Jeong Dong Lee about South Korean industrial policy having evolved into a technology one

In half a century, South Korea has turned from an agricultural country into one of the most innovative countries in the world, currently keeping the 14th position in the Global Innovation Index 2015. Jeong Dong Lee, professor at the Seoul National University, made a presentation on the development of the South Korean innovation system at the HSE international conference “Foresight and STI Policy”. He also shared the main points of his report with the second-year students of the HSE ISSEK’s “Governance of Science, Technology and Innovation” Master’s programme.

Four growth stages

Professor Lee devoted a major study entitled “Time for Accumulation. Suggestions for the Future of Korea” published in September, 2015, to еру analysis of South Korean STI policy tools. The scientist identified four stages of the country’s economic growth, described the unique objectives and the focus of each of them, priority development spheres and tools, and external conditions which have caused specific changes. Interestingly, South Korea’ transformation from a “third world” into “first world” country described in the book almost completely coincides with the author’s lifetime.

As professor Lee noted, the country’s economic management paradigm was repeatedly adjusted to match the current external challenges: the oil crises of the 1970s and 1980s, the Asian financial crisis of the 1990s. According to him, political response to the recent global financial crisis is still being developed (see Figure 1).

Figure 1. Per capita GDP growth in South Korea.

During the 1st stage (the 1960s – 1973) economic growth in South Korea was given an impulse by the First Five-Year Economic Development Plan adopted in 1962. The government declared that its primary objective was supporting the economy in general, and to encourage its growth it has made every effort to attract hard currency investments – by providing export-oriented loans and credits, introducing tax breaks and favourable exchange rate. The R&D sphere received practically no support during this first stage.

The 2nd stage (1973–1986) began after the second energy crisis. In response to the changed situation, the government decided to support six capital-intensive heavy and chemical industries (steel, electronics, petrochemicals, automobiles, shipbuilding, heavy engineering). These were seen as the most promising ones in terms of conquering global markets and increasing the country’s GDP by boosting exports. Various legislation was adopted to support development in these sectors; preferential loans were made available to companies (more than 90% of all loans were provided to support the development of the petrochemical industry); relevant infrastructure was built (vocational training centres established, land made available to build shipyards; currently Hyundai owns the largest shipyard in the world). To further accelerate the development of priority industries and promote their cooperation with the R&D sector, advanced equipment was procured in the leading countries (subsequently to be disassembled, subjected to reverse engineering and used as the basis for making similar products in Korea). R&D investments began to grow, both by the public and private sectors. Due to heavy government regulation (and not as a result of market-based mechanisms) production processes in the supported industries were completely restructured. The economic structure has changed, with the light industry’s share significantly decreasing and the shares of heavy and chemical industries sharply growing.

During the 3rd stage (1986–1997), the legislation to support development of the above six industries was replaced with a new document. In 1984, the Industrial Development Act was adopted, setting course towards economic liberalisation, support of the private sector, and neutral policy towards all sectors of the economy. Instead of promoting specific industries and supporting big players, the government put the accent on minimising entry barriers for small and medium companies, and promoting development of new high-tech businesses. Public R&D investments were increased, including in basic research. There was a marked difference between the second and third stages of the innovation policy: the imitational nature of the economy began to transform into innovation-based development strategy.

The 4th stage began in the 2000s after the Asian financial crisis of the late 1990s, and continues now. The Korean government promotes development of high-tech businesses based on broad competition, and has set information and communication technologies as the national priority. STI policy was reoriented from short-term objectives to medium- and long-term perspective. Business environment favourable for venture companies is being created (until the 1990s, there was no such concept as venture capital in Korea at all). R&D expenditures measured as the share of GDP grew so much that a social consensus emerged that they became too high and should be cut down.

According to the researcher, the impressive growth of the South Korean economy was based on two fundamental innovation policy principles: 1) throughout the 50 years it was consistent and covere

d all the national institutions, which has ensured uninterrupted development of the economic system; and 2) it was co-evolutional, responsive, and sustainable to changing external conditions. Other specific features of the policy are shown in Figure 2.

Figure 2. Key words characterising the policy paradigm shift.

Summarising his analysis of development trends of the South Korean economy, professor Lee stressed that during all of the above stages the accent was primarily put on guarantied availability of funds and quick return on investment, initially through industrial policy but then in the mid-1990s development of priority technologies has moved to the foreground. Thus industrial and sector-specific policy in South Korea has evolved into technology policy.

On relations between business and the state

When asked to comment on how during the period in question the relations between business and the state were developing, professor Lee noted that from the 1960s to the early 2000s, the state was an unconditional leader, setting course for business and designing plans, strategies, and development programmes. The high quality of public officials’ work and interaction principles easily understandable for companies have also contributed to the success of the public-private partnership (PPP). After the mid-2000s, the role of the government, including provision of public funding, began to diminish while the contribution of the private sector started to grow.This resulted in new challenges. E.g. a certain anxiety has emerged in South Korean society regarding policies pursued by large companies such as Hyundai and Samsung. National corporations which, due to the government support they’ve received, have turned into global players in the high-tech sectors, now largely rely on foreign investments and have transferred some of their assets and production facilities into the neighbouring China. Meanwhile Koreans still see them as “their own”.

The currently predominant neoliberal concept has made it necessary for Korea to find a new PPP model, new approaches and regulation methods. These and other changes, in particular technological re-orientation towards short production cycle and increased impact of ICTs on all sectors of the economy, must be reflected in the new long-term national development strategy, professor Lee stressed.

On accumulating experience based on history or geography

In the scientist’s opinion, many developing countries who try to set their perspectives and design long-term development strategies face the experience accumulation problem.Jeong Dong Lee illustrated this thesis with the example of building the bridge to the Incheon Airport (see Figure 3), the sixth longest one in the world. The project began with creating the concept, followed by a detailed design, the actual construction, installation, and putting the bridge into operation, professor reminded. Korean companies have successfully dealt with all these stages except the first one: the concept was designed by Europeans. Creating a concept for such a bridge requires a huge volume of knowledge, and a lot of trial-and-error experience accumulated by generations of professionals. It’s this kind of experience, as a derivative of a long history of specific production, that distinguishes developed countries from developing ones.

In a number of industries, European professionals are being actively pursued by China which is accumulating its own solid experience – only, based not on time but on geographical space (see Figure 4). In conceptual design of mobile phones the Celestial Empire has already made great progress. On the whole, proliferation of the new Chinese model based on creation (as opposed to imitation), and the Chinese factor generally, are making the neighbouring Korea rather nervous.

To meet this new challenge, the country must create socially acceptable investment framework to support accumulation of experience in time, believes professor Lee. And he suggests this conclusion may also be relevant to other developing economies.

By Elena Gutaruk and students of the Master’s programme “Governance of Science, Technology and Innovation” — Pavel Bakhtin, Olga Nehaychik, and Alexandra Zimireva