest share of total FDI in all manufacturing sectors during the

past decades. Moreover, the three Korean Chaebols were able to obtain considerable

numbers of cooperation with foreign companies, which included Lucky-Goldstar

(LG) and AT&T's joint-venture in manufacturing telecommunication products,

Samsung and Hewlett Packard co-operation in computer manufacturing, and

Samsung Semiconductor's 64K DRAM technology licensing and its VLSI tech-

nology from various American companies. Likewise, Hyundai received technology

transfer in its VLSI development from several sources abroad, and Goldstar is a

licensee of Fairchild, AMD, and AT&T (Mowery and Steinmueller, 1991).The Korean government further encouraged foreign transfer of technology

indirectly by relaxing the regulations on overseas investment by Korean companies

in the 1980s. The policy allowed Korean companies to invest abroad more easily. At

present, LG, Hyundai and Samsung have already set up U.S. subsidiaries in Silicon

Valley, California and many places in Europe. Foreign subsidiaries allowed Korean

companies to utilize the more competent manpower and researchers in other

countries. In addition, they reduced the transaction costs in technology transfer and

learning, and increased the possibility of collaboration with foreign companies and

governments. Overseas investment reduced the risk barriers, information uncertain-

ties, and capability constraints faced by Korean companies in the world market.

When the acquired technology was transferred back to parent companies in Korea,

the domestic industry was transformed in a more ecient and less risky way.

CONCLUSION

The contextual changes in Korea have brought about a new partnership between

government and industry, collaborating to overcome problems in industrial trans-formation and maintain the competitive edge in the global marketplace. The common

problems faced by developing countries in the process of industrial transformation

are information inadequacies, information non-appropriateness, and capability

constraints. Relying solely on the market mechanism fails to deal with these problems

successfully as private rms are mainly concerned with protability and risks, and

certain benets and costs in their investment are not internalized in their decisions.

Remedies for these market failures depend on institutional mechanisms that can

appropriate information and resources more eciently. Government intervention is

an option. In Korea, government funding of S&T activities and programmes to

promote innovation takes place under circumstances dierent from those of mostother nations. Korea's economic growth has been dynamic, a situation that generates

more revenues for public investment. Growth has been guided by an industrial policy

that requires developing indigenous S&T capabilities that can create a competitive

industry at world levels.


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Although past research suggests that the government also can have failures in

policy making and create more costly ineciencies, the study suggests that govern-

ment action to facilitate industrial transformation is desirable if: (i) the government

establishes close linkages between an industry and the government, which can help

reduce information gaps and prevent failures in policy making; (ii) the governmentcan utilize a wide array of policy tools, such as mandates, incentive policies and direct

investment in R&D, to resolve the problems of non-appropriateness and externalities;

(iii) both actors, the government and industry, are outward-oriented and open to

information and resource inows from foreign countries and the world market.

Recent literature have suggested that the institutional interaction between the

government and industries are subject to the inuence of political leadership, institu-

tional dynamics between the bureaucracy and the private sector, and socio-political

interests of business in society (Bright, 1996, pp. 293 300). This implies that the

interaction between the government and industry does not remain stagnant over

time. Rather, it changes as the contextual factors social, economic and politicalfactors are transformed gradually. For example, the successful mechanism between

the government and the Chaebols that helped the Korean electronics industry in the

1970s and the 1980s may not work in the future. We have already seen several

contextual changes in Korea which have been challenging the traditional decision-

making mechanism between the industry and the government. Moreover, a changing

role of government in the national development will be a policy question in the future.

The process of democratization in the parliament and the reduction in the legitimacy

of authoritarian leadership by the bureaucratic system have started to shake the

state leadership in making industrial policies. The result of nancial liberalization

has exposed the problems of non-performing assets (NPAs) in commercial banks

resulting from the government's failures. The NPA overhang delayed the liberal-

ization of the nancial sector, banks in particular. They also caused X-ineciencies

for bank management, as improved protability through better management was

more than oset by larger losses due to those NPAs (Sakong, 1993, p. 181). The

traditional linkage between Chaebols and the government is also under pressure

to change. It is being criticized as a hindrance for Korea to absorb new technology

and adapt exibly to market challenges (Kim, 1993, p. 22; Leipziger and Petri, 1993,

p. 23). This further erodes the legitimacy of state leadership in directing business

development.The Korean government still plans to invest signicantly in R&D in the elds of

electronics and telecommunications. The focus of public investment seems to be

shifting to the provision of basic and intermediate R&D and education, which

demonstrates strong externality eects and non-appropriateness. Nevertheless, the

interactive mechanism between industry and the government will still be important,

because the mechanism helps to reduce information costs and facilitate learning

externalities.

To conclude, the process of industrial transformation is a continuous decision-

making process by the government and industry in response to information inputs

and capability constraints. Dierent contexts of social, economic and political factorsmay make certain interactive modes between the government and industry more

advantageous to the transformation process. In the context of developing countries

government intervention is desirable to help industry overcome the problems of

information externalities and capability constraints. However, as an industry matures




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and contextual factors change, the mode of government intervention and interaction

between the government and industry will also change.

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