[GE Innovation Forum 2015] The Future of Work in Korea (English)

The Future of Work in KoreaA New Strategy for Growth

1The Future of Work in Korea

Author: Marco Annunziata, Chief Economist , GE

This paper is part of a series from GE’s Chief Economist , Marco

Annunziata, exploring the next generation of industrial progress.

Other papers in this series include:

• The Future of Work (2014)

• The value of interconnectedness (2014)

• The Industrial Internet @ Work (2013)

• Industrial Internet: Pushing the boundaries of men and machines (2012)

• By region:

- The future of work in Australia: Building the third wave of growth (2014)

- Mapping the future of work in MENAT (2014,2015)

- The future of work in Turkey (2014)

- The state of European innovation (2014)

- Industrial Internet: A European Perspective (2013)


Executive SummaryKorea needs a new growth strategy. This is perhaps the most powerful proof that in today’s highly competitive economy, both countries and companies

have to constantly look forward.

Korea is a poster child for economic development: it is one of the few countries that

escaped the “middle-income trap” and graduated to high income levels. It has become

the 15th largest economy in the world and the 7th largest exporter—with a relatively small

population and no natural resources. It has a world-class education system and a highly

competitive export industry; it has always invested heavily in R&D and has high quality

infrastructure, including digital.

Today, however, Korea faces three major challenges: stronger competition from China and

other countries; sluggish service sector productivity; and a rapidly aging population. Not-

withstanding its strong R&D investment, Korea has suffered from a widening productivity

gap vis-à-vis a number of its global competitors.

While the population is highly educated, the school system has become less effective at

meeting the demand of industry, with an emerging skills gap. Moreover, small and medium

enterprises (SME) play too small a role in Korea’s economy; the current system is still

skewed in favor of larger conglomerates, and does not encourage collaboration.

At the same time, the pace of industrial innovation is accelerating, driven by a conver-

gence of physical and digital technologies—what GE has labelled the Future of Work. This

is rapidly redesigning the global competitive landscape, while offering tremendous gains in

efficiency and productivity across industrial sectors.

Korea must leverage this new wave of innovations to establish a leading global position for

the coming decades. This will require a new growth model, built on three pillars:


1. Stronger home-grown innovation, including by startups and SMEs

2. Collaboration, including with global players

3. Education, to ensure a supply of skills well matched to the new wave of industrial

innovations.

The innovations of the Future of Work can be a game-changer for Korea. The improve-

ments in efficiency enabled by advanced manufacturing and resulting in GE’s vision of

the Brilliant Factory can boost productivity and competitiveness in Korea’s industries,

from shipbuilding to electronics. Industrial Internet solutions applied to new vessel designs

can generate massive cost savings for operators, and healthcare applications can help

improve the efficiency of Korea’s healthcare system to cope with the pressure of fast pop-

ulation aging while positioning the country as a global provider of services and technology.

Future of Work innovations can help Korea achieve its goals for the development of re-

newable energy, including through better energy storage systems and fuel cells technolo-

gies; and they can boost the indigenous development of technologies that are crucial to a

stronger defense industry, such as aircraft and marine engine, avionics, aircraft mechani-

cal systems and embedded systems.

For Korea’s new growth model to succeed, SMEs need to play a stronger role in driving

innovation and competitiveness. Collaboration will be a key condition to success. The

accelerating pace of innovation and the more intense global competition will require

Korean companies to change business and innovation models—but they also offer an

unprecedented opportunity for the country to reboot its productivity, competitiveness and

prosperity.


now the 7th largest exporter in the world. Its macro fundamentals are sound.

Today, however, it faces three important challenges:

• First, China and other countries in the region have begun to move up the val-

ue-added ladder, posing a competitive threat to Korea’s industry.

• Second, service sector productivity growth has been sluggish, holding back

It has become the 15th largest economy

in the world, notwithstanding a popula-

tion of only about 50 million and virtually

no natural resources. It has built a highly

competitive export industry—Korea is

In this regard, Korea is the model that

even a giant like China could aspire to.

IntroductionKorea understands better than most countries the need to look forward. It is a poster child for economic development, one of the few countries that have successfully transitioned from middle- to high-income and escaped the middle-income trap.

Middle Income TrapFigure 1

Source: World Bank


household incomes and capping the pace of economic growth.

• Third, rapid population aging is set to reduce the available labor force while in-

creasing pressure on public finances. The aging challenge is currently compounded

by a low female participation in the labor force.

Buffeted by these headwinds, Korea is struggling to find a new growth engine: accord-

ing to IMF estimates, Korea’s potential growth rate has declined steadily from about

7% from 1990-97 to about to 4 ¾ from 2000-07 and 3 ¼ - 3 ½ from 2001-12.

Korea: GDP GrowthFigure 2

Source: IMF

Old Age Dependency RatioFigure 3

Source:United Nations Populations Projections

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On current trends, working age population will peak in 2016, and Korea will be one of

the oldest OECD countries by 2050. A rapid increase in the dependency ratio would

cut potential growth further to 2 – 2 ½ % by 2025; per capita income would plateau at

about 65% of the level of the U.S.

Bringing together the physical and the digital worlds is the next generation of

industrial progress.

At the same time, the pace of industrial innovation is accelerating, driven by a conver-

gence of physical and digital technologies. The strategy that has served the country

well over the past decades is no longer adequate to meet the challenges of height-

ened global competition and accelerating technological change.

Harnessing reams of data, the collective intelligence of human beings across the

globe, and advanced manufacturing materials and processes—the Future of Work—is

delivering transformative progress for people and businesses worldwide.

We have called this the Future of Work because it is redefining the way that work will

be performed in the decades ahead: the technologies that will be used, the advanced

tools that will augment workers’ capabilities, the new skills required, the greater inten-

sity and different forms of collaboration, the organization of the production process

and the coordination of supply chains and distribution channels.

This is happening just as Korea seeks a growth model that enables it to unleash new

possibilities in industrial innovation—generating exceptional gains in productivity that

will rejuvenate the country’s economic growth and job creation for decades to come.


The Future of WorkThe Future of Work is driven by three interrelated and mutually reinforcing trends: 1. The Industrial Internet, which merges big data with big iron, integrating cloud-based analytics with industrial machinery, resulting in greater efficiency and reduced downtime; 2. Advanced Manufacturing, which weaves together design, product engineering, manufacturing, supply chain, distribution and servicing into one cohesive intelligent system, delivering greater speed and flexibility at lower costs; 3. The Global Brain, the collective intelligence of human beings across the globe integrated by digital communication, resulting in crowdsourcing, open collaboration, and a much faster pace of innovation.

Bringing together the physical and the digital worlds is the next generation of

industrial progress.1

The innovations of the Future of Work are turning traditional industrial assets into

interconnected devices, full-rights members of the internet of everything. They are

also changing the nature of economies of scale, and blurring the lines between

manufacturing and services.

1 Annunziata (2014), “The value of interconnectedness”, GE White Paper


This value derives primarily from unprecedented gains in productivity and efficiency.

Industry represents about one-third of global economic output, with manufacturing

accounting for between 15 and 20%.2 The scale of global industrial operations im-

plies that even small efficiency gains translate into substantial aggregate economic

gains.

In 2012 we estimated that just a 1% efficiency improvement would yield some

$90 billion savings in the Oil and Gas industry over a fifteen-year period; over $60

billion each in the power industry and the healthcare industry, and about $30 billion

each in aviation and in rail transport. These sectors and others will benefit from the

higher speed, reduced unplanned downtime, and lower fuel burn that the Industrial

Internet can bring—ultimately resulting in higher profitability.3 From shipbuilding and

marine to healthcare to power generation and storage, Korea’s economy stands to

reap substantial efficiency gains.

Industrial innovations are blurring the lines separating industry and services, ex-

tending their efficiency gains well beyond the boundaries of the industrial sector as

traditionally defined. Indeed, the Industrial Internet is a key driver of the projected

growth in the total number of interconnected “things”, expected to reach some $50

billion by 2020.4

Our estimates of one-percent efficiency gains show the benefits that even marginal

performance improvements can bring to industry. But in practice, GE’s Industrial

Internet applications across a range of sectors deliver gains that are much larger: in

power generation, GE’s Wind PowerUp technology delivers a 4-5% increase in an-

nual output, resulting in even greater improvements in profitability for wind farms.

In aviation, Industrial Internet solutions are yielding important reductions in fuel

consumption as well as in flight delays and cancellations.

2 Annunziata, M. and Evans, P. (2012). “The Industrial Internet: Pushing the Boundaries of Minds and Machines”, GE White Paper, http://www.

ge.com/docs/chapters/Industrial_Internet.pdf. Industry accounts for about one quarter of economic activity in advanced economies and over

one third in emerging economies.3 Ibid.4 CISCO’s Internet Business Solutions Group, see http://share.cisco.com/internet-of-things.html


Similar gains are within reach for Korea’s key industries. Consider energy consump-

tion; Korea relies on imports for virtually the totality of its energy needs. In 2013,

it imported $170 billion worth of energy. A 1% increase in energy efficiency would

save around $1.5 billion in annual energy imports (assuming the crude oil prices

stabilize at levels lower than the 2013 average).

Digital technologies are already making important inroads in the automobile indus-

tries, bringing greater efficiency and safety. Spearheading the adoption of these

technologies can boost the global competitiveness of Korean car manufacturers,

and in the marine industry, data-driven solutions will help automate certain ship

functions and optimize their routes. GE’s SeaStream solutions can already increase

uptime by 20%.

In healthcare, Industrial Internet solutions are opening the way for personalized

medicine. Korea has the best digital infrastructure in the world and is ideally posi-

tioned to lead the digital revolution in healthcare. Moreover, Korea is a global leader

in electronics, and the country’s economy can benefit greatly from helping to devel-

op this new generation of industrial technologies. We will discuss more in detail the

opportunities for key sectors of Korea’s industry in Section 4.

Leveraging the full potential of this wave of innovation is not easy, however. For both

companies and countries it represents as much of a challenge as an opportunity.

It requires significant investments. It requires the development of new capabilities,

concentrated in the areas of data science, software and cloud computing, user

interfaces and cybersecurity. These new capabilities in turn need to be melded with

traditional scientific and engineering capabilities.

Innovation is disruptive, and this faster-paced innovation will be even more so. It

will present new challenges for individual companies. It will have painful short-term

costs in segments of the labor market, as some jobs will be displaced and some

skills made obsolete.

But for companies and individuals alike, the Future of Work brings tremendous op-


portunity for Korea. It can deliver important productivity gains in industry, rebooting

the competitiveness of Korea’s manufacturing. It can blur the traditional distinction

between manufacturing and services, generating new service sector employment

opportunities with faster productivity growth and stronger wage dynamics.

Moreover, Korea can aim to play a leading global role in the Future of Work wave of

innovations: Korea is the most wired-connected country in the world, which places

it in an ideal position to fuel the growth of software and the budding Industrial Apps

Economy, and to become a leading provider of digitally enabled services.

Korea is well-positioned to lead this transformation.

In the following sections, we will assess the current state of Korean innovation, as

well as further opportunities for Korean companies and Korean society to reboot

productivity, competitiveness and prosperity.


Korea’s Strengths and WeaknessesKorea’s macro fundamentals are strong. It has maintained a prudent fiscal policy with no financial excesses—though household and corporate debt levels are relatively high. Stable macro fundamentals and strong institutions have made Korea a safe haven in the eyes of international investors, giving stability to funding flows.

Korea ExportsFigure 4

Source: Macrobond

5 As of 2011.

Korea benefits from a highly

educated and skilled work-

force—47% of people of

working age have a tertiary

education, compared to an

OECD average of 32%5 — and

a broad adoption of advanced

technologies in its industrial

sector—helping a large num-

ber of Korean firms to remain

globally competitive. A highly

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6 National Science Foundation, http://www.nsf.gov/statistics/seind14/index.cfm/chapter-4/c4s2.htm6 National Science Foundation, http://www.nsf.gov/statistics/seind14/index.cfm/chapter-4/c4s2.htm

developed Information and Communication Technology infrastructure constitutes

an additional competitive advantage.

Korea is also extremely well integrated in the global economy. It is one of the most

open economies in the world: measured as the ratio of exports and imports to GDP,

Korea’s degree of openness is about double the OECD average. Korean firms are

strongly integrated in the increasingly complex system of global supply chains, es-

pecially within Asia. They play a crucial role in global manufacturing, notably at the

high end of the value-added ladder.

Korea benefits greatly from being part of the world’s fastest growing region, but its

open and market-oriented policies have also ensured that its trading pattern is well

diversified: Korea has free trade agreements with 52 countries, including the U.S.,

the European Union and China, which together account for about three quarters of

global GDP.

It has also traditionally invested heavily in R&D and innovation. Between 2008 and

2013, total R&D expenditure has increased by over 70%, driven by a near-80% rise

in corporate R&D. Korea’s total R&D spending as a share of GDP is the highest in the

world together with Israel’s, both at over 4%; this compares to about 3 ½ % in Ja

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pan, less than 3% in the U.S. and Germany, and just under 2% in China and the U.K.6

Thanks to this investment, over the last ten years Korea has consistently ranked

between number 10 and number 12 in the world for the number of science and

technology research papers published, accounting for close to 3% of the global

number of publications. In 2014, Korea ranked 6th in the world for competitiveness

in science and 8th for competitiveness in technology, according to the IMD World

Competitiveness Yearbook.

These impressive statistics are a testimony to the strength of Korea’s innovation

framework. Korea’s policymakers have always well understood the importance of

innovation, and innovation has helped fuel the country’s successful economic per-

Government Support For Innovation Is Eff iciently Organized

Figure 7

Government And Public Authorities Allocate An Adequate Share Of Their Budget To Support Innovative Companies

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formance to date.

The numbers, however, hide an important vulnerability: Korea’s innovation strate-

gy so far has been geared mostly to large corporates in the manufacturing sector,

while SMEs as well as the service sector have been left behind. Today, this is becom-

ing a significant limitation, capping Korea’s innovation potential.

Korea has a well-established system of ex-ante evaluation of potential R&D projects,

led by the Korean Evaluation Institute on Industrial Technology. This system, howev-

er, leads to a fairly high degree of centralization, and might lead to a concentration

of resources on relatively safer bets. In GE’s 2014 Global Innovation Barometer,

Korea’s executives indicated that the quality of government support for innovation

has deteriorated even just over the course of last year, another indication that the

existing framework is no longer adequate.

Even though the country devotes substantial resources to R&D and innovation,

Korea’s executives polled by the Barometer think that public authorities are not

allocating enough resources to the right kind of companies.

Policymakers now realize the need to incentivize greater risk appetite in R&D. In

addition, today’s innovation is most likely to be successful if it takes place in a more

decentralized manner, leveraging collaboration across a variety of actors.

The deceleration in Korea’s potential growth shows that the strong investment in

R&D is now experiencing diminishing returns in terms of productivity growth and

economic activity, especially vis-à-vis a number of its global competitors. According

to the latest OECD data, Korea ranks only 28th out of 36 countries for overall labor

productivity. Data from the Conference Board’s Total Economy Database show a

similar picture, and highlights how the productivity7 gap against other major econo-

mies has widened over time:8

7 See https://stats.oecd.org/Index.aspx?DataSetCode=PDB_LV

8 See https://www.conference-board.org/data/economydatabase/

9 OECD Economic Surveys, Korea, June 2014


The productivity gap is partly due to a structural weakness in the services sector:

the OECD estimates that service sector productivity is only about one half of produc-

tivity in manufacturing.9 It should also be noted that according to OECD statistics,

in the last few years Korea’s productivity has been growing faster than most other

countries in both industry and manufacturing (with only Poland and Estonia keeping

pace) and also in services.

The magnitude of the outstanding productivity gap, however, suggests that a lot

more progress is needed, and that Korea cannot afford to miss the opportunity

presented by new waves of innovation.

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There are several ways Korean governments and companies can strengthen their

innovation strategy to allow the country to play a leading role in the Future of Work

revolution. This new growth model should, in our view, rest on three pillars:

1. Stronger home-grown innovation. In the past, Korea has enjoyed its strongest

growth performance by leveraging its abilities as fast-follower. To secure sustained

strong growth in the future, Korea must become a leader in new innovative technol-

ogies.

2. Collaboration. The Future of Work relies crucially on collaboration among a

variety of players. Yet GE’s 2014 Global Innovation Barometer shows that for Korea’s

companies the focus on collaboration has decreased rather than increasing.10

Small and Medium Sized Enterprises (SMEs) in particular do not have strong enough

collaboration with academic institutions or with larger corporates. Korea ranks only

39th out of 60 countries for technological cooperation among companies.11

3. Education. Korea’s education system is one of the best in the world, and ranks

second globally for students’ problem-solving skills, which will be essential to thrive

in an environment of accelerating innovation. The system, however, has become

10 GE’s Global Innovation Barometer is an annual survey of top executives who are actively involved in their companies’ innovation strategy.

In 2014 the survey spanned 26 countries.

11 IMD database, December 2014

The Roadmap for the Future


less effective at providing the abilities needed in the workplace, and a skills gap is

emerging. This should be addressed through more vocational training, a closer dia-

logue with industry, and greater reliance on new learning technologies.

Stronger home-grown innovation—especially through smaller businesses and start-ups.

Korea’s innovation strategy has traditionally been geared to—and driven by—large

conglomerates. By comparison, SMEs have played a secondary role. As a conse-

quence, SMEs have been less active and successful in pursuing innovation, and have

contributed less to export performance and job creation. This needs to change.

SMEs play a crucial role in Korea’s supply chains, and in some cases have already

demonstrated their potential and their ability to create innovative products. The

2014 GE Global Innovation Barometer also shows that SMEs are ranked at the top

of the forces driving innovation, just ahead of start-ups and of multinationals—and

well ahead of large domestic corporates.

Korea’s SMEs, however, subject to a number of constraints and pressures that have

so far thwarted their growth. As suppliers, SMEs often suffer their weaker bargain-

ing position vis-à-vis chaebols and other larger customers. This can translate into

significant cash-flow pressure and margins squeeze that constrains their ability to

plan and invest for growth.

This financial pressure creates a need for SMEs to establish themselves on the mar-

ket as quickly as possible. Given the relatively small scale of the domestic market,

this requires developing new products rapidly and at low cost, bringing them to

markets fast and at scale, and addressing any problems at a later stage as they

manifest themselves. Fast product development and speed to market are extremely

important—GE has also recognized this with our adoption of Fastworks—but SMEs

could benefit if they had more breathing space to prototype and improve products

before deployment at scale.


SMEs tend to have limited internal technology development capability. This is often

due to their small size, and the fact that in their initial stages they find it hard to

attract more experienced technical talent, relying instead on recent graduates or

junior staff. They also tend to have limited exposure to global business practices

and a very limited network of global connections (in some cases compounded by

language barriers).

Access to financing is another headwind for smaller companies, especially for start-

ups. The availability of venture capital and angel financing is still limited. Venture

capital investment has risen at a moderate pace, from just under $1.1 billion in 2010

to $1.3 billion as of October 2014.12 The number of venture capital firms has re

12 Source: Korea Venture Capital Association (KVCA).

Who Is Driving Innovation The Most Today In Your Country?

Figure 10

21%

SMEs Start-ups & Individuals

Multinationals LargeEnterprises

Headquarteredin your country

Governmentsand publicauthorities

Universities and

research labs

Publicauthorities at

local level

SoEs

20% 19%

13%11% 11%

3%1%

Number & Investment Amount of VCs / VCs by Age(2014)

Figure 11

Amount($B)

# of VCs

1.09

1.26 1.23

1.381.30

'10 '11 '12 '13 '14 Oct

Less than 3yrs

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10-15 yrs

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25%13%

17%

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mained very stable at just over 100, and with relatively low turn-over: some 70% of

VCs are more than five years old.

The market is very concentrated, with 42% of investments made by the top ten

venture capital firms; these are well-established firms with solid financial resources

for continued investment. Bio and medical sciences have seen the strongest in-

vestment, together with image and performance recording. There is also increasing

investment in later stage companies as follow-ups.

The impact of lack of financing is especially evident in the still relatively small num-

ber of startups: only 755 in 2013, a 10% increase from the 560 of 2010—though the

steadily increasing trend is encouraging. In terms of sector specialization, there is an

increasing focus in mobile technologies, IT and web services.

These pressures and constraints leave SMEs and start-ups in a vulnerable position.

They see the value of collaboration, but find it hard to identify the right partners;

moreover, the constant financial pressure pushes them to focus more on immediate

tactical deliverables rather than on a more strategic approach to identifying their

customers’ pain points and developing new solutions to address them. So far, policy

support to SMEs has mostly taken the form of subsidies, but these have proved

inadequate to rebalance the allocation of resources towards smaller companies.

Yet there are good reasons to be optimistic about their future. More and more

Number of Start-ups & Companies by Sector

Figure 12

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8%

8%

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Others

Contents

Commerce

Game

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Ads/Marketing

Web Service

IT Service

Mobile


young, entrepreneurial Koreans with a global background, most often U.S – educat-

ed, are launching start-ups, focusing especially in web technologies. U.S. and global

venture capitalists have an active and increasing interest in Korea’s venture capi-

tal world and in its start-ups. Korea is part of the Asia Venture Capital and Private

Equity Council, which opens up networking and collaboration opportunities with

Asia, Russia and the UK; it signed a Memorandum of Understanding with the British

Venture Capital Association in 2013; and there is a global venture partnership fund

which brings together VCs from Korea, the US, the UK and Hong Kong.

The Future of Work also presents SMEs with important opportunities. Advanced man-

ufacturing is redefining the notion of economies of scale, making it easier for smaller

companies to achieve profitability and competitiveness. And open collaboration will

enable them to tap into a wider net of resources, boosting their growth potential.

Perhaps most importantly, Korean start-ups can now benefit from

a very robust ecosystem.

The government plays a strongly supportive role, with a Tech Incubator Program for

Start-ups (TIPS) and with the active involvement of Ministry of Science, ICT and Future

Planning as well as several other government agencies. TIPS is complemented by a

number of non-government incubators and acccelerators. Six Korean universities

have set up an Entrepreneur Center which provides incubation support, networking

and consulting on each of the college campuses. Finally, an Angel Investment Sup-

port Center offers matching funding to investment for up to $200k, provides an online

market for start-ups seeking funds, and organizes seminars and lectures.

New actions to build on these steps and further advance their growth can include:

• Reforming the system of R&D tax credits

• Making public procurement policies more geared to innovative products

• Facilitating access to financing, and

• Rethinking the current system of heavy reliance on government subsidies to


SMEs, which can often become an obstacle to SMEs growth and a source of ineffi-

ciencies. 13

The government is indeed committed to helping SMEs upgrade their productivity and

business capabilities, using technology as a lever: the Ministry of Trade, Industry and

Energy provides $ 1.2 billion of funding for technology R&D in SMEs; the funding is

focused on basic research R&D but gradually being extended to commercialization

R&D. The government is also considering a mentoring program where senior Korean

technologists could help SMEs on specific technology transfers programs.

These are steps in the right direction. Collaboration with a range of actors, including

multinationals, will be another ingredient for success.

Collaboration

Start-ups can be an extremely powerful engine of innovation and creativity; by their

very nature, they tend to be more risk-taking and more open to collaboration. In

GE’s 2014 Global Innovation Barometer, 85% of innovation executives agree that

collaboration with start-ups and entrepreneurs will be critical to driving innovation

success in the future. In Korea, however, their focus on collaboration has decreased

rather than increased; Korea ranks only 39th out of 60 countries for technological

cooperation among companies.14

Stronger co-operation with US and global venture capital firms, and collaboration

both with other SMEs, with larger established players like GE, and with universities

and other research institutes are the next critical ingredients to faster sustained

growth of Korea’s start-up universe.

A stronger emphasis on collaboration can be extended along two dimensions:

13 On these points, see also OECD (2014) “Industry and Technology Policies in Korea”

14 IMD database, December 2014


• The Global Brain: crowdsourcing and open source innovations are essential

driving forces of the new waves of innovation. Korea’s R&D efforts should lever-

age open collaboration to a much greater degree, tapping into the potential of

talent across the world—including, but not limited to, the significant and highly

talented Korean diaspora.

• Innovation Clusters and Ecosystems: while digital technologies have largely

broken down geographical barriers to collaboration, physical proximity can still

act as an accelerator. Innovation centers where different companies can co-lo-

cate R&D activities and pursue joint opportunities can allow for the faster devel-

opment of innovative solutions best tailored to the needs of Korean companies,

boosting productivity and competitiveness.

Collaboration with larger companies, including multinationals, can play a powerful

role in helping the development of start-ups and SMEs—in a mutually beneficial

dynamic. GE believes strongly in the value of collaboration; we have already begun

to establish closer relationships and collaborations with smaller companies.

The symbiotic relationships that develop within a supply chain can be especially

conducive to cooperation on research efforts to develop new and innovative solu-

tions. Collaboration and co-development of new technologies can accelerate the

Figure 13

Technological Cooperation Among Companies

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creation of new productivity enhancing solutions tailored to the needs of Korea’s

industry, but also of solutions that can allow Korea’s SMEs to leverage their relative

strengths to start building globally competitive positions.

Education

Talent has always been essential to innovation and to commercial success. As

technological progress accelerates and global competition becomes more intense,

talent will be more essential than ever.

As we mentioned earlier, Korea’s education system scores extremely highly in inter-

national rankings. In the latest PISA assessment (2012), Korea ranked in fifth place,

after China, Singapore, Hong Kong and Taiwan.15

A very large share of the population takes advantage of this high-quality education

system: nearly 50% of Koreans of working age have a tertiary education, compared

to an OECD average of just over 30%. Even more importantly, Korea ranked second

(within a whisker of top-ranked Singapore) in students’ problem-solving skills, de-

fined as being “quick learners, highly inquisitive and able to solve unstructured prob-

lems in unfamiliar contexts”; these abilities will be essential for students to thrive

in the coming decades as accelerating innovation will require workers to adapt to

constantly changing technological conditions.16

Anecdotal evidence suggests, however, that the education system has become less

effective at providing the skills that are needed in the workplace. The ensuing skills

gap problem is at risk of becoming more and more pronounced as accelerating

innovation changes the demand for skills in a faster and less predictable way.

The skills gap is currently accentuated by the duality in the labor market. Existing

15 The OECD’s Programme for International Student Assessment (PISA) is a triennial international survey which aims to evaluate education

systems worldwide by testing the skills and knowledge of 15-year-old students ( http://www.oecd.org/PISA ).

16 See http://www.oecd.org/pisa/singapore-and-korea-top-first-oecd-pisa-problem-solving-test.htm


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workers benefit from a high degree of protection, which often results in a barrier to

the entry of younger workers. Meanwhile, there is low female participation in the

labor force (at only 60%, compared to 70-80% in most advanced economies).

Addressing this challenge will require a multi-pronged effort. The top priority should

be to foster a closer dialogue between the education system and industry to better

align the demand for and supply of skills. Students would be able to get earlier and

better information on the career opportunities available upon graduation; teachers

and school administrators would be able to tweak curricula to maximize the stu-

dents’ career prospects.

There is also a need for more vocational training. The innovations of the Future

of Work will fuel a manufacturing renaissance, and will augment the abilities of

workers at all levels of the skills distribution. Contrary to often-voiced concerns that

innovation will create opportunities only for engineering and science graduates,

new technologies will increase the productivity (and earning potential) of specialized

workers at different levels. Vocational schools that can provide the right specialized

skills can provide the access gate to these new opportunities.

Figure 14 PISA scores (2012)

0 200 400 500 0 100 200 300 400 500 0 100 200 300 400 500

Math Science Reading

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Japan Leichtenstein

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EstoniaFinland

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AustriaAustrailia

IrelandSlovenia

DenmarkNew Zealand

Czech RepublicFrance

United KingdomIceland

Latvia


The education system should also increase its flexibility and adaptability. The new

technologies that are transforming industry will increasingly require new sets of

skills, combining digital and mechanical aptitudes. These will include digital-me-

chanical engineers, as well as managers who are well versed in data science and

know how to leverage analytical insights to optimize operations.17 Also, while Ko-

rea’s education system correctly places a strong emphasis on Science, Technology,

Engineering and Mathematics (STEM), it will be increasingly important to foster cre-

ativity and broader problem-solving abilities, solidifying Korea’s leadership position

in this area.

Companies will have to play a stronger role through on-the-job training to help

workers update and upgrade their skills as technology progresses. Companies

should also leverage Industrial Internet applications that will help transfer knowl-

edge across workers, make employees better able to tap the stock of accumulated

knowledge and expertise, and facilitate collaboration.

Universities and companies should also make greater use of new technologies,

including massive open online courses, to make access to knowledge more open

and flexible.

17 See Annunziata and Evans, “The Industrial Internet @ Work”


Once these enabling conditions are in place, the innovations of the Future of Work

can be a game changer for Korea. They can increase efficiency and productivity

throughout Korea’s manufacturing sectors; bolster the competitive position of its

shipbuilding industry; make healthcare more effective and affordable, turning Korea

into a global leader in digital and personalized healthcare; they can help Korea meet

its targets on renewable energy.

Manufacturing—Brilliant Factories

Advanced manufacturing combines software and analytics, new production pro-

cesses and materials, and new technologies to improve efficiency on the factory

floor, including through better linkages and coordination with supply chains and

distribution channels—at GE we have called this the Brilliant Factory. It results in

shorter cycle times for product development and production, and in increased

speed and flexibility. These technologies have the potential to transform every

branch of Korean industry. Key components that could be adopted across Korea’s

manufacturing sectors include:

Rebooting Korea’sIndustry


• Virtual Manufacturing - Using digital and collaborative tools, workers can elim-

inate the analog, quickly iterating to create 3-D product models that constantly

improve.

• Advanced Technologies - With laser-powered 3-D printers, workers can rapidly

prototype new solutions and accelerate the production of next-gen parts.

• Sensor-Enabled Automation - Throughout the factory, sensor-equipped ma-

chines collect data, enabling plant operators to prevent unplanned downtime

and boost productivity.

• Factory Optimization - Data-driven human processes, robot-supported work

and other operations can be changed in real time to maximize productivity and

efficiency.

• Supply Chain Optimization - Cross-business tools can reconfigure supply chain

and factory operations to meet specific customer needs with more speed, stan-

dardization and savings.

GE is already leveraging these advances in its own operations. In healthcare,

high-performance computing integrates the data systems used in the product de-

sign, engineering and manufacturing stages, reducing cycle time by 30% and costs

by 15%. We are optimizing workflow on factory floors based on data-driven insights,

leading to higher throughput; and we are working to integrate our suppliers’ IT and

data systems into our own environment.

Collaboration with companies like GE could help Korea’s manufacturers introduce

elements of advanced manufacturing into their own processes, leading to the cre-

ation of a network of Brilliant Factories across the country.

Marine

Korea’s shipbuilding industry is a major pillar of Korea’s economy. It is the world’s

leader by value and second only to China by volume, accounting for about a third of

global vessel completion. While Korea’s shipbuilders produce a wide range of vessel

types, production is tilted towards high-value ships (including oil and gas tankers);

Korea’s average vessel value is twice as high as the global average.


The focus on high value-products has been supported by heavy investment in R&D,

and a competitive wage structure which attracts skilled workers into the industry.

The 2009 global financial crisis and recession, however, triggered a decline in oper-

ating profits and a rise in debt levels. These vulnerabilities are now exacerbated by a

slowdown in global trade and in the offshore oil and gas sector, and an increasingly

intense global competition, especially from China—though Korea continues to lead

in drillships, semi-submersible drilling and LNG carriers.

Yet while global trade has slowed in recent years, robust global growth in the years

and decades ahead implies that demand for vessels will continue to increase closely

in line with shipping trade growth, which is projected to grow at an annual rate of

just under 4% through 2020.18 Moreover, as Asia is projected to remain the fastest

growing region, we expect a continuation of the trend that has seen demand for

and production of vessels becoming increasingly concentrated in Korea’s own

backyard.

Digital innovations can bring important productivity gains in both the production

and the operation of high-end vessels. Predictivity-based Industrial Internet solu-

tions leveraging big data and analytics could allow vessels to be operated at signifi-

cantly higher levels of efficiency. Given the high costs of production and operation

of high-end vessels, even incremental improvements in efficiency could generate

very substantial gains in terms of additional revenues and reduced costs. A shift to

preventive, condition-based maintenance could reduce unplanned downtime to

virtually zero, resulting in very large cost-savings.

To gain competitiveness and restore higher margins of profitability in the industry,

Korea should play to its strength, maintaining its specialization in high-end vessels

while leveraging the new innovations of the Industrial Internet.

Environmental concerns are beginning to weigh more heavily on the industry. Digital

technologies can help reduce fuel consumption—as is already happening in avia

18 Source: Clarksons Research.


tion—lowering the risk of potential restrictions on sea routes. Ship owners and op-

erators are searching for “greener” and “smarter” solution for offshore activities and

Korean shipyards are at the forefront of building state-of-the-art vessels such as

arctic LNG carriers, ultra-deep water drill ships, LNG-fueled commercial vessels etc.

More will need to be done. Future ‘‘greener” and “smarter” vessels could be de-

signed with the development of gas turbine-based power generation (COGES) and

propulsion, which will yield better fuel efficiency and lower emissions. Industrial

Internet solutions will enable smarter vessel asset management.

Reaching excellence in this area would be a powerful differentiator for Korea’s ship-

building industry, bolstering its globally competitive position.

GE has long been a partner for Korea in this market, recognizing both Korea’s global

leadership position and the vital importance that the sector has for the country’s

economy. We invest heavily in our people, technology innovation and supply chain

in the country. Our Global Offshore and Marine organization is headquartered in Bu-

san. We strongly believe that standardization of technology and more efficient ship

designs will be critical to help Korean shipyards differentiate themselves against

competition.

In offshore, Korean yards should look to invest in technologies required to explore

offshore oil/gas in harsher environment such as ultra-deep water and arctic area.

GE is working with our Korean partners (at various stages) on several of these inno-

vations. Korea’s government is an important partner in this venture, supporting the

collaboration of global and Korean companies, both large and small, to ensure the

long-term competitiveness of the shipbuilding industry.

Healthcare & Life Sciences

The healthcare and life sciences industry plays a central role in Korea’s economy,

and is high on the list of policymakers’ priorities. Government R&D in the industry

has more than doubled from $0.5 billion in 2008 to $1.1 billion in 2012; in 2014,

President Park Geun-hye has explicitly indicated healthcare as a strategic priority

industry for Korea.

Korea’s low birth rate and rapidly aging population imply that the country will face


increasing pressure to provide more and (even) better healthcare services. Business

Monitor International project that healthcare expenditure will rise by over 6% a year

over the next four years. Overall health spending is around 7.5% of GDP.

Fostering faster, digitally-driven innovation in healthcare would serve a dual pur-

pose in Korea. It would help improve efficiency and cost-effectiveness in healthcare

services, to ensure top outcomes continue without putting an unsustainable burden

on public finances or crowding out other socially valuable or growth-enhancing

expenditures.19 It would also contribute to accelerating economic growth, creat-

ing high-quality domestic jobs and positioning Korea as a competitive provider of

healthcare services and technology globally, taking advantage of the strong pro-

jected growth in demand for healthcare services across the world.

The Korean pharmaceutical market is the 10th largest globally, with around $860

million invested annually in the highly fragmented Korean pharmaceutical industry.

Major Korean conglomerates such as Samsung and LG are key players in life scienc-

es, and several foreign companies have entered into R&D collaborations and licens-

ing agreements with local companies. Over the past decade, global recognition of

Korea’s life sciences industry potential has heightened, primarily due to improved

intellectual property rights protection and strong government support for R&D. To

build upon this momentum, the Korean government has announced capital and in-

stitutional support to boost biopharmaceutical manufacturing and Bio tech industry

under “BIO-Pharma Korea 2020”, and has set an ambitious target of acquiring a 22

percent global biosimilars market share and becoming one of the global top 7 drug

powerhouses by 2020. We believe Korea will emerge among the frontrunners in the

race to lead the global biosimilar and life sciences markets.

Renewable Energy

Renewable energy is strategically important for Korea. As we noted earlier in the pa-

per, Korea is dependent on imports for the near-totality of its energy consumption—

19 On the cost effectiveness of health care, it must be noted that Korea’s health expenditures are well below Japan’s and less than half the US level.


its energy imports amounted to $170 billion in 2013 alone. Without any significant

endowment of natural resources, renewables are the only way for Korea to reduce

its energy dependence.

Investing in renewables would reduce the cost of energy for Korea’s industry, boost-

ing its competitiveness; and it would make the economy less vulnerable to sudden

fluctuations in international oil and gas prices (though, it should be noted that

Korea’s electricity prices for both households and industry are already slightly below

the OECD average).

Indeed, already in 2004 the Korean government approved the Act on the Promotion

of the Development, Use and Diffusion of New and Renewable Energy, with the

stated goal of becoming one of the top five producers of new and renewable energy

globally. The policy effort has included substantial government investment (close to

$2 billion over 2012-1320 ); an R&D tax credit and import duty reduction scheme; a

Renewable Portfolio Standard that sets targets for the percentage of energy supply

that 13 major utilities will need to generate from renewables (a share rising to 10%

by 2024); and the Seoul Solar Power Support, which launched in 2013 to incentivize

further solar power generation.

The effort has begun to yield results. The number of companies operating in the

renewable energy sector has doubled between 2007 and 2012, reaching 200 (a

15% compounded annual growth rate). Over the same period, employment in the

sector has risen from about 3,500 to over 11,800 (a 27% annual rate) and sales have

jumped from about KRW 1.2 trillion to nearly 6.5 trillion (a 40% annual growth rate),

while investment has more than doubled from just over KRW 600 billion to nearly 1.4

trillion. On current plans, installed capacity for renewable energy generation should

reach nearly 10 GW by 2027, almost double the 5.5 GW installed capacity as of

2013—this would amount to a marginal increase in the share of renewable energy

in the total installed base, to 7% from 6%.

This is an enormous growth opportunity for Korea but the road ahead is still long.

20 See http://www.kpmg.com/global/en/issuesandinsights/articlespublications/taxes-and-incentives-for-renewable-energy/pages/south-ko-

rea.aspx 21 The total projected defense budget for the next five years is $232.5 billion with $77.1 billion in defense acquisition and $155.4 billion in

operations. Korea has been one of the top defense markets outside the United States for decades. In 2014, Korea exported $3.6 billion worth

of military equipment.


The International Energy Agency estimated that in 2011, new and renewable energy

accounted for only 1.5% of Korea’s electricity supply and 1.6% of Total Primary

Energy Supply (TPES), one of the lowest in the OECD.22

Boosting the role of renewable energy will require simultaneous investment and

progress in fuel cells—which use hydrogen or other fuels to cleanly and efficiently

produce electricity—and energy storage systems (ESS), which, as the name implies,

can store energy produced by renewables during favorable conditions (for example,

a particularly windy or sunny day) and deploy it during periods of peak demand.

The ESS market is at the moment government-driven, but based on the govern-

ment’s commitments and expected private sector involvement, Korea’s ESS market

is projected to grow at an impressive 37% CAGR to 2020.

The fuel cells market faces a similarly favorable outlook. As mentioned above,

Renewable portfolio Standards (RPS) will require the share of energy supply gener-

ated from renewable to rise to 10% by 2024 for the major utilities. RPS regulations

provide strong incentives for fuel cells development23 —plus, the constraints incurred

in high-voltage transmission grid construction will require a greater recourse to

distributed power solutions, again favoring the development of fuel cells.

Figure 15 Ess Market Size

22 IEA, “The Republic of Korea – 2012 overview”, https://www.iea.org/publications/freepublications/publication/Korea2012_free.pdf 23 Via a 2.0 weight in tradable Renewable Energy Certificates.

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GE has already developed Industrial Internet solutions that could dramati-cally boost the performance and competitiveness of Korea’s top industries.

MARINE:GE’s SeaStream Insight provides a single unified portal, making remote machine and systems information available for live status and productivity support on the vessel. It includes the latest in dynamic ship positioning technology, vessel con-

trol and automation, and the ability to manage multiple data stream with the utmost flexibility and protected by the cybersecurity expertise of GE’s Wurldtech. SeaStream Insight can increase uptime by 20%, a tremendous benefit for marine operators who currently suffer average annual losses of $12 million per drillship due to unplanned downtime. GE’s Vessel Performance Analyzer (VesPA) helps design the entire electrical system to power and propel a vessel, optimizing thrust and power to ensure the best performance while meeting envi-ronmental targets. VesPA allows shipbuilders to simulate and compare multiple electrical config-urations at the design stage, and select the optimal configuration based on the specific vessel’s performance requirements. It also allows to calculate the corresponding annual operating expen-diture, so as to reduce both fuel consumption and operational expenditures. GE’s Marine Mapper (GEMM) provides visibility on all of GE’s equipped ships, including positioning, installed equipment and performance. The system allows to dramatically improve the services provided to the installed base, with better response times, optimized provision of parts and main-tenance, resulting in increased efficiency and cost savings for customers.

HEALTHCARE:GE’s DoseWatch allows clinicians to minimize a patient’s cumulative exposure to radiation while delivering high resolution images. GE has also developed solutions that allow teams of physicians and caregivers to collaborate remotely in a secure cloudbased environment,

having instantaneous and simultaneous access to exam results and collaborating on diagnosis and treat-ment plans.

DEFENSE:Korea’s investment in defense can also be an important catalyzer, notably with its focus on advanced weapon systems and equipment and indigenous R&D pro-

grams.21 Korea is looking to grow its local propulsion system industry and is particularly interested in developing indigenous capability in small turbine engines for UAVs and guided missiles systems. The government is encouraging collaboration between domestic and foreign companies on small engine development; aims to increase investment in military medical services, including advanced portable and remote diagnostics; and is pushing to develop big data analytics and Industrial In-ternet solutions applied to defense. Collaboration has a strong potential to accelerate innovation in the high tech areas of focus for Korea’s defense industry, including aircraft and marine engine, avionics, aircraft mechanical systems and embedded systems, as well as digital technologies—all areas where GE is a market leader—with spill-over benefits to other areas of industry.


Korea needs a new growth model to extend its remarkable economic success into the

coming decades. The accelerating innovations of the Future of Work provide a pre-

cious opportunity; Korea is an ideal position to exploit it, given its strong infrastructure,

including digital, and its highly qualified labor force. But a lot more work is needed to

turn around the recent deterioration in productivity and growth performance.

We believe a new strategy should be based on home-grown innovation, collabora-

tion, and education—all of which need to be strengthened.

The innovations of the Future of Work can be a game changer for Korea. They can

increase efficiency and productivity throughout Korea’s manufacturing sectors; bol-

ster the competitive position of its shipbuilding industry; make healthcare more

effective and affordable, turning Korea into a global leader in digital and personal-

ized healthcare; they can help Korea meet its targets on renewable energy.

To reach these goals, SMEs will have to play a stronger role. Collaboration across a

range of different actors—government, large Korean corporates, SMEs, academia

and research centers, and multinationals—will be crucial. GE is a world leader in the

technological innovations of the Future of Work, and we look forward to continue

our long-standing partnership with Korea to successfully meet together the chal-

lenges ahead.

Conclusions


“The Future of Work in Korea” A new strategy for growth

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[GE Innovation Forum 2015] The Future of Work in Korea (English)

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