Science, Technology, and Innovation Policy for

Structural Transformation:Korean Experiences

Sung chul ChungProfessor

University of Science and Technology (UST)

schung@ust.ac.krchungsc@stepi.re.kr

Note

The term “innovation” is receiving hot attentions from both theoreticians and practitioners as S&T and innovation are critical to national development.

But there is no such thing as an optimal or best innovation system. National innovation system is a product of the na-tional context which is determined by various factors, in-cluding culture, history, political system, natural environ-ments and others that affect human behavior.

Korean development

Over the past five decades, Korea has transformed itself from one of the

poorest countries in the world into one of the most dynamic industrial economies…

GNI P/C: $ 87(’61) → $23,000(‘12) Exports: $55 M(’61) → $552 B (‘12) Unemployment: 22.3%(’61) → 3.2% (‘12)

How has Korea been able to make the transition ? One of the Key factors is science and technology.

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Structural Transformations of the Korean Economy

Traditional agrarian society

Industrial economy

High-Technol-

ogy indus-tries

Creative knowledge economy 1960s-80s

1980s-2000s

2000s -

Technology learning: Learn-ing by imitating foreign tech-nologies

Duplicative imi-tation

S&T capacity building

Indigenous R&D:

Creative imi-tation: Emerg-ing new tech-nologies + domestic R&D

Institutional reforms

Creative inno-vation:

Development of new growth en-gines, creative research Creativity ed-

ucation

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Technology Learning for Industri-alization

1960s-1980s“In the beginning, R&D was not the major element of STI

policy… Lacking in technological capability, Korea had no option but looking outward for technologies re-

quired for industrialization -- an “outward-looking de-velopment strategy.”

Where Korea was in the early 60s……

Socio-political situation: Unstable, recovering from the Korean War

Economic situation: Traditional agrarian society, relying on primary sectors for more than 60% of GDP

One of the poorest economies then in the world suffering from all the problems that poor countries in those days were fac-ing……So, the most urgent challenge for Korea as a nation was how to liberate its people from the chronic poverty

But Korea had neither capital nor technology required for industrialization. The only resource it had was hu-man resources – “well-educated but under exploited” workforce.

Korean strategy

No option but “outward-looking development strategy,”

But Korea could not rely so much on foreign direct invest-ment and foreign licensing for the acquisition of capital and technology as other developing economies, because shortage of foreign exchanges, people’s desire for economic independence, and the hesitance of foreign investors to invest in the then

economically uncertain and politically unstable Korea. The government took very restrictive policy toward FDI

and FL, such as ownership restrictions, technology trans-fer requirement, export requirement, etc. …

Thus, FDI and FL had a minimal impact on the economic development of Korea …

Technology acquisition via informal chan-nels

Instead of depending on FDI for capital and technology, “the govern-ment brought in large-scale foreign loans and allocated them for investments in selected industries, which led to massive importation of foreign capital goods and turn-key plants. In-dustries later reverse-engineered the imported capital goods for the purpose of acquiring the necessary technologies, while, at the same time, building a base for scientific and technologi-cal development…”

. Channels for technology acquisition: 1962-81 (M US$)

FDI FL Capital Goods

1962-66 45.4 0.8 316.0

1967-71 218.6 16.3 2,541.0

1972-76 879.4 96.6 8,841.0

1977-81 720.6 451.4 27,978.0

How industries acquired technolo-gies ?

Light industries, such as shoes, apparels, etc. learned technology mainly through OEM production arrangements, as OEM buyers pro-vided everything from raw materials to design, to production knowhow, and to quality control.Chemical industries relied very much on turn-key base importa-tion, which provided technical training programs as part of the pack-age. They later internalized the technology by implementing and oper-ating the imported factories and attained technical capability to main-tain and further improve upon the imported technologies….Machineries and, to a lesser extent, electronic in-dustries resorted relatively more to formal licensing for technology acquisition than other industries… learning by imitating and implementing foreign technologies (Duplicative imitation)

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To help the industries in technology ac-quisitionAnd to build up S&T capacity …..

Establishment of the Korea Institute of Science and Technology (KIST, 1966): Korea’s first R&D institute in modern sense Creation of the Ministry of Science and Technology (MOST, 1967):

Responsible for S&T policy formulation and implementation S&T Promotion Act (1967) Establishment of GRIs in the strategic areas (1970s) Creation of the Korea Advanced Institute of Sciences (KAIS, 1971):

S&T graduate school (US system) Construction of the Daeduk Science Town (Ground-braking 1974):

Home for the government R&D institutes and industrial technology research centers (Now, known as DaedukTechno-Valley)

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Achievements: Industrialization with high growth

1960s-’80s: Average annual growth rate: over 9%

Source of growth: Abundant human resources, high

investment rate, plus latecomer advantageTransformation from an agrarian society to an

industrial economy, which was based on low- and medium-tech industries.

Benefits and costs of the Korean strat-egy

Korean strategy: Restrictive policy toward FDI and FL, re-lying more on informal channels for technology acquisition than formal channels.

Benefits: (1) Less costly, but require higher capability of tech-nology recipients in not just identifying and selecting technolo-gies but also absorbing, assimilating and improving upon the transferred technologies. (2) Independence from the techno-logical predominance of MNCs,

Costs: Korea had to forego the opportunities that direct for-eign investment offers..

Lesson: For this strategy to succeed, technology recipient has to have strong absorptive capacity, meaning that Korea could succeed in acquiring technologies for industrialization largely owing to the rich pool of well-educated human resources….

Key factors behind the growth

1. Political leadership: vision and strategy Consistent linkage of S&T to socio-economic devel-

opment2. Promotion of demand for innovation

Outward-looking development strategy Challenge-led approach: Heavy and chemical de-

velopment strategy3. Human resources

Investment in education HRD linked to socio-economic development

Indigenous R&D for Structural Transformation

1980s-2000sIn the early 1980s, the government shifted its policy

from promoting technology learning to technology de-velopment, as the technological requirements for fur-

ther development could no longer be met through learning by implementing and imitating.

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Economic situation: Transition toward a low-growth phase

The high growth phase was coming to an end around the end of the 1980s Exhaustion of latecomer advantage in growth Changing socio-economic environments: Change in

trade regime(WTO), democratization, union movements, increasing wages – decline in growth potential and ur-gent need for alternative sources of growth

Need for structural transformation toward high-tech, high value-added industries

A new challenge for Korean devel-opment

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2002

2000

1998

1996

1994

1992 19901988

1976

1978

1980

1982

1984

1986

0.0

0.5

1.0

1.5

2.0

2.5

0 20 40 60 80 100 120Royalty Payment/BERD

BER

D/S

ales

Source: OECD

Money spent on technology licensing

(Money sp

en

t on R

&D

)

Policy shift: From learning to indigenous R&D

Launching of the National R&D program (1982) Promoting private firm’s research: financial, tax and other in-

centives to stimulate R&D investments in the private sectors

Private industries began to change their technology acquisition strategies from learning to developing, increasinginvestments inindigenous R&D

Rapidly increasing R&D expenditures, while reducing royalty payment

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STI Policy policies for structural transforma-tion (1) Expansion of R&D and launching of mission-ori-

ented national R&D programs: HAN Project launched in 1992 Aiming at developing strategic technologies to fuel the growth in the next decade (emerging new technologies + domestic R&D)

A. Product-oriented: Semiconductor, HDTV, ISDN, New drugs/agro-chemicals, Advanced production system, Electric cars

B. Core technologies: New materials, Next generation nuclear reac-tor, New energy, Environmental technology, New functional bio-materials

Formulation process: Technology foresight > PP joint committee > Inter-ministerial agreement > Implementation

Format: Large, long-term industry-government collaboration The HAN project was followed by other similar large target-

oriented programs involving private companies

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(2) Promotion of ICT development

Creation of the Ministry of Information and Communication (‘95)

ICT Promotion Fund (Government budget + telecom compa-nies’ contributions , ‘96)

App 1-1.5 Billion US dollars for ICT R&D per year Funding PP collaborative R&D

Informatizaton Promotion Act (‘96) Korea Information Infrastructure Initiative (KII, ‘95)

10 year 3 stage Plan for the construction of Info highway)

The Informatization Promotion Committee (‘96) Chaired by the Prime Minister

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(3) Strengthening policy incentives to promote and facilitate RDI in the private industrial sec-tors

Promoting private firm’s research: strengthen-ing financial, tax and other incentives to stimu-late R&D investments in the private sectors

Opening of a stock market for new technology-based firms: KOSDAQ (Korea Securities Dealers Automated Quotations) as a division of KRX (1996)

Promotion of venture capitals Information infrastructure

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(4) Institutional reformsIn the early 1990s, in response to the chang-

ing economic environments: Liberalization and deregulation (foreign trade

and investment) IPR regime (in compliance with the TRIPS) Competition policy (in particular, in the commu-

nication industry)Around the end of the 1990s, in response to

the Asian Financial Crisis: Public sector reform: Smaller, efficient govern-

ment Labor market reform: Flexibility of labor market Financial sector reform: Opening and deregula-

tion Corporate sector reform, etc.

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Policy results (1): Remarkable growth of R&D and innovation activities, in particular: Rapid increases in private R&D centers, in particular, SME

R&D labs. Increased share of industrial R&D expenditures in the gross

national R&D expenditures to 80% (around the end of 1990s)

Massive investment in high-tech fields by large Chaebol companiesNo of industrial R&D

centersSource: KOITA Private industries’

share in GERD: 75%

SME LEs

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Outputs from the R&D investments(1): massive in-creases in scientific publications (SCI), making Korea visible in the international science and technology com-munity

Starting fromnowhere, Koreanow is 12th

producer of SCI publications…

No of SCI publications World share

Source: KAIST

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PCT applications US patents

No Share Rank No Share Rank

1993 128 0.4 19 779 0.8 11

1995 196 0.6 18 943 0.9 10

2000 1,580 1.7 10 3,314 2.1 8

2002 2,520 2.3 9 3,786 2.3 7

2004 3,558 2.9 7 4,428 2.7 5

2006 5,948 4.0 5 5,908 3.4 5

2007 7,080 4.5 4 6,296 4.0 4

Outputs from the R&D investments(2): in-creased patents, both international and domestic, opening new technological opportunities for indus-tries..

Source: KOITA

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Economic impacts (1): Young entrepreneurs took theincreased technological opportunities to start new busi-nesses.

New ideas (R&D results) + improved business envi-ronments (institutional reform) + KOSDAQ

No of new start-upsSource: KOITA

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Economic impact (2): Productivity growth in high-tech

industries

Increased R&D investments have resulted in higherproductivity growth inhigh-tech industries (Estimation: STEPI 2007)

ICT and hi-tech industries have shown higher pro-ductivity growth (Labor productivity)Source: KIET

ICT

HT

MH MLT

LT

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Top 10 ex-ports 1980s

Apparels

Ships

Knit wear

Shoes

Semiconduc-tors

Automobiles

Polyester

Leather

Textiles

Radio sets

Top 10 ex-ports 2000s

Semiconduc-tor

Automobiles

Ships

Mobile hand-sets

Synthetic resin

Auto parts

Monitor

Com. Equip. parts

Flat display

Computer parts

National R&D projects for GRI-Industry collaboration:

D-RAM memory chip: ’86-97, 92-97CDMA technology: ‘89-’96Flat display:’95-’01Auto engine: ‘92-01Ship design system: ‘01-05Mobile internet(Wibro): ‘03-05Next generation display: ‘95-’01 ICT promotion, Plus improvement in business environments

Economic impact (3): Structural transforma-tion

Economic impacts (5): Establishing world prominence in several high-tech areas

Semi-conductors: 3rd (2006) Electronic products: 4th (2006)Mobile handsets: 2nd (2008)Display (TFT LCD): 1st (2008)Automobile: 5th (2006)Steel: 5th (2006)Shipbuilding: 1st (2006)

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Key factors behind the structural transformationHuman resourcesFocused strategy: Focused R&D coupled with

institutional reformsPrivate sectors’ RDI capability: financial and

technologicalNational consensus: sense of crisis

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Creative Innovation2000-

Toward creative innovation

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Korea at a crossroad

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Policy challenges

1. Creating new jobs and markets based on cre-ative innovation

2. Enhancing global STI cooperation for creative Economy

3. Establishing innovation eco-system where creativity is fully rewarded

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Moving toward a creative innovation-based economy: An exploration Increased focus on creative basic research Development of new growth engines 9 strategic industries: 5G mobile communications,

Ocean plants, Smart car, Intelligent robot, Wear-able smart devices, Smart safety system, etc.

4 base industries: Intelligent semi-conductor, Big data, New materials, Internet of things

Improvement of the regulatory framework to pro-mote and facilitate creative innovation

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ConclusionWould Korea be able to make another transi-

tion toward a creative innovation-based economy?

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Korea has been successful to a certain extent in making structural transformations from an agrarian society to high-tech, high value-added industrial economy

Factors behind the success: Early stage (1960s-80s): Political leadership, HR, outward-

looking development strategy, sense of crisis, social cohe-sion

Later stage (1980s- ): HR, private industries’ RDI capability, focused strategy(proactive government), and national con-sensus (sense of crisis)

The institutional reforms in response to the Asian financial crisis also made an important contribution to the structural transformation by improving the regulatory frameworks and busi-ness environments (public sector, labor market, financial system, corporate sector).

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But to complete the transformation, Korea has to make another transition toward a creative innovation-based economy, which will be much harder to achieve

To achieve the goal, Korea has to solve the fol-lowing problems, among many others:

Reconciling the Confucian tradition which is charac-terized by vertical social order, strict ethical norms, conservative values, etc. with the culture of innova-tion which is founded on horizontal relationships, di-versity, tolerance, openness, trust, etc.

Education for creativity Correcting concentration and imbalances of ST sys-

tem Internationalization of the S&T system

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Thank you for the attention