Lessons to be learned from South Korea’s stellar rise

South Korea has in just over half a century risen from chronic poverty to be today one of the world’s most dynamic industrial economies. It has positioned itself as a global player in technology in sectors like automobiles, semi-conductors and telecommunications, and its growth was accomplished despite resource constraints and geopolitical uncertainties. South Korea’s stellar performance is widely praised as a model for emulation, yet it is nowadays concerned that its growth will soon plateau unless it can make the transition from being a technological follower to an innovator.

South Korea’s starting point meant that at first it had to be a follower. The country’s very poor industrial base had been almost totally destroyed during the Korean war at the start of the 1950s, heavily handicapping its private sector in the following decade. But although foreign direct investment (FDI) was at that time generally considered as the most effective way for a developing country to acquire production technologies, management skills and a business know how, South Korean’s government chose to restrict foreign ownership and the repatriation by investors of profits along with controls on technology transfers.

Instead of relying on funding through FDI, the government itself took on large foreign loans and allocated them to strategic industries, which in turn led to a massive influx of foreign capital goods and turnkey plants. Private industries acquired the necessary technologies by reverse engineering the imported machines, or through technical training as part of turnkey projects.

In the case of light industries, like shoes, clothing and textiles, the major sources of technological training and learning were original equipment manufacturing (OEM) production arrangements. South Korean companies benefited hugely from these because they offered opportunities to work with foreign buyers who would provide everything from product designs and materials to quality control. This was the stage of which South Korea pursued industrialisation by imitating and assimilating foreign technologies.

The structural changes to the growing South Korean economy were accompanied by increased levels of sophistication that could no longer be met by imported technologies. The Seoul government responded to these changes by shifting the policy focus from learning to development, and in 1982 launched a national R&D programme. This was the first programme specifically designed for industrial technology development, and it was accompanied by tax and fiscal incentives to promote industrial R&D. These actions were further reinforced in the 1990s by large scale mission-oriented programmes aimed at developing strategic technologies. Private industries joined in by switching their strategy from imitating and assimilating mature foreign technologies to in-house R&D, drawing upon emerging new foreign technologies. During the 1980s and up to 2000, R&D spending in South Korea soared from 0.5% of GDP to more than 3%, with the private sector’s share increasing to 80% towards the end of the 1990s. This period witnessed some remarkable achievements, almost all of them resulting from local and international joint R&D efforts drawing on foreign technologies.

Many developing countries have since tried similar strategies, but very few have succeeded. So what was it that made South Korea different? The most important factor has been human resources; without its well-educated, strongly motivated and highly disciplined workforce, South Korea wouldn’t have been able to achieve such success. Another factor was the government’s policy vision of a unified South Korean national goal.

Seoul’s export-based development strategy has also been very effective in stimulating innovation in private industries. To thrive in the global economy, South Korean companies had to invest heavily in technology and innovation, and were able to do so because of Korean’s cultural values emphasising frugality, which in turn explains the high savings and investment rates during that period.

Unfortunately, South Korea now seems to have hit the limit of its “fast follower” strategy. Slower growth, reduced job prospects and the deteriorating performances of South Korean companies, including Samsung, all warn that its past strategy no longer works. South Korea has to change if it is to recover its dynamism. The South Korean government has duly responded with a new development vision labelled the “creative economy.” Despite confusions over what the creative economy actually means, the main idea appears to be that new growth can be generated by facilitating cross-fertilisation of IT and other areas. Some experts agree with this idea, but others are doubtful. Of greater concern is how the policy should be implemented rather than the idea itself. Can South Korea achieve a creative economy under its current innovation system, and can the government lead innovation toward the creative economy in the way it did in the catch-up process?

Among the key features of South Korea’s innovation system is the role of government, which is rarely matched in terms of its influence over the private sector. It’s a system that has a lot to do with South Korean culture that is deeply rooted in hierarchical collectivism that places a higher value on community than on individuals, and emphasises social order more than interactions between the members of the society while also being strict about ethical norms.

It’s a culture that provides a glimpse into what the relationship is like between the government and the private sector in South Korea’s innovation system. It makes it easier to achieve social cohesion and to mobilise social energy toward a shared goal, and so it is very effective once the goal is clearly defined. The path to the goal was well-known in the case of the “fast follower” strategy, but the other side of the same coin is that Confucian culture tends to suppress new ideas and discourage risk-taking by penalising failures. This suggests that the factors responsible for past successes may now work as barriers to growth.

To sustain future growth, South Korea needs to find a way to reconcile Confucian culture with the culture of innovation based on diversity, openness, trust, social interactions and tolerance. And the government has to redefine its own role in navigating the country’s course toward a creative economy.

South Korea’s experience shows that there’s no such thing as an optimal innovation system. Innovation systems evolve in a national context that is influenced by such factors as culture, history, politics and the natural environment, all of which are subject to change. This means no model exists that transcends time and the cultural space.