1. Development & Productivity Catch-up:
Korean Model of
Development & Productivity Catch-up:
From Capability-building
to Double Upgrading
Keun LEE
Professor of Economics / Seoul National University
Director / Center for Economic Catch-up
Member / Committee for Development Policy, UN-ECOSOC
President / Int’l Schumpeter Society
Council Member, World Economic Forum

2. Korea was similar to a typical Country in Africa:
A former Colony
Had a Civil War
Poverty and Hunger (US food aid)
*Worse: Division into North & South
No mineral resources (all in North)
->Need for Human & Capability based growth
with learning & building capabilities as its key element

3. = Closing the gap with the bench marks
What is catch-up?
from “Catching up, forging ahead, and falling behind”
(Abramovitz, 1986 JEH)
= Closing the gap with the bench marks
1) national level: per capita income, share in world GDP,
2) firm-level: market share, sales growth, productivity

4. Korea’s Catch-up beyond Middle income trap:
Per cap GDP as % of Japan, Korea = 27% in 1960; 96% in 2015

5. as the essence of the Korean Model thus able to sustain growth
Capability Building
as the essence of the Korean Model thus able to sustain growth
for a longer time

6. From State-Market dichotomy to 2 kinds of capability building
Traditional focus: government vs. markets Dichotomy
Our focus= capability-based view on Korea
→ fundamental barriers to sustained development
**Two steps of Building Capabilities:
1st: 1960s, 70s: enhancing basic human capabilities: food supply
(agricultural revolution) & primary/secondary education revolution
2nd: building technological capabilities of indigenous firms in 70’ 80s
and then upgraded into high ends since the late 1980s

7. Learning by importing foreign technology in 70s, 80s
Korean firms, investing in learning foreign technology;
--- mainly operational technology through purchase of capital goods or reverse engineering (L. Kim 1997).
Government policies, to stimulate the importation
of foreign technology.
--- There were laws on capital goods imports, foreign loans and technology imports, including the Foreign Capital Inducement Act (1966).
-- In 1972, the Technology Development Act was introduced to stimulate technology imports;
-- In 1973, the Foreign Capital Inducement Act was revised to relax the approval criteria and facilitate technology import procedures (OECD 1996).

8. Foreign Technology Licensing followed by In-house R&D
(Chung and Lee 2015 World Dev’t)

9. Then, Critical Juncture for Upgrading:
the mid to late 1980s
Korean firms started to establish in-house R&D and emphasize their own indigenous technologies,
given their price competitiveness being challenged by next-tier exporters and rising domestic wages;
1) surpassed R&D/GDP ratio 1%,
→ share of private R&D 50%
2) beginning of rapid rise of firm patents > indiv. Patents
3) first time (post-war) had trade surplus in the late 80s.

10. The Mid-80s : R&D/GDP soared

11. Accumulated no.of in-house R&D centers
tax exemption by Govt)
3 (1967) → 14 (1976) → 261 (1986) → 1162 (1992)

12. Why Soaring of R&D since mid 80s?
Big business: Competitiveness crisis with rising wages
-> need to upgrade and enter into higher end segments and industries 2) Gov’t responded : tax exemption for R&D ; encouraged in-house R&D labs 3) series of private-public joint R&D to enter into high ends telephone switches, memory chips, cell phones & digital TVs → cash cows of Korea → Now, how it is done? → G-P-G model

13. G-P-G: Cell Phones, Memory Chips,
Digital TV (more role in R&D by private)
G (gov’t agents):
Joint R&D
by Private & Public labs
G (gov’t policy):
Exclusive Stands
or Procurement
P (private firm):
Manufacturing

14. Increased Tech. capabilities => Double upgrading/Diversification
=> Productivity Catch-up with Japan
intra-sector upgrading and diversification
= Continuous upgrading into higher value-added
segments in the same industry
2) Inter-sector upgrading and diversification
= moving into newly emerging higher value-added industries.
→ Gov’t facilitated upgrading by targeting and entry control
(for initial rents & long term investment)

15. Upgrading in the same industry: Value Chain in Semiconductor Sector
IC Fabrication
Materials
Equipment
IC Wafer
IC Design
IC Mask
IC Testing
IC Packaging
Value-added chain
High value-added
Low value-added
Medium- V-added

16. Composition of Major Export Items in Korea,
(% in total Exports): by inter-sector diversification

17. Successive Entries: from textiles to ITs
Composition of sales Changes in Samsung
Source : Chang (2003), Notes: numbers are share percentages in sales

18. Korea’s TFP (productivity) Catch-up with Japan
Rapid catch-up
(about 30%)
Gap
(about 10%)
Note : Note TFP level of all Japanese listed firms in each year is set to be 100.
We can regard the difference as % gap of TFP between two countries. 18

19. Convergence in IT = fast catch-up: ex) Samsung vs. Matsushita
Sam. Elect.:
OVER
While Industry : JUST 19

20. But slow catch-up in auto, why. : eg: Hyundai vs
But slow catch-up in auto, why?: eg: Hyundai vs. Toyota; cf) slower in machine tools
H.M. : 20

21. 1) Not all sectors are the same!
What determined TFP catchup? both sector - and firm-level factors (Jung and Lee 2009 in Industrial & corporate change)
Codifiable (non-tacit knowledge (+)
Embodied tech. transfer(+)
Oligopoly market (+)
1) Not all sectors are the same!
Eg) Auto with tacit knowledge takes more time to catch up
Predict the direction of Structural transformation!!
2) Oligopoly Rents + int’l market discipline worked to TFP growth
Sectoral factors
(Malerba 2002, 2004)
Firm level
learning & capability
External discipline (export-orient) (+)
Efficiency wage(+)
Innovation (R&D, patents(+)

22. Innovation
systems
at 3 Levels:
country;
Sector;
firm
→ 2014
Schumpeter Prize

23. Korea’s Dynamic Specialization: LIC->MIC->HIC
In 1960s, 70s (LIC) = latent comparative advantage sectors (bench marking Japan)
1st in the mid 80s: to short cycle sectors in MIC
2nd in the 2000s: to long cycle sectors in HIC; ex. Samsung
2 Tech. turning point
Short cycle sectors
Lin’s Latent Com Advant.
Long cycles

24. Lesson for LICs/African Countries 1
Building different capabilities at different stages ( something uncertain & not available in markets)
1) Early stage (initial conditions);
build human capabilities by investing into health, food, & education
2) Lower & lower middle income stages:
To build operational skills / production technologies in indigenous firms
in factor (labor/resource)-intensive sectors
by licensing in foreign technology with know-how contracts
3) upper mid income stage:
build up innovation capabilities by involving
various forms of learning (private-public, domestic-foreign R&D, inviting
foreign trained engineers, setting up overseas R&D posts)
- to break into higher-end segment of value chains ( to avoid Mid I trap)

25. 2. Rents as incentive & source of funds for long term investment
Lesson 2
2. Rents as incentive & source of funds for long term investment
but with discipline from export markets
1) Earlier stage ( 60’, 70s, );
- Focus on labor intensive export growth by fixed investment,
‘disciplined’ rents from tariffs/loans as sources for fixed capital investment
-> labor productivity growth but no TFP growth
2) later stages (since mid 80s) :
- exports now led by product upgrading /innovation:
- now TFP growth led by R&D investment
- rents from oligopoly domestic markets subject to world market discipline
3) Both stage: Exporting to generate dollars to pay for imported capital goods;
without some forms of assurance (rents or expected profits), difficult to induce long term investment, without which no long term survival & no TFP catchup.

26. Lesson 3: Not all sectors same in str. transformation!
Faster TFP catch up in sectors with higher degree of embodied tech.,
and codifiable and short cycle knowledge
3. Dynamic Specialization for faster structural Changes over stages:
1) at low income stages (60s, 70s):
specializes in factor-intensity (labor or resources) sectors
with gov’t promotion (undervaluation/tariffs/ loans)
to increase not TFP but RCA (export shares)
2) at lower middle income stage (mid 70s)
to move into capital-intensive (latent comparative advantage) sectors
inheriting sectors from the country above you (eg, Japan)
3) at upper middle stages ( mid 80s later)
to move into emerging or short-cycle, codifiable tech based sectors,
such as IT manuf. & services,
To increase TFP and value-added

28. Three Specific Comments
for Uganda

29. 1) Issue of Trade deficits and Macro Constraint
Korea also had 3 decades of trade deficits, until 1986
In the 1960s: huge saving gap:
savings =9% of GDP, gross investment 15% of GDP;
thus relied on foreign borrowing to fill the gap
and that is why exports is important and binding factor for growth
Central control on foreign exchanges : export earnings allocated for investment of foreign capital goods
Try to minimize imports of non-necessaries such as luxury consumer goods, and even some foreign fruits (eg Banana )
Capital Control: esp on outbound flow of money, unless justified for imports of capital goods.
Control over domestic interest rates:
financial repression vs. financial restraints (Stiglitz):
-> controlled interest rates OK as long as real rates are positive;
-> more savings not from high int rates but from growth of incomes

30. 2) Issue of Unregulation and supporting institutions
Unregulated input supply that fails to enforce quality; unregulated trading in tea; market with counterfeit inputs
Korean practices: Regulation of entry control in key sectors;
only those who passed some standard (quality control)
to be allowed to do business in certain sectors:
=> A kind of industrial policy : by limiting the no of firms, those in the sectors to be assured stable profits and thus with money for investment; return rates higher than interest rates
eg) 5 firms with profits better than 10 firms with no profits
Some institutional devices for export promotion:
1) General trading companies to conduct exports on behalf of SMEs
2) KOTRA (Korea Trade-Investment Promotion Agency)
= trade attachees all over the world like an embassy

31. 3) Issue of Low value-addition in exports:
Korea: Double upgrading = intra and inter- sectoral
First, unlocking production potentials is good
but the next step is upgrading for higher-values
Otherwise, into the ‘Adding-up’ problems in Africa:
neighboring countries exporting the same things, flooding the market, which lead to ever lower prices of the goods.
Examples: Coffees/Flower in many African countries
Solution: Differentiation and Upgrading
a) Coffee: from crude coffee to more processed coffee
from crude oil to refined oils (eg: Korea)
b) Make Flower/Coffee Higher value-added using STI
eg) Make flower insects/disease free; last longer with specific flavour/smells
c) Enter into distribution/marketing and also brands; rather than just production
-> promote your own brand: like “Intel inside”

32. Functional Upgrading in a given sector into higher value segments: 3 Stages: OEM – ODM – OBM :
Assembly/
Production
Design
(R&D)
Marketing
OEM
(own equipment)
ODM
(own design)
OBM
(own brand)
Examples:
Apparel; sweat shops
Foxxcon for Apple;
Some Korean SMEs
 Often not easy or quite difficult;
Many stuck in OEM Trap (low end good production)

33. with 1992 the year of own brand marketing
Trends of Sales by Aurora World after trying OBM (only one OBM out of 700 OEM in Korea)
with 1992 the year of own brand marketing
showing “U” shaped OEM trap over :
Why crisis-> attack by MNCS to cut the orders
Crisis/ trap

34. Extension and upgrading into backward or forward linkage sectors
Another Upgrading Mode: from the Resource-Curse of the resource-based industries
Extension and upgrading into backward or forward linkage sectors
Input suppliers (backward linkages)
and Commodity processors (forward linkages).
Examples in Botswana: Diamond cutting and Polishing
In 2005: De Beers‟ 25 year mining license was due for renewal;
=> a Big deal: De Beers to to create a cutting and polishing industry.
(De Beers used to say: Botswana had no comparative advantage vs. India)
* World's leading cutting and polishing companies (16 in total)
established factories in Botswana;
to transfer cutting and polishing skills to local citizens.

35. ‘Thank you” and References (www.keunlee.com)
Lee, Keun, & BY Kim,”Both Institutions & Policies matter but differently at different income levels: long run economic growth,: World Development (2009)
Chung, Moon Young and Keun Lee, "How Absorptive Capacity is Formed in a Latecomer Economy: Different Roles of Foreign Patent and Know-how Licensing in Korea", World Development Vol. 66, pp. 678–694, 2015
Jung, Moosup and Keun Lee ‘Sectoral systems of innovation and productivity catch-up: determinants of the productivity gap between Korean and Japanese firms’, Industrial and Corporate Change 19 (4): 1037–69.
Lee, Keun, & C. Lim (2001), “Technological Regimes, Catching-up & Leapfrogging: the Findings from the Korean Industries”, Research Policy,
Park, K., and Keun Lee (2006), “Linking the Technological Regime to Technological Catch-up: An Empirical Analysis Using the US Patent Data,” Industrial and Corporate Change, July 2006
Shin, H. and K. Lee (2012). ‘Asymmetric Protection Leading not to Productivity but Export Share Changes: The Case of Korean Industries, ’. Economics of Transition, 20(4):

36. Thank you!
Merci!
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