April 2008 Sungchul Chung Evolution of the Korean Innovation System Harnessing the Potential of Science and Technology

1 1 Objectives  To overview the process of building technological capability within the framework of economic development in Korea  To assess the Korean innovation system  To derive policy lessons

2 2 Structure  Industrialization and S&T development: How Korea acquired and utilized S&T for industrialization?  How Korea built up an indigenous R&D system?  Contribution of S&T to economic development  Key characteristics of the Korean Innovation System  Policy lessons

3 3 Korean growth: How far Korea has come  Geo-political and geo-economic conditions  A small divided country relying on foreign countries for security  A resource-pour, densely populated country with small domestic market and weak technological base : Human resource was the only asset for economic development  Outward-looking development strategy based on human resources and technology 1. Where Korea was in the 1960s 1

4 4  Economic situation (1961)  GNP : $ 2.3 billion (1980 prices), GNP P/C : $87  Exports : $55 million, Imports : $ 390 million  Share of manufacturing in GNP : 15%  Unemployment rate : 22.3%  One of the poorest counties in the world

5 5  S&T situation  R&D manpower (1969) : 5,337  R&D investment (1963) : $ 9.5 million (Gov’t: $ 9.2 million)  R&D organization : National Defence R&D Institute (1953) Korea Atomic Energy Research Institute (1959)  A barren land as far as S&T was concerned

6 6  Economic developments: 13 th largest economy, and 12 th largest trading countries in the world with a per capita income of US$ 20,000  S&T developments: 7 th largest investor in R&D with an R&D manpower of over 250,000  Emerged as a major producer of scientific papers(13 th in the world) and industrial properties (4 th in the world)  Established world technological leadership in such areas as ICT, automobiles, D-RAM memory chips, LCD, ship-building,etc 2. Where Korea is today 1

7 7  Acquisition of technologies for development : ’60s and ’70s  Development of light industries and heavy chemical industries for import substitution and export-expansion  Generated enormous demand for technologies that were not available from domestic sources  Policy responses  Promotion of inward transfer of technologies  Developing domestic absorptive capacity to digest, assimilate and improve upon the transferred technologies How Korea acquired technology for industrialization Technology acquisition for industrialization

8 8  Promotion of technology transfer  Policy constraints : shortage of foreign exchanges, and strong desire for economic independence  Restrictive stance toward DFI and FL  Policy relying on long-term foreign loans to finance industrial investment : “Gov’t 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 plant. Industries later reverse-engineered the imported capital goods for the purpose of acquiring the necessary technologies.”

9 9  Private industries’ responses  Light industries (shoes, clothing, textile…)  Rely on OEM production arrangements  Chemical industries  Resort to turn key-plant importation with technical training  Electric and machineries  Relatively more reliant on FL  DFI and FL played relatively less important role in TT in the process of industrialization of Korea. Korea relied on its HR for learning from foreign technologies transferred through informal channels.

10  Korean economic growth into the 1980s  Increased demand for complex and sophisticated technologies  Increasing reluctance of foreign countries to transfer technologies to Korea  Policy response : Launching the NRDP and promoting private industrial R&D  NRDP in 1982  Policy incentives for industrial R&D : financial, fiscal, tax, etc.  But actual policy preparation had already been going on since the early 1960s Building-up indigenous R&D system

11 Chronology of Major S&T Policy Measures 1960’s Establishment of KIST (1966), MOST (1967) S&T Promotion Act (1967) 1970’s Establishment of GRIs in the field of chemical & heavy industries from mid-1970s Construction of Daeduk Science Town (Started in 1974) 1980’s Launching of the national R&D program (1982) Promoting private firm’s research institutes by reforming financial & tax incentives to stimulate R&D investment 1990’s Promotion of university research: SRC, ERC, etc. Introduction of new types of nat’l R&D programs - Highly Advanced Nat’l Program, The 21 st Century Frontier R&D Program. Establishment of inter-ministerial coordination body: NSTC 2000’s Introduction of National Technology Road Map (NTRM) - To suggest TRMs for key technologies to secure products/functions. Introduction of overall coordination system

12 S&T Legal System S&T Framework Law (2001) Technology Development Promotion Law (‘72) Engineering Technology Promotion Law (‘73) Biotechnology Promotion Law (‘83) Basic Scientific Research Law (‘89) Collaborative R&D Promotion Law (‘94) Dual use Technology Promotion Law (’98) Brain Science Research Promotion Law (’98) Nano Technology Development Promotion Act (’02) Specific Research Institute Promotion Law (’73) Korea Atomic Energy Research Institute Act (’73) Korea Science and Engineering Foundation Law (’76) Industrial Research Association Promotion Law (’86) Act on Korea Institute of Nuclear Safety (’89) Daegu-Kyongbuk S&T Institute Law (’03) Act on Establishment-Management & Fostering of Government-Supported S&T Research Institutes (’04 ) Atomic Energy Act (’58) Nuclear Liability Act (’69) Act on Governmental Contract for Indemnification of Nuclear Damage (’75) Law for Physical Protection of Nuclear Facilities (’03) Radiation & Radioisotope Promotion Act (’02) Meteorological Service Act (’61) Standard Time Act (’86) Science Museum Act (’91) Presidential Advisory Council on S&T Law (’91) Daedeok Science Town Management Law (’93) Korea Advanced Institute of S&T Law (’80) Professional Engineers Law (’92) Gwangju Institute of S&T Law (’93) Female Scientists and Engineers Act (’02) Scientists and Engineers Mutual Aid Association Act (’02) Special Law for Reinforcing National S&T Competitiveness (’04) [Promotion of Technology Development] [R&D Institutes Promotion] [Nuclear Energy][HRD][Others]

13  Literacy scores of PISA 2000 Source: OECD, Education at a Glance, Source: Author’s compilation from government’s statistical resources.  Human resource: Educational attainment Human resources Illiteracy rate (percentages) University enrollment ratio of HS graduates (percentages) Number of university graduates 20,45229,54462,688178,631244,852 - Percentage share of science & engineering graduates Human Resource Developments

14  Government R&D Programs Ministry Year initiated Major programManagement agencies Ministry of Science and Technology 1982 Specific R&D Program Korea Institute of Science & Technology Evaluation & Planning (KISTEP) Korea Science & Engineering Foundation (KOSEF) Ministry of Commerce, Industry and Energy Industrial Base Technology Development ProgramAlternative Energy Development Program Korea Institute of Industrial Technology Evaluation & Planning (ITEP) Ministry of Information and Communications 1989 IC Technology Development Program Institute of Information Technology Assessment (IITA) Ministry of Environment Environmental Engineering Technology Development Program Environmental Basic Technology Development Program National Institute of Environmental Research (NIER) Ministry of Construction and Transportation 1994 Construction Technology Development Program Korea Institute of Construction Technology (KICT) Ministry of Agriculture and Forestry 1994 Agricultural Technology Development Program Agricultural R&D Promotion Center (ARPC) Ministry of Health and Welfare 1995 Health and Medical Technology Development Program Korea Health Industry Development Institute (KHIDI) Ministry of Education1983 Basic Scientific Research Support Program Korea Research Foundation (KRF) Government R&D

15  Industrial Technology Policy Industrial technology policy National R&D programs Infrastructure and diffusion Institutional supportIncentives Objectives To develop core industrial technologies To enhance intermediary functions and to fill the gaps among innovation actors To nurture GRI and to strengthen GRIs’ research capabilities To induce or assist private enterprises’ technology development activities Tools Ministries’ R&D programs Research personnel, technical information, cooperative R&D facilities, regional R&D centers, spin-offs, etc. Funding for GRIs’ operational expenses and basic research Tax-exemptions, financial support, subsidy for technology development Effects on industry To expand knowledge and the technology pool for industrial use To facilitate diffusion and to make better industry use of technologies To bring up helper or partner for industry’s technology development To strengthen industry’s own technological capabilities

Wig Plywood Apparels, Steel, Chemicals, Construction, Home application Automobiles, Ships, Computer, Semi- conductor -TD Reserve Fund -PE System -R&D Tax Incentive -Industrial R&D Center -NRDB -MOST: HAN Project -MOCIE: Industrial Base TD Program -MIC: IT, R&D -Industrial Base Development Program -Promotion of Ventures -KOSDAQ -RIS -New Growth Engine -TT 212 3,210 13,849 24,155 R&D Input-based growth Semi-conductor, digital appliances, IT, ….. Knowledge-based growth GERD MOSTMOCIE, MIC, MOE, …..Regional gov’s Technology Development Reserve Fund(’72) R&D Tax Incentive(’81) Tariff Debation for R&D Equipment(’82) Special Tax Incentives for Foreign Engineers(’02) Korea Technology Promotion Corp.(’74) KTB(’82) - Law for the Promotion of Start-ups(’91) - Financial Support for Industrial Development(’86) - S&T Promotion Fund(’93) - IT Promotion Fund(’93) NRDP(’82) -Industrial Base Technology Development Program(’87) -New Growth Industries (’03) - Regional Cluster Program (’03) Tax Financial R&D Subsidies  Government’s role: RDI support programs by stage TT

17  RDI Support programs : , Total T Information T Consulting T Transfer T Trade 35.03, R&D Subsidy HRD Legal, etc Procurement 36.63,402**5.815Financial 15.91,480*6.617Tax %Million $%No. Budgets (2005)Number of Program * Tax revenue foregone ** Amount of loan available

18  Growth of R&D investment  6 th largest R&D investor among OECD countries Note: Upper portion of the bar refers to industry contribution, and the lower parts that of the government. Billion Won R&D Expenditures in Korea 25,000 20,000 15,000 10,000 5,000 0

19  Trend of Korea’s R&D expenditures  Private industries account for over 75% of the GERD Source: Ministry of Science and Technology, Republic of Korea

20 Investment in knowledge vs machinery & equipment selected OECD countries 1998 as % GDP CountryKnowledge* Machinery & Equipment Sweden United States Korea Finland Switzerland Canada Japan OECD average * Knowledge = investments in R&D, software, and higher education. Investments in knowledge would exceed av in machinery & equipment if total investment in education were included.

21 Outward-looking Development Strategy International Market Pressure for Competitiveness Industrial R&D Competitiveness Pressure for R&D Human resourceFinancial resource S&T policy/RDI Support Programs / Measures Economic Development Demand for Technology Supply of R&D Resources S&T Development LE-oriented Industrial Policy + Factors behind the developments

22  Factors behind the growth  Demand side : Outward looking development  export- orientation of industries  pressure from international market for technological competitiveness  increased demand for R&D investment  Supply side o Financial resources : Large-firm-oriented industrial development  chaebol system  increased abilities of private industries to finance long-term, risky R&D projects o Human resource : Korea prepared itself well for R&D by investing heavily in education and HRD  S&T infrastructure: institutions, legal systems, policy, programs, etc.

23 Economic consequences of the developments  R&D Outputs  Number of KPO patents granted  Number of US patents granted to Koreans : 7th in the world  Number SCI publications : 13th in the world (Highest growth)  Established world prominence in such areas as : LCD, semi- conductors, PDP, cellular phones, etc Number1,8082,6877,62012,51234,57945,298 Korean share

24 Most knowledge intensive OECD economies: Share of knowledge industries in GDP (1998) COUNTRY Knowledge Industries* Education & Health Total US Germany UK France Holland Euro Union Hungary Korea *Knowledge Industries=high and medium tech, post and telecom, finance and insurance, business services (excluding real estate activities)

OECD Japan USA KoreaItalyCanada R&D Elasticity of TFP (1991~2004)

26 Contributions of Factors to Growth (1971~2004) Growth by (%) share (%) Growth by (%) share (%) Growth by (%) share (%) Labor Capital TFP R&D Stock Real growth

27 Rep. of Korea Ghana Thousands of constant 1995 US dollars Difference attributed to knowledge Difference due to physical and human capital  GDP/Capita growth: Korea vs Ghana Knowledge makes the Difference between Povery and Wealth... (World Bank)

28 Average GDP/Capital Growth Rates ( )

29  Strength and weakness  Strength  Consensus on the importance of S&T: Dynamism of Korean business enterprises plus strong commitment of the government to S&T-based national development  Economic environments conducive to active innovation: Domestic firms’ exposure to international markets--pressure for R&D  Chaebol system: Financial capability to invest in long-term risky projects  Human resources  Growing scientific achievements:publications, IPR, etc  Attained technological leadership in selected areas Key characteristics of KIS

30  Weakness  Disadvantage of being small  Imbalances in innovation system 1. Basic scientific research vs technological development 2. Large firms vs SMEs 3. Regional concentration  Excessive reliance on private investment: vulnerable to changes in markets  Weak industry-science relationship  Insufficient internationalization: insufficient R&D DFI, international co-invention, etc.

31 Policy Lessons  Lessons  Market competition is the very source of motivation for innovation  Pressure for technological competitiveness  Effectiveness of the outward-looking development strategy for small economies  Human resource is the key to learning  Government can play effectively the role of facilitator and promoter at the early stage of development  The efficiency of an NIS hinges very much upon ISR

32 Thank you!