Knowledge Strategies for Development: Challenges for Korea Carl Dahlman World Bank KEDI WB Workshop Balanced Regional Development and the Role of Higher Education Pohang February 23, 2004 ©Knowledge for Development, WBI

Structure of Presentation 1. Economic Growth in Historical Perspective 2: The Knowledge Revolution 3. A Knowledge Economy Framework 4: Benchmarking Korea in the Global Knowledge Economy 5: Challenges for Korea in New Context 6: Critical Issues for Korea’s Competitiveness 7: The Role of Regional Innovation Systems and Clusters 8: Some Tough Issues for Discussion ©Knowledge for Development, WBI

1: World GDP/Capita and Population

Growing Differences in GDP/Capita

Shares of World GDP - Constant US$ ( ) % East Asia & Pacific High income: OECD ex. US & Japan Japan United States Sub-Saharan Africa Middle East & North Africa (Light Blue) Latin American & Caribbean Europe & Central Asia South Asia (Grey) High Income: Non-OECD (Black)

©Knowledge for Development, WBI Eight Fastest Growing Economies (constant 1995 US$)

Growth Depends on Successful Knowledge Strategies At lower level of development (and S&T capability) it depends largely on effectively tapping into global knowledge (playing rapid catch-up) At higher levels of development (and S&T capability) it also depends critically on own innovative effort Korea and Taiwan have already made the transition from being primarily catch-up economies to becoming innovating economies

GDP/Capita Growth: Korea vs Ghana ©Knowledge for Development, WBI

2.The Knowledge Revolution Ability to create, access and use knowledge is becoming fundamental determinant of global competitiveness Seven key elements of “Knowledge Revolution” Increased codification of knowledge and development of new technologies Closer links with science base/increased rate of innovation/shorter product life cycles Increased importance of education & up-skilling of labor force, and life-long learning Investment in Intangibles (R&D,education, software) greater than Investments in Fixed Capital in OECD ©Knowledge for Development, WBI

The Knowledge Revolution – cont. Greater value added now comes from investment in intangibles such as branding, marketing, distribution, information management Innovation and productivity increase more important in competitiveness & GDP growth Increased Globalization and Competition Trade/GDP from 38% in 1990 to 52% in 1999 Value added by TNCs 27% of global GDP Bottom Line: Constant Change and Competition Implies Need for Constant Restructuring and Upgrading ©Knowledge for Development, WBI

Implications for Developing Countries Developing Countries run of risk of being left behind as a result of increasing importance of knowledge and of a widening knowledge divide with advanced countries. They need to develop coherent strategies to deal successfully with the constant restructuring resulting from the knowledge revolution. They will need to make more effective use of knowledge for their development--to become knowledge economies. ©Knowledge for Development, WBI

3: The Knowledge Economy There are many definitions of the “Knowledge Economy”, many emphasizing just information technology and high technology We take a broader definition: “An economy that makes effective use of knowledge for its economic and social development. This includes tapping foreign knowledge as well as adapting and creating knowledge for its specific needs.” ©Knowledge for Development, WBI

Framework for Using K4D Four Key Functional Areas Economic incentive and institutional regime that provides incentives for the efficient use of existing and new knowledge and the flourishing of entrepreneurship Educated, creative and skilled people Dynamic information infrastructure Effective national innovation system ©Knowledge for Development, WBI

KAM Methodology 2004  KAM: 76 structural/qualitative variables to benchmark performance on 4 pillars  Variables normalized from 0 (worst) to 10 (best) for 121 countries   Multiple modes offering wide range of graphic representations and functionalities ( Most Recent, comparison options)  Aggregate Knowledge Economy Index (KEI) – average of performance in 4 pillars – KI  Weighted and unweighted version – Innovation Variables ©Knowledge for Development, WBI

Korea Basic Scorecard for Korea:

4: Knowledge Economy Index ©Knowledge for Development, WBI

5: Challenges for Korea Korea is caught between higher technological capability of Japan (and advanced countries) and lower wage costs of China (and other developing countries) Needs to continuously move up the value chain and create profitable activities aimed at international markets, and not just in manufacturing

15 Largest Economies: GDP 2002 (Trillions of international $) United States $10.14t China $5.73t South Korea $0.78t India $2.69t Indonesia $0.66t Mexico $0.88t Brazil $1.31t Spain $0.85t United Kingdom $1.51t Italy $1.48t France $1.55t Germany $2.17t Canada $0.90t Japan ,00010,00015,00020,00025,00030,00035,000 GDP per capita (international $) 2002 Ave RGDP per capita growth (%) Russia $1.41t

Special Characteristics of Korea High investments in R&D as share of GDP — almost 3.0% High investments in Education as share of GDP %, counting cost of tutoring But not clear it is getting corresponding return from such high investments Very centralized development Seoul: 47% population, 53% economic power, 73% corporate R&D centers, 77% venture business, 80% top 10 universities, 80% of public R&D Industrial production very heavily dominated by large chaebol companies

6: Critical Issues for Korea How to get bigger economic return from large investments in R&D and education? How to participate effectively in the global and regional economy? What is the role of regional innovation systems?

Challenges in R&D and Innovation Korea does invest a lot in R&D and has technological leadership in some areas but it is still relative small in global scale Korea needs to improve the productivity of its R&D investments Korea needs to improve climate for innovation Universities do very little R&D Most R&D and patenting is being done be few large chaebol Need to create a more favorable climate for innovation

World Shares of USPTO Patent Count ( ) excluding US and Japan % Germany Taiwan Germany France United Kingdom South Korea Sweden Netherlands

Challenges for Education and Training Stock challenge: rapid creation and diffusion of knowledge means even adults constantly have to learn, therefore need Multiple mechanisms for continuous training beyond formal education system To exploit potential of information and communications technologies to expand training opportunities Effective system for skills assessment and certification Flow challenge: education system must teach students how to learn through their lifetime regardless of when they leave it: implies need for Better teaching and learning pedagogies for core skills Broader interdisciplinary approaches Financing mechanisms to expand access and improve quality Need to address both stock and flow challenges through better approach to life-long learning Reform and re-allignment of public and private roles As well as domestic and foreign ©Knowledge for Development, WBI

Improving the Performance of Education and Training Improve productivity of education Increase efficiency through less regulation, more accountability, greater flexibility to respond to needs of productive sector Improve incentive regime for teachers and faculty Change the content of education Improve critical thinking and problem solving skills, Improve communication skills and ability to work in groups Teach learning to learn Develop more effective system of lifelong learning More flexibility in terms of multiple pathways to different competencies Develop better system of just in time training ©Knowledge for Development, WBI

Participating More Effectively in Global Economy Increasing strategic alliances With foreign firms With foreign research institutes With foreign universities Moving up global value chains Becoming more productively integrated into global value chains controled by companies from other countries Further developing own brands and distribution networks Moving beyond manufacturing to services

7: What is Role of Regional Innovation Systems? Regional innovation systems and clusters Four key institutions in clusters The critical role of the university Fostering clusters Implications for policy

Regional Innovation Systems and Clusters There is some evidence that dynamic clusters contribute to a region and a county ’ s competitiveness Clusters are defined as geografic concentrations of interconnected companies, specialized suppliers, service providers, firms in related industries, and associated institutions that compete but also cooperate (Porter 1998, On Competition) Key benefit of clusters seems to be the externalities that result from specialization, information, and knowledge exchange, which reduce transactions costs and permit greater innovation and productivity increase

Key Institutions in Clusters Four key institutions Universities Research Institutes Firms Local Government But real key is the network of interactions among them that produce value Therefore policy should focus not so much on the key institutions, but their interactions Hardest part is how to achieve such combinations effectively and with what instruments

Critical Role of the University Education and Training Training scientist and engineers, as well as entrepreneurs, and professionals Should not be limited to formal training, but to lifelong training Therefore must be very responsive to needs of firms in cluster Science and Research In Korea universities are not so strong in research Therefore research effort has to be strengthened But it must be relevant to needs of surrounding business But perhaps key role is actually in facilitating networks Relationship with former students and class networks Contract research to industry or research centers Public forums for discussion

Fostering Clusters Many efforts focus on strengthening individual components of cluster But most critical is the interaction among the elements of cluster Therefore efforts have to give greater attention to programs that foster that interactivity Joint research Contract research from firms to universities and research institutes Mobility of personnel among three agents Skills development programs

Fostering Interactivity Should go beyond specific region to interaction with other clusters in country Many strong clusters exits in Korea There are strong complementarities among manuy of them But should also include fostering interaction with clusters in other countries because of increasing globalization of knowledge Exchanges of experiences and personnel Research and production linkages

8:Some Tough Issues for Discussion How many regional innovation systems to push for? What is the role of targeting and special incentives? Is there a risk that pushing for too many may compromise excellence and national competitiveness? Is there a trade-off between equity and excellence? What are best strategies for promoting regional innovation systems? How proactive a role can national or even local government take vs supporting or facilitating role What is role of private sector in general and chaebol in particular?

Annex

KAM Normalization Procedure Absolute values Allocation of rankings Normalization (0-10) Formula: Normalized (u) = 10*(Nw/Nc) Normalized (u) – normalized score allocated Nw – no of countries with worse ranking Nc – total sample of countries (121) ©Knowledge for Development, WBI

Innovation – Size matters ©Knowledge for Development, WBI

Innovation : Size matters – unweighted version ©Knowledge for Development, WBI

Average GDP/Capita Growth Rates