Article

Korea Must Strive to Become Knowledge-Exporting Nation

Korea should focus on becoming a knowledge-exporting nation. This will allow the country to sustain a robust growth trajectory and maintain its trade surplus.

By Bain & Company

Published on August 13, 2001
min read


Korea should focus on becoming a knowledge-exporting nation. This will allow the country to sustain a robust growth trajectory and maintain its trade surplus. To achieve this, Korea needs to upgrade its traditional manufacturing sector as well as its service sector towards knowledge and export oriented service and manufacturing activities. What is the future of Korean industrial policy? It can be defined industrial policy as the set of directions and actions taken by the government of a country to strengthen the competitiveness of the industrial sector. And the goals and levers can define all industrial policies. In terms of goals, the main question is: where should the Korean economy focus in the next decade to become more competitive? This is the very important question of Korea's future economic portfolio. Should it focus on its existing leading industries or move towards new fields? In terms of levers, the question is what kind of tools should the Korean policy maker deploy? Is the interventionist sectoral policy model of the past still applicable? Should policy makers apply a totally different toolkit and how should the Korean administration organize to do it? Before digging into these issues, three important remarks should be made. It is important to look at industrial policy in a broad sense and include the service sector as part of our analysis. The service sector represents today a large and critical component of all advanced economies. Therefore it is difficult and arbitrary to talk about the competitiveness of a country while keeping service activities outside of our scope. Besides, boundaries between industry and service are increasingly blurry. Large "industrial" corporations generate their wealth from a mix of industrial and service activities, the latter representing an increasing portion of their growth and profit. This is particularly obvious in the automotive and computer industry. It can be focused our recommendations on the most relevant policy levers for Korea's future competitiveness, regardless of which ministry are in charge of these levers. In the current Korean administration, the Ministry of Commerce, Industry and Energy (MOCIE) have responsibility for Korea's industrial policy. Some of our policy recommendations are part of MOCIE's current scope of activities while others clearly go beyond. In these cases, we will attempt to provide guidelines about possible evolution in MOCIE's role. Industrial policy is only one of the levers which contribute to raise competitiveness in a market economy and it may not be the biggest one. Although industrial policy is present in some form or shape in all advanced economies including the most liberal and "market driven,'' the economic agents. The companies and the individuals themselves are ultimately the key drivers of competitiveness. The directions and means of industrial policy are important questions but equally or more important are questions. "How will individuals spend their time and their money, what will be their career or life aspiration? What value will they instill in their children, what kind of education will they provide? How will managers run their company? What skills will they bring? What strategic principles will they apply in their day-to-day management? Which corporate culture and organization will they promote?" For several decades, Koreans have looked towards their government for directions and blamed its role in difficult times, but they hold the keys to competitiveness in their own hand. About this, it will be primarily proposed not only the policy recommendations but also point to practical initiatives which need to be undertaken by the agents themselves: managers, educators, consumers, irrespective of the government policy. A new paradigm of industrial policy for the Korean economy is absolutely needed. The "top down" model of industrial development, which triggered Korea's so-called economic miracle doesn't work anymore and has created poisonous side effects. Since the recession, the main focus of Korea's economic policy has been financial restructuring and Korea's industrial competitiveness has stagnated and, in some cases, slightly deteriorated. More recently, Korea's export numbers have started to drop dangerously. Industrial policy makers can facilitate this necessary "upgrading" by developing and coordinating cross-sectoral programs along six keys such as "Education, R&D, Labor, Venture development, Intellectual Property Protection and Foreign Direct investments." Industrial policy alone will not be enough to turn Korea into a knowledge export powerhouse. This massive transition will require a general motivation from all the business leaders and the general public. 1.1 Traditional industrial policy is dead. Korea's traditional industrial policy is dead and that the nation needs a new industrial development paradigm. Top-down sectoral policies based on cheap bank credit and tax-breaks allowed a remarkable economic take-off in the past 25 years and gave birth to large industrial sectors in record time. Meanwhile, they produced numerous negative structural side effects that precipitated the 1997 recession and imposed a huge clean-up burden on the country (still to be completed). Also, this model slowed down the emergence of a strong entrepreneurial and service sector in the Korea. Since the recession, economic policy have triggered a large wave of structural reforms and produced so far "mixed" results. These reforms have until now mainly focused on emergency financial restructuring rather than long-term industrial competitiveness. In this post-recovery era, Korea's industrial competitiveness has not improved and export numbers have recently started to deteriorate. Korea clearly needs a new paradigm of industrial policy. The traditional model is ill adapted to the new size and level and development of the Korean economy and hardly compatible with the rules of the game in an open market-driven economy. At the same time, the required changes are too big and the market mechanisms not robust enough yet to guarantee progress without a clear industrial strategy.

Korea should focus on becoming a knowledge-exporting nation. This will allow the country to sustain a robust growth trajectory and maintain its trade surplus.

To achieve this, Korea needs to upgrade its traditional manufacturing sector as well as its service sector towards knowledge and export oriented service and manufacturing activities.

What is the future of Korean industrial policy? It can be defined industrial policy as the set of directions and actions taken by the government of a country to strengthen the competitiveness of the industrial sector. And the goals and levers can define all industrial policies.

In terms of goals, the main question is: where should the Korean economy focus in the next decade to become more competitive? This is the very important question of Korea's future economic portfolio. Should it focus on its existing leading industries or move towards new fields?

In terms of levers, the question is what kind of tools should the Korean policy maker deploy? Is the interventionist sectoral policy model of the past still applicable? Should policy makers apply a totally different toolkit and how should the Korean administration organize to do it?

Before digging into these issues, three important remarks should be made.

It is important to look at industrial policy in a broad sense and include the service sector as part of our analysis. The service sector represents today a large and critical component of all advanced economies.

Therefore it is difficult and arbitrary to talk about the competitiveness of a country while keeping service activities outside of our scope.

Besides, boundaries between industry and service are increasingly blurry.

Large "industrial" corporations generate their wealth from a mix of industrial and service activities, the latter representing an increasing portion of their growth and profit. This is particularly obvious in the automotive and computer industry.

It can be focused our recommendations on the most relevant policy levers for Korea's future competitiveness, regardless of which ministry are in charge of these levers.

In the current Korean administration, the Ministry of Commerce, Industry and Energy (MOCIE) have responsibility for Korea's industrial policy.

Some of our policy recommendations are part of MOCIE's current scope of activities while others clearly go beyond. In these cases, we will attempt to provide guidelines about possible evolution in MOCIE's role.

Industrial policy is only one of the levers which contribute to raise competitiveness in a market economy and it may not be the biggest one.

Although industrial policy is present in some form or shape in all advanced economies including the most liberal and "market driven,'' the economic agents. The companies and the individuals themselves are ultimately the key drivers of competitiveness.

The directions and means of industrial policy are important questions but equally or more important are questions.

"How will individuals spend their time and their money, what will be their career or life aspiration? What value will they instill in their children, what kind of education will they provide? How will managers run their company? What skills will they bring? What strategic principles will they apply in their day-to-day management? Which corporate culture and organization will they promote?"

For several decades, Koreans have looked towards their government for directions and blamed its role in difficult times, but they hold the keys to competitiveness in their own hand. About this, it will be primarily proposed not only the policy recommendations but also point to practical initiatives which need to be undertaken by the agents themselves: managers, educators, consumers, irrespective of the government policy.

A new paradigm of industrial policy for the Korean economy is absolutely needed. The "top down" model of industrial development, which triggered Korea's so-called economic miracle doesn't work anymore and has created poisonous side effects.

Since the recession, the main focus of Korea's economic policy has been financial restructuring and Korea's industrial competitiveness has stagnated and, in some cases, slightly deteriorated. More recently, Korea's export numbers have started to drop dangerously.

Industrial policy makers can facilitate this necessary "upgrading" by developing and coordinating cross-sectoral programs along six keys such as "Education, R&D, Labor, Venture development, Intellectual Property Protection and Foreign Direct investments."

Industrial policy alone will not be enough to turn Korea into a knowledge export powerhouse. This massive transition will require a general motivation from all the business leaders and the general public.

1.1 Traditional industrial policy is dead.

Korea's traditional industrial policy is dead and that the nation needs a new industrial development paradigm. Top-down sectoral policies based on cheap bank credit and tax-breaks allowed a remarkable economic take-off in the past 25 years and gave birth to large industrial sectors in record time.

Meanwhile, they produced numerous negative structural side effects that precipitated the 1997 recession and imposed a huge clean-up burden on the country (still to be completed). Also, this model slowed down the emergence of a strong entrepreneurial and service sector in the Korea.

Since the recession, economic policy have triggered a large wave of structural reforms and produced so far "mixed" results. These reforms have until now mainly focused on emergency financial restructuring rather than long-term industrial competitiveness.

In this post-recovery era, Korea's industrial competitiveness has not improved and export numbers have recently started to deteriorate.

Korea clearly needs a new paradigm of industrial policy. The traditional model is ill adapted to the new size and level and development of the Korean economy and hardly compatible with the rules of the game in an open market-driven economy.

At the same time, the required changes are too big and the market mechanisms not robust enough yet to guarantee progress without a clear industrial strategy.