South Korea is one of the world’s most successful economies. A recent economic survey of Korea undertaken by the OECD found that it has been one of the fastest growing economies amongst the 34 developed countries that comprise this organisation. Over the past decade Korea’s real gross domestic product (GDP) has risen by 4% per annum with rapid growth in per capita income. As shown in the graph below, since the 1970s, Korea has begun to rapidly catch up with advanced economies such as Japan and the United States. For example, in 1991 Korea’s per capita income was only 38% of America’s, but by 2010 it was 64%.
This is not to say that Korea is a perfect society or an ideal economy. As the OECD report notes, Korea’s population is aging and productivity growth is slowing. There is also a growing level of income inequality. High costs of education and rising poverty amongst the elderly have also triggered intense political debates. However, it should be recognised that Korea has transformed its economy from a devastated battlefield into the home of global manufacturers such as Samsung, Hyundai and LG in a little over 60 years.
The emergence of Korea’s national innovation system
When the cease fire was signed in July 1953 South Korea’s economy lay in ruins. The Korean War had raged for over 3 years and few parts of the country had been spared from the fighting. From that time to the present Korea has undertaken a systematic transformation of its economy.
In 1962 the South Korean Government launched its first 5-Year Economic Development Plan. This focused on the development of labour intensive export industries such as textiles, clothing and footwear. Innovation was of less importance in this period than industrial development. However, there was the establishment of the Korea Institute of Science and Technology (KIST) and the Korea Advanced Institute of Science (KAIS).
By the 1970s and 1980s the focus shifted to heavy industries such as petrochemicals, shipbuilding, automotive manufacturing and consumer electronics. A key outcome of this industrialisation was the development of the country’s major conglomerates or chaebols. These firms were assisted to borrow foreign capital and supported in their investments into heavy industry. Innovation was given less attention, although the higher education system was expanded along with government funded research institutes.
From the mid-1980s the Korean Government’s attention was turned to fostering high-technology industries such as semiconductors. This transitioned in the 1990s into more knowledge-intensive industries. Over this time there was significant investment made by the government into the creation of industrial cities, technology and science parks. A National R&D Program was launched along with initiatives aimed at helping private companies develop high technologies.
It was in this period that the major investment in R&D shifted from the government to the private sector. By 2007 80% of Korea’s R&D expenditure was occurring within the private sector. This was supported by government tax incentives for R&D and the importation of foreign technology.
South Korea’s transition from a low-wage factor-driven economy through a medium wage efficiency-driven economy and into the realms of a high wage innovation-driven economy over recent decades has been impressive. However, some analysts have expressed concern over the ability of Korea to sustain this level of growth.
For example, in a paper published in the “World Review of Science, Technology and Sustainable Development” in 2010, Kwang Wook Gang and Pier Abetti concluded that while the Korean innovation system was working well for the chaebols it was not so effective for the nation’s small to medium enterprises (SMEs). They suggest that the chaebols were effective for the country’s economic development in earlier times, but were now becoming “obsolescent”. What was needed were more mature multinational corporations and entrepreneurial SMEs.
Five key policy initiatives that promote clusters
According to Professor Sam Ock Park from Seoul National University, South Korea’s economic transformation was the result of strong intervention by the national government, with particular focus on five major policy initiatives.
The first of these was the fostering of region-specific industrial clusters. These comprised around four strategically important industries in each region, with support from government at both the national and local level. Regional innovation councils were used to help facilitate the development of these clusters.
The second was the creation of environments conducive to the fostering of entrepreneurship and innovation. This included the creation of a business environment that encouraged new business formation and offered stable and transparent legal systems. Quality of life and access to financing, business support services, flexible labour, education and training, plus R&D centres were also features of these initiatives.
The third initiative was the enhancement of a collective learning process within innovation networks. This included strategies such as the removal of legal and regulatory obstacles to inter-firm cooperation. Also included were incentives for collaborative research between industry and universities, plus access to professional services and the fostering of social networks.
The fourth initiative was the building up of a stock of social capital. This was facilitated via the active engagement of non-government organisations, Churches and through social networking forums such as conferences, workshops and seminars.
Finally, there was a promotion of local and global networks. This included engagement with other countries such as Japan, Singapore and China in cross-border knowledge exchange for education, research and industry collaboration. These five policy initiatives are illustrated in the diagram below.
Are there lessons for Australia?
The economic growth of South Korea has been impressive and Australia’s links to Korea are strong. It is one of our major trading partners, and Australia’s involvement in the Korean War adds a further connection that should not be ignored. However, what lessons can Australia take from the Korean experience?
One important lesson we might take from Korea’s economic transformation is the close collaboration between government, industry and the academic community in the process of nation building. Higher education is viewed as playing a central role in the nation’s innovation process, with significant investment going into sciences.
Korea also spends around 3.74% of its GDP on R&D, which compares with 2.76% in Australia. They also believe in infrastructure and have invested heavily in building their road, rail, port and airport systems to be amongst the best in the world.
The Asian Financial Crisis of 1997 caught many in Korea by surprise. The cosy relationship between the government and the chaebols that had built its export driven “Tiger” economy began to unravel. However, Korea responded by restructuring the chaebols and re-focusing their efforts on an innovation driven knowledge economy.
Australia has not suffered the devastation of war and has been the “Lucky Country” in relation to its possession of such abundant resources. However, we may want to take a lesson from Korea about the benefits of building strong industry clusters across regional areas, fostering innovative knowledge networks, encouraging entrepreneurship and building social capital. We should also note the importance of investment in infrastructure, education and R&D while encouraging the growth of world class industries.