1. A “Capability-based View” on Korea Keun Lee
Differentiating the Korean model and the Lessons
A “Capability-based View” on Korea
Keun Lee
** Professor of Economics
Seoul National University
Director, Center for Economic Catch-up

2. Skepticism about Korea as a Role Model
While Korea has often proposed as role model for other developing countries, there is also an equal amount of skepticism about that.
Such skepticism seems to come from the perception that the Korean model had involved the great degree of state activism including targeted protection of some industries or firms.
But, today’s global environment would not allow such intervention.
Such perception has a good reason to prevail as the early literature tend to focus on the role of the government vs. markets in catching-up development.

3. But, capability based view on Korea
This approach, an extension of technology-based view,
But want to keep distance from the government-market dichotomy, as It has more micro-economic foundation.
Our starting point: the most fundamental barriers to sustained development is having local capabilities or not.
Without some critical degree of capabilities, growth based on lower wage rates or simple price competitiveness, tends to be short-lived or not sustained.
Korea succeeded because it had built such capabilities since the mid 1980s by putting emphasis on in-house R&D in private sectors and increasing aggregate R&D/GDP ratio beyond 1% even to reach 2.5% or higher.

4. TFP (productivity) Catch-up: Korea vs. Japan
Rapid catch-up
Remaining Gap
(about 10%) 4

5. Development as a process of capability enhancement
the most obvious or ex-post difference between the developed and developing countries.
the differences in capabilities to produce and sell internationally competitive products for a prolonged period of time.

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

7. Capability Building as the essence of the Korean Model
Openness and export promotion have been generally regarded as one of the key policy ingredients for developing countries.
Thus, many countries simply resorted to devaluation or standard trade liberalization, which led to an export boom due to price effects and some stabilization of external balances.
However, macro-based reform brought in immediate recovery but was not sustained, or leading another rounds of Bof P crisis
Korea was the same as other LDCs, eg, chronic trade deficits until the mid 1980s
Since the mid 1980s, started to build up its own R&D capabilities which allowed the Koreans to upgrade exports competitiveness toward higher ends goods.
Only with this, Korea was able to be freed from the trade deficits trap

8. + moving into newly emerging higher value-added industries.
2) Continuous upgrading into higher value-added segments in the same industry
+ moving into newly emerging higher value-added industries.
-> Gov’t facilitated the upgrading by targeting and entry control

9. Composition of Major Export Items, (% in total Exports)

10. Successive Entries: Composition of sales in Samsung
2.4 1
1.1 3 1
1.6
Source : Chang (2003), Notes: numbers are share percentages in sales

11. Upgrading in the same industry:
Value Chain in Semiconductor Sector
High value-added
Low value-added

12. Critical Juncture: 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.

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

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

15. Composition of R&D Expenditure in Korea
By the early ‘80s, the share of public R&D ≈ that of private R&D ≈ about 50%.
private R&D accounted for more than 70% of the total since the mid-1980s

16. Individual vs. corporate patents

17. Utility model vs. Invention Patents

18. Domestic vs. foreign patents
86/87: substance patents
79/80: Wipo/Paris convention; 84:PCT

19. Transferability and Lessons :

20. 1 ) WTO constraints
Constrains on deploying many of the institutions and policy settings that were available, But 
WTO rules allows substantial room for state subsidies for R&D expenditure.
The US does lots of state-led R&D in the name of defence-related R&D – and smart developing countries will follow its example.
Developing countries can pay much more attention to their ‘national systems of innovation’ because R&D conducted through GRIs is important in developing domestic technological capabilities,
The WTO allows some discretion in policies to support the SMEs, and, furthermore, export subsidies in the countries with per capita income below certain levels.

21. 2) Defences against rent-seeking (from state activism)
2 Suggested Elements to curb the potential for rent –seeking
1) outward or export-orientation for disciplining
2) from re-distribution of rent to creation and generation of new rents or taking them from foreingers by substitutive targeting.

22. Convergence : Samsung vs. Matsushita22

23. “Gap persists” : Hyundai v.s. Toyota23

24. Evidence: Importance of incentives, discipline, learning
(Korean /Japan) Productivity Catch-up
= F ( tacitness, rent*discipline, innovation/learning, ---)
=F ( 1/(patent/R&D), market concentration* (export/sales),
no. of patents, ….).
Park and Lee (2010: Industrial and Corporate Change) 24

25. Trend of tariff in Korea

26. Correct Meaning of Industrial Policy (state activism):
= not a protection but earning a time to learn
(Samsung : at least 20 years)
= Not picking winners but picking good student and match them with good teachers.
(student should be locals (Koreans)=> indigenous innovation
But, making them learn s not easy
- Need incentives (performance-based incentives), private firms and property rights,
- also disciplines ( from world markets) 26

27. Sequential modes of learning & knowledge access
1) Learning by working/doing:
technical guidance from OEM buyers or learning by working in FDI
-- Key technology is embodied in imported machinery and equipments.
-- basically automatic learning by doing with no intention or plan
2) Licensing: recognize the need for more systemic learning
- licensing and actively seeking learning or transfer from FDI partners.
eg) Korea in the 1970s-80s; Taiwan, in the 1980s, monitor industry
-- critical factor for effective learning = absorption capacity of the late-comer firms, which depend on education system and other elements of the NIS .
3) In-house R&D
4) Overseas R&D post or public-private Consortium, and International M&A
-- public-private R&D consortium, research of the existing literature, overseas R&D outpost, co-development contract with foreign R&D or technology specialist firms and/or international M&A.
Eg) In the 1990s, government lab in notebook industry in Taiwan;
from the early 1990s, Korean; overseas R&D posts,.
In entering digital TV, LG acquired the US Zenith for core technology
5) Horizontal collaboration or alliance based on complementary assets.
Eg) Samsung have reached this stage

28. Capital Goods Imports -> Licensing -> FDI
Changing Modes of Accesses to Foreign Technologies in (mil. US $, %)
Amounts
Licensing
payments
(FDI)
Capital goods
imports
Payment
[A]
Cases
[B]
Amount
[C]
tech.transf.
(C1)
[D] E]
[E]
/imports
0.8
33.0
47.4
4.7
39.0
486.0
18.9
per year
0.2
6.6
9.5
0.9
7.8
97.2
20.4
285.0
218.6
21.9
350.0
2668.0
30.8
4.1
57.0
43.7
4.4
70.0
533.6
96.5
434.0
879.4
87.9
851.0
8106.0
27.3
19.3
86.8
175.9
17.6
170.2
1621.2
451.4
1225.0
720.5
72.1
244.0
27.7
90.3
245.0
144.1
14.4
48.8
5137.1
1184.9
2078.0
1767.5
176.8
565.0
32.0
237.0
415.6
353.5
35.4
113.0
9314.6
4359.4
3471.0
5634.7
563.5
1622.0
36.4
871.9
694.2
1126.9
112.7
324.4
1797.0
1240.0
1938.8
193.9
506.0
37.0
898.5
620.0
969.4
96.9
253.0
Total
7906.1
8766
4177
33.5

29. Correct Meaning of Openness
( from a late-comer perspective)
opening of your market vs. opening to foreign knowledge and learning opportunity
-> Strategic opening vs. naïve opening
Also, in Korean cases, an element of asymmetric opening:
outbound opening with inbound protection;
rich countries should allow such opportunity for poorer countries
Eg) high school soccer team vs. Pro team

30. Still needed : A Catch-up-Friendly
World Economic System?
World economic system is increasingly making catch-up more difficult
- “make globalization work” (Stiglitz 2006)
Ex: IPR issue: simply increasing the IPR protection is to protect the interests of the incumbent IPR owners, mostly MNCs
called for asymmetric or cascading opening to foreign trade such that a richer country at certain level open their markets any country less rich than oneself
=> more “fair rather than free” trade regime

31. Toward Seoul Consensus?
**First , define the key feature of it:
1) Modernization + Democratization together
2) Equalizing growth (Migration; New village movement)
3) not short-lived but sustained over long term
Economic Aspects
1) two times of leapfrogging: 80중, 2000년대
2) Strong: big business, manuf, Exports, gov’t정부주도
( vs. Weak: SMEs, Service, domestic dd, civil soceity)
3) business groups and technological development
4) Indigenous vs. Foreign capital (licensing, DFI, Exports)
5) Asymmetric opening
=> Opening vs. Growth (necessary but not sufficient condition)

32. Background papers (www.keunlee.com)
Lee, Keun, “Can Korean be a role model for Development,” WIDER working paper. 2009
Jung, Moosup, and Keun Lee, 2010, “The Sectoral systems of Innovation and Productivity Catch-up of Korean firms with Japanese firms,” Industrial and Corporate Change, forthcoming (online published).
Lee, K. and Kim, Y.K. (2010), “IPR and Technological Catch-up in Korea”, Intellectual Property Rights, Development and Catch-up, edited by Odagiri, H., Goto, A., Sunami, A. and R. Nelson, London: the Oxford University Press.
Lee, K. and John Mathews, (2009), “Upgrading in the same industry and Successive Entries in new industries for sustained catch-up, “ Paper presented at the Workshop on “ Innovative firms and Catch-up,” held in Mexico City, November 2009, organized by Ed Amann, John Cantwell, and Martin Bell.