OECD - World Bank Conference on Innovation and Sustainable Growth in a Globalised Worldon Innovation and Sustainable Growth in a Globalised World

Innovation and Growth:Innovation and Growth:The Case of Korea

November 18-19, 2008

Joonghae Suh( suh@kdi.re.kr )

M d l A 501 (1959)Model A-501 (1959)

The First B/W TV set (1966)The First B/W TV-set (1966)

Technology-driven & market-pull growth

- Display Industry -

400 Digital Broadcasting MobileMobileOELD

Marke

300

MobileTelephony

PDP

STN

small TFT

t size (m. U

MonitorMonitor

STN

TFT

PDP

FED

LCOS

USD

)

200PersonalComputer

TVTVPRT

CDT DVT

PDP

100

TVTV

CPT

LCOS

FEDMono CRT

Color TV

’60 ’70 ’80 ’90 ’00 ’05

Source of Growth major role of TFPSource of Growth – major role of TFP

30

35

40

15

20

25

0

5

10

-5

0

Semi-conductor

IT parts Display Electronic parts

Comm. Equip.

Computer Office equip.

Electronic home appl

IT home appl.

Manufac.total

appl.

Labor Capital TFP

Growth accounting firm-level data from 1980 - 2001Growth accounting, firm level data from 1980 2001

Accumulation cum assimilationAccumulation cum assimilation(in the spirit of Pack and Nelson, 1999)

50

30

40

g a

vera

ge,

%

10

20

n 3

-ye

ar m

ovi

ng

-10

0

69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92

gro

wth

rate

in

-20

year

Royalty payment Capital goods imports

(Howard Pack and Richard Nelson, “The Asian miracle and modern growth theory,” Economic Journal, 1999.)

Channels of Technology Transfer toChannels of Technology Transfer to Korea, 1962-2005 (US$ billion)

FDISum of foreign

licensing and capital goods imports

Foreign licensing

Capital goods importsimports

1962-66 0.05 0.32 0.00 0.321967-71 0.22 2.56 0.02 2.541972-76 0.88 8.94 0.10 8.841977-81 0.72 28.43 0.45 27.981982-86 1.77 52.16 1.18 50.981987-91 5.64 125.31 4.36 120.951992-96 8 41 228 16 7 32 220 848.41 228.16 7.32 220.84

1997-2001 57.85 265.23 13.19 252.032002-2005 39.92 318.61 14.63 303.98

Total 115.46 1,029.72 41.25 988.46

The interplay of foreign technologies and indigenous R&D

2.5% 2.5%

The interplay of foreign technologies and indigenous R&D

2002

2000

1998

1996

1994

2.0ERD

/Sal

es, %

2002

2000

1998

1996

1994

2.0ERD

/Sal

es, %

2000

1992 1990

19881.5

BE 2000

1992 1990

19881.5

BE

1984

1986

1.0 1984

1986

1.0

1978

1980

1982

0.51978

1980

1982

0.5

19761980

0.0

0 20 40 60 80 100 120

19761980

0.0

0 20 40 60 80 100 1200 20 40 60 80 100 120

Royalty payment/BERD, %

0 20 40 60 80 100 120

Royalty payment/BERD, %

Trend of Korea’s R&D Investment

100 3

80

90

2.5

private share, %

60

702GERD/GDP, % (right axis)

40

50

1

1.5government share, %

20

30

0.5

1

0

10

4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4

0

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Evolution of Korea’s Innovation System1960 19 0 1980 1990 20001960s 1970s 1980s 1990s 2000s

DevelopmentFactor-Driven Stage

I t t D i StStage Investment-Driven Stage

Innovation-Driven StageSources of Competition

cheap labormanufacturing capability

innovative capability

Major Direction of

Industrial Policy

Expand export-orient light industries

Expand heavyand chemical

industries

Expandtechnology-intensive

industries

Promotehigh-technology

innovation

Transition toknowledge-based

economy

S&T Role

ScientificInstitutionBuilding

Scientific InfrastructureSetting

R&D and PrivateResearch LabPromotion

Leading Role inStrategic Area

- HAN

<New Challenges>

S&T Role of

Government

- MOST/KIST- S&T promotion act - 5-year economic plan includesS&T

-GRI-Daeduck sci. town-R&D promotion act -KSIST:highly qualified personnel

- NRDP - Promoting privateresearch labs- Promotion of industrial R&D

- Enhancing univ. reseach capability- Promoting co-op research - Policy coordination- GRI restructuring

InnovativeCapability ofCapability of

Private Sector

Trend of Korea’s R&D Investment

Market competition is the prime driver for innovation

K fi h ld t i th ld k t• Korean firms should compete in the world markets

Human resource is the key for learning

• The interaction between education and innovation systems

Government’s role as facilitator at earlier stages

• Government’s active role earlier years; business took the lead later• Government s active role earlier years; business took the lead later

Catch-up: assimilating foreign tech w/ indigenous efforts

• The Effective use of technologies both domestic and abroad

Education and HRD System

Educational Expansion in Korea – Gross Enrollment Rates (2004)

100

120

80

P i h l

60

Primary school

Middle school

High school

University

20

40

0

1970 1975 1980 1985 1990 1995 2000 2004

Lessons

Managing the Economy for IndustrializationM k t i t ti b t ti t hiMarket intervention but promoting entrepreneurship Maintaining fiscal soundness: Instrumental for reforms L t ti ith d li d tiLong-term perspective with gradualism and pragmatism Political leadership: Shared vision for nation-building

Education and Human Resource DevelopmentSequential educational expansion• Shifting investment emphasis from primary, secondary to tertiary

Mobilizing private sectors to fund educationInvestment in HRD pays off over the long run

Lessons

R&D and Innovation SystemMarket competition is the prime driver for innovationMarket competition is the prime driver for innovation Human resource is the key for learning Government’s role as facilitator at earlier stagesGovernment s role as facilitator at earlier stages Catch-up: assimilating foreign tech w/ indigenous efforts

Building Information InfrastructuresSt i l i ith t t i i t tStepwise planning with strategic investment • The case of informatization promotion fund

G t b i t hi i th k fGovernment-business partnership is the key for success• The case of CDMA: Risk-sharing enables leapfrogging

Korea in the 21st century

The end of high-input, high growth regime;There exists sizable gap in productivity

7

140GDP per hour worked

6.3

4.65

6

Netherlands United States

IrelandFrance (5)

Belgium

Norway

100

120

4.64.3

2.83

4

GreeceJapan

IcelandAustraliaOECD

SpainCanadaSwitzerlandEU19 (3)

United KingdomFinland

SwedenDenmark

AustriaItalyEuro-zone (4)

Germany

80

1.51.8 1.8

1.6

1

2

KoreaPoland

Czech RepublicSlovak Republic Hungary

PortugalNew Zealand

40

60

0

1991~00 2001~10 2011~20 2020~30

potential growth rates TFPG

Turkey (2)Mexico

0

20

00 20 40 60 80 100 120 140

GDP per capita

40.0(%)

30.0

20.0

10.0

1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004

Gross Fixed Capital Formation over GDP (2004~06 average, %)

40

50

10

20

30

40

0

10

CH

INA

IND

IA

KO

RE

A

SP

AIN

CE

LA

ND

ST

RA

LIA

LO

VA

KIA

RE

LA

ND

CZ

EC

H

ZE

ALA

ND

JAP

AN

GR

EE

CE

UN

GA

RY

RT

UG

AL

EC

D A

VG

ZE

RLA

ND

CA

NA

DA

ITA

LY

AU

ST

RIA

EN

MA

RK

ELG

IUM

FR

AN

CE

ME

XIC

O

MB

OU

RG

TU

RK

EY

ER

LA

ND

S

FIN

LA

ND

PO

LA

ND

NO

RW

AY

RU

SS

IAN

ER

MA

NY

UK

SW

ED

EN

BR

AZ

IL

US

IC

AU SL I

NE

W Z G

HU

PO

OE

SW

ITZ C A

DE B F M

LU

XE

M

NE

TH

E F P N R

GE S

R&D/Physical Investment (%)R&D/Physical Investment (%)

20

25

FIN

15

20

USA JAPGERFRA

10

FRAUK

NEDKOR

5

KORITAESPPORMEX

0

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

MEX

Are we living in a different world?

Technical change is skill-biased also in KoreaHigher education does not offer high returns.

25%

1.8%

20

25

1.6

8

151 2

1.4

10

995

996

997

998

999

000

001

002

003

004

1.0

1.2

995

996

997

998

999

000

001

002

003

004

19 19 19 19 19 20 20 20 20 20

light industries chemicalsmetals machineryelectronics automobile

19 19 19 19 19 20 20 20 20 20

light industries chemicalsmetals machineryelectronics automobile

Relative Wage univ. graduate / high-school graduateEmployment share of university graduates

Changes in Employment Structureg p y

Sales(trillion W. in current

Total employment(‘000)

Overseas Domestic Member in current prices)

( 000) of labor union

1992 3 8 30 1 29 24 (80%)1992 3.8 30 1 29 24 (80%)2002 18.9 58 33 25 12 (50%)2006 41 0 82 53 29 9 (30%)2006 41.0 82 53 29 9 (30%)

GlobalizationGlobalization US JapanUS

2000

2004

150,000

200,000

250,000

US

D)

Japan

1990

2000200430,000

40,000

50,000

SD

)

19801985

1990

1995

0

50,000

100,000

0 200 400 600 800 1 000 1 200 1 400 1 600 1 800 2 000

FDI(m

il U

1980

1985

1995

0

10,000

20,000FDI(m

il U

S

0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000

Nominal gross fixed investment(bil USD)

00 200 400 600 800 1,000 1,200 1,400 1,600

Nominal gross fixed investment(bil USD)

Korea

2000 20045 000

Taiwan

8,000

1995

2000 2004

2 000

3,000

4,000

5,000

DI(m

il U

SD

)

2004

2000

1990

4,000

5,000

6,000

7,000

,

DI(m

il U

SD

)

1980

1985

1990

0

1,000

2,000

0 50 100 150 200 250

Nominal gross fixed investment(bil USD)

FD 1995

1985 19800

1,000

2,000

3,000

0 10 20 30 40 50 60 70 80

Nominal gross fixed investment(bil USD)FD

Nominal gross fixed investment(bil USD) Nominal gross fixed investment(bil USD)

Challenge 1: Accumulation Gap

Despite, still relatively, high investmentSizable gap in capital stock, (which explains PRD gap)

(USA = 100)[Capital-labor ratio]

140

160Let market work, with better RF. E it i t t

100

120

1980

- Equity investment ceiling

- Separation of

60

801980

2000

pfinancial & industrial capitalRegulation on

20

40- Regulation on

investment in Seoul metropolitan areas

0

FIN NOR DNK BEL SWE FRA USA NLD ITA AUS CAN KOR

Source: OECD STAN DB

- Privatization of SOE

Challenge 2: Quality Gap in HR and Education

Over-educated Korean? Despite high investment, the return seems low

more competition in education

IMD ranking of 60 nations

Finland USA Australia

Korea Japan India MalaysiaEducation system meets the needs of a competitive economya aEducation system meets the needs of a competitive economy

University education meets the needs of a competitive economy

Challenge 3: Innovation System

R&D activities become comparable to peers But highly concentrated on large firms

Strengthening LE-SME ties

120

140

50

60

70

80

80

100

120

0

10

20

30

40

40

60

0

77-91

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Samsung E LG E Hynix Hyundai E

D E LGPhili H d i M

0

20

P H E E

NL

KR FI S U

CD

DK R

AT E B O A S U Z E IT S U Z

PT R

SK R

PL X

Daewoo E LGPhilips Hyundai M

J C S D N K U L

OE

C D F A B G N C I A N I E H C P G S T P M

1995 2005

Challenge 4: ICT Dilemma

Divergence between ICT and non-ICT, LE and SME, exporting and domestic orientedEmployment effect is low, will be lowered

Trust in internet world

Structure of ICT IndustriesIC T Industry's S hareG D P and Em ploym ent

80%

100%

10

12

14

16

share o f G D P

40%

60%

Software

Service

Equipment4

6

8

10

share o f E m plo ym ent

0%

20%

Korea US

0

2

4

997

998

999

000

001

002

003

004

005

006

1 1 1 2 2 2 2 2 2 2

Challenge 5: Governance Gap

Annual Work Loss (days per 1000 workers)

4955

Rigidity of Employment

20,3

30,8

2934

Source: ILOSource: World Bank

0 1,4 2,7

SG DE NL IR KR

03

SG US IR KR NL DE

Source: ILOSource: World Bank

7 5

Corporate Governance9,4

8 9

Transparency Index7,5

6,76,0 5,8 5,7

9,48,9

7,5 7,5

4,3

SG HK ML KR TW SG NL IR US KR

Source: Transparency InternationalSource: Asian Corporate Governance Association

SG HK ML KR TW SG NL IR US KR

Summary

Korea : mixture of frontier and catch-up

No single recipe. It is like an orchestra: more than simple sum of individual players, conductor’s role.

Functioning institutions are fundamental to sustain economic growth. Korea’s experiences can be seen as the evolutionary

f t /i tit tiprocesses of systems/institutions.

Building effective institutions is very important, sometimes painful, national agenda. National implies partnership between government and business (market)

As new challenges are coming, so the needs to reform/restructure existing systems/institutions.

End of Presentation

“Nothing is ready-made; everything is to be made.”everything is to be made.

(Hilary Putnam’s foreword to Nelson Goodman, Fact, Fiction and Forecast, 4th ed., 1983)