Competitiveness Strategy of Korea October 2004 Yoo Soo
Competitiveness Strategy of Korea October 2004 Yoo Soo Hong Chaired Research Fellow Korea Institute for International Economic Policy
1. Introduction
Purpose of the presentation o Assess current challenges facing Korea with a focus on the impact of the rapid growth of the Chinese economy o Discuss future direction of industrial technology development and competitiveness in Korea Focus o Focusing on the SWOT analysis of of the Korean industry o Focusing on strategies for enhancing competitiveness through industrial innovation 3
The Rate of Economic Growth in Major Countries (GDP, %) 1998 1999 2000 2001 2002 2003 2004 (IQ) Korea -6. 9 9. 5 8. 5 3. 8 7. 0 3. 1 5. 3 China 7. 8 7. 1 8. 0 7. 3 8. 0 9. 1 9. 7 Japan -1. 1 0. 1 2. 8 0. 4 -0. 4 2. 7 5. 6 Singapore -0. 9 6. 4 9. 4 -2. 4 2. 2 1. 8 7. 3 Australia 5. 3 4. 3 1. 9 2. 4 3. 0 3. 1 3. 2 U. S. A 4. 2 4. 5 3. 7 0. 5 2. 2 3. 1 4. 2 Source: ADB, IMF, Statistics Yearbook of China. 4
FDI into Korea (US$ 100 million) Source: BOK o FDI into Korea declined substantially despite many incentives and efforts by the government. 5
Challenges Posed by China Korea’s trade dynamics with China may decline - For the time-being, Korea’s trade with China will increase. However, the rate of increase will decline as Chinese local firms gain competitiveness. Hollowing-out of the Korean manufacturing industry - The shift of Korean production facilities to China implies hollowing-out of the Korean domestic industries and substituting Chinese workers for domestic workers, which worsens the employment situation in Korea. 6
Losing national and international competitiveness against China - The technological gap between Korea and China will be narrowed much faster than expected. - Korea will lose competitiveness against China not only in technology but also in institutional development. Heavy dependency on the Chinese economy and ‘the contagion effect’ - synchronization with and dependency on the Chinese economy have dual effects on the Korean economy: co-prosperity vs. contagion. - However, the positive effects will dominate as long as the Chinese economy keeps growing. 7
A Comparison of Competitiveness of High-tech Industries in Korea and China (Compared to advanced countries as 100, %) Country 2002 level 2010 level Korea 75 80 China 50 65 Korea 80 90 China 50 65 Korea 40 50 China 30 40 Korea 40 60 China 30 50 Korea 65 75 China 45 60 Telecommunications Semiconductors New Material Bio engineering High-tech industry 2002 gap (year) 2010 gap (year) 8 3 10 5 3 2 7 3 Source: Hong, Y. S. 2003. 8
Korea’s Investments into China 1999 Investment to China Share of total overseas investment Amount (US$ mil. ) 2000 2001 2002 Accumulated 348 (-48. 6) 605 (73. 9) 545 (-10. 6) 806 (47. 8) 6, 666 454 (76. 7) 753 (65. 4) 1, 022 (35. 7) 1, 279 (25. 1) 7, 445 Amount (%) 10. 8 12. 7 11. 0 33. 8 16. 3 Case (%) 42. 1 37. 1 48. 9 55. 1 Case (ea) 43. 8 Note: ( ) is yearly change in percent. Source: KOTIS. 9
2. Towards an Innovationdriven Economy and Innovation of the NIS
Core of the Innovation Economy Economic development Enviroment Innovation system Innovation Capability Innovation activities Industrial development Technology accumulation Influence Feedback Policy Source: Hong, Y. S. Evaluation 11
Development of Industry and Technology Policy in Korea Industrial Development - Develop importsubstitution industries 1960 - Expand export-oriented light industries s - Support producer goods industries 1970 s - Expand heavy and chemical industries - Shift emphasis from capital import to technology import - Strengthen export-oriented industrial competitiveness. Technology Development Highlight - Strengthen S&T education - Deepen scientific and technological infrastructure - Promote foreign technology imports 1960: 79/capita - Expand technical training - Improve institutional mechanism for adapting imported technology - Promote research applicable to industrial needs 1970: 253/capita Labor and Capital (Continued) 12
Industrial Development Technology Development Highlight - Develop and acquire toplevel scientists and engineers - Perform national R&D projects efficiently - Promote industrial technology development 1980: $1, 655/capita 198 0 s - Transform industrial structure to one of comparative advantage - Expand technologyintensive industry - Encourage manpower development and improve productivity of industries - Reinforce national R&D projects - Strengthen demandoriented technology development system - Institutional reforms 1990: $5, 890/capita 1990 s - Promote industrial restructuring and technical innovation - Promote efficient use of human and other resources - Improve information networks - Move towards High tech and high value-added industries - Develop IT industry - Search the next generation - Strengthen national and regional innovation systems - Internationalize R&D systems and information networks - R&D increase in IT, BT, NT, etc. 2000: 9, 823/capita 20002003 Capital and Technology and Innovation and KBE 13
Government R&D Programs by Ministry Year 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 01 02 03 GT Project (7 Ministries) Science & Technology Creative Research Initiative National Research Laboratory 21 C Frontier R&D Program National R&D Program (MOST) Nuclear Power Development Basic Science Research Commerce, Industry & Energy Industrial Technology Development Energy Resource Technology Development Information & Communication Health & Welfare Environment Agriculture & Forestry Industry & Human Resources Development Construction & Transportation ICT Development Health & Medical Technology Environment Technology Agricultural Technology Construction & Transportation Technology Academic Research Promotion Program Brain Korea 21 14
World Market Share of Major High- and Medium-Tech Industries in Korea, 2001 Share in the world market (%) Rank Automobile 5. 2 5 Machinery 1. 4 15 Semiconductors 5. 7 3 Digital electronics 5. 1 4 Electronic medical equipment 1. 5 13 Bio 1. 4 14 Aerospace 0. 4 15 Environment 1. 2 16 Shipbuilding 32. 4 2 Source: Ministry of Industry and Energy. 2002. Internal Document. 15
Korea’s Exports Growth Rates by Industry (%) 2004 2002 2003 10. 4 22. 4 40. 3 Semiconductors 16. 6 17. 5 46. 7 Automobiles 10. 9 29. 4 42. 0 31. 4 40. 8 Petrochemicals 10. 4 28. 7 29. 0 Machinery 10. 4 27. 4 60. 7 Electronic Home Appliances 11. 0 17. 2 28. 4 9. 7 6. 4 46. 9 Light Industry -1. 9 -0. 3 7. 5 Total Exports 8. 0 19. 3 38. 0 Heavy & Chemical Industry Steel Ships IQ Note: IQ is as of April 20, 2004. Source: Korea International Trade Association. 16
Dominant Industries in Korea Textile Home Electronics Iron & Steel Overseas Construction Home Electronics Semi-conductors Iron & Steel Automobile Shipbuilding Semi-conductors IT Automobile Shipbuilding Textile Petro-chemicals Semi-conductors Mobile Communications Digital Home Electronics E-Commerce Bio Contents Fine parts Food Plywood Wig 1960 1970 1980 1990 2000 17
Contribution of IT to GDP 60 50. 5 (%) 50 32. 8 40 30 12. 1 20 10 4. 5 5. 9 1990 1992 14. 1 0 1994 1996 1999 2000 Source: Bank of Korea (BOK) 18
Korea’s First Rank Products in the World (2002) ($million, ea, %) No. of first rank items World export amount Korea’s first rank export amount 5, 113 77( 1. 5) 5, 585, 747 21, 766( 0. 4) Light industry Textile⁄garment Plastic product 1, 382 528 126 37( 2. 7) 31( 5. 9) 2( 1. 6) 837, 934 128, 417 175, 879 8, 169( 1. 0) 7, 041( 5. 5) 822( 0. 5) Heavy & chemical industry Iron & steal White electronics Ship 2, 901 293 36 17 36( 1. 2) 7( 2. 4) 2( 5. 6) 4(23. 5) 3, 892, 751 201, 580 49, 485 44, 057 13, 264( 0. 3) 1, 263( 0. 6) 1, 888( 3. 8) 6, 239(14. 2) Industry Total No. of export items Note: ( ) is share in the world total. Source: KITA. 2004, Weekly Trade Review 19
Development of High-Tech Industries in Korea £ Dominance of IT-related Industries - The recent annual growth rate of IT-related industries was over 20 % in 1998 -2000, although it decreased to over 6% in 2001 -2002. - The top 10 exports of Korea are dominated by IT-related products. £ Weak Basic Research and Core Technology - Korean high-tech producers are still weak in basic research and marketing, evaluated as about 50% of the level of advanced countries. 20
£ Problems in the NIS in Korea - The Korean innovation policy system in the past and present is characterized by a strong hierarchical structure in decisionmaking. Although the system was relatively successful in mobilizing resources in the past, recently the system has been severely criticized to be inefficient for the new era of knowledgebased economy, where innovation is the most important factor. - Korea is facing a serious challenge: Creating a new governance scheme for more efficient and democratic science, technology and innovation policy. 21
Strategies for Securing National Competitiveness £ Acquisition of world-top-class technologies - Korea should pour more R&D efforts to core technologies and emerging technologies on the basis of strong basic science. £ World class education for HRD - For this and stronger international competitiveness, the Korean education system should be reformed as quickly and broadly as possible. £ Innovation-driven economy and innovation of NIS - Through a balanced and efficient NIS, Korea should realize an innovation-driven economy ahead of China. £ Active opening of the Economy - All these require active opening of the economy to the world. The whole country should be a ‘special economic zone’. 22
3. Restructuring NIS
STI Administration System in Korea Presidential Advisory Council for Science and Technology National Science and Technology Council Prime Minister Korea Research Council of Fundamental Science and Technology Korea Research Council of Industrial S&T Ministry of Planning and Budget Korea Research Council of Public S&T Ministry of Science and Technology 10 Ministries 24
£ Reformation of National Innovation System - The government plans to strengthen the role and authority of the National Science & Technology Council (NSTC) by: Monitoring and coordinating strategies for new growth technology development Ensuring that the results of NSTC’s evaluation and coordination be reflected in budget-allocation Improve the system for planning, management, evaluation, and outcome diffusion of R&D projects 25
Basic Scheme for the New NIS National Goals (Feed back) Science and Technology Development Objectives Planning and Division of Roles Performance Evaluation Comprehensive Adjustment by MOST Outputs Budget Allocation Program and Project Implementation by Ministry and Branch 26
ST Policy Priorities Tasks Policy Objectives Future growth engine creation 1. Selective and focused development of national strategic science and technologies Strengthening bases 2. Promotion of basic science research for creative innovation capacity 3. Rearing ST manpower for knowledge-based society Internationalization and localization 4. Internationalization of ST and establishing Northeast Asia R&D Hub 5. Regional STI for balanced national development Advancement of the innovation system 6. Increasing ST investment and efficiency 7. Promotion of the private sector’s technology development for industrial technology capacity 8. Strengthening infrastructure for higher ST productivity Participation of the people in the ST process 9. Increase the role of ST in response to social demand 10. Dissemination of ST culture among the general public 27
Comparison of R&D Investment in 6 T Areas (2001) (billion won) ST 11, 636 157 2, 902 697 247 2, 372 669 682 477 131 403 ET 219 4, 495 NT 82 BT 6, 058 30, 797 374 3, 477 1, 117 1, 487 760 1, 528 IT 2, 298 1, 247 Korea US Japan Germany 206 UK 28
Human Resource Development £Decreasing number of children students and S&E college - Shortages in high-tech manpower will become more and more serious. - 3 D (difficult, dangerous, dirty) mentality of the youth £Utilization of the youth - Introduction of more effective VET (vocation, education and training) - Close cooperation between schools and industry - Encouraging young entrepreneurs and increasing FDIs - Flexible labor market 29
£From production to research - For the development of IT, BT, NT, CT, ET, ST and the next generation engines of growth, more research institutes with highly qualified researchers are needed. - Inducement of leading foreign R&D centers to Korea is a must. £Education reforms - The most urgent task is to reform the entire education system in Korea for a flexible and pragmatic education. (Private expenditures for education are too excessive. ) - For this, wide and active opening of the education sector is a must. 30
£ Development and provision of creative and qualified researchers - Korea plans to cope actively with future demand for the development of new technologies by establishing master plans for rearing and utilizing 10, 000 researchers in promising high-tech areas. - Korea will encourage university manpower supply system more toward a demand-oriented one by establishing innovative education models for science and engineering colleges. - More attention will be paid to strengthening science education at school curricula, training science laboratory teachers, and securing up-to-date laboratory and teaching materials. 31
4. Directions of National Strategies
Major Current National Strategies of Korea Northeast Asian business hub - Establish a system of Northeast Asian economic cooperation - Build infrastructure for a logistics and business hub Science⁄Technology-Based Society - Expand R&D investment - Encourage technological innovation and nurture new industries Regional innovation and balanced national development - New capital and regional innovation clusters - Develop region-specific strategic industries and reinvigorate regional economy 33
Next generation engine of growth - 10 areas of new high-tech industries FTAs - Korea-Chile FTA - Korea-Japan FTA - Korea-Singapore FTA 2010 Industrial Vision - Aims at realizing G 4 in industry through innovation 34
Problems of the Current National Strategies in Korea Too ambitious - Strategies such as ‘Northeast Asian Business Hub’, and ‘Science⁄Technology-Based Society’ may not be easily implemented although they are in the right direction. Too many - Too many national strategies and agenda to be implemented within the budget constraint, if the strategies are not properly phased and coordinated. Strong unionism - A strong labor union may discourage foreign investment and entrepreneurship, which are vital for the future of Korea. 35
Slow Economic Growth Rate in Korea £ The long-run trend in economic growth in Korea shows a downturn. Growth rate 8. 9% 7. 1% 5. 2% Year 1962 1990 1996 2003 36
£ In order to realize GDP per capita of $20, 000, new growth engines are needed. This requires upgrading the existing industrial structure. GDP (trillion) Textiles Home electronics Iron and steel Home electronics Semi -conductors Iron and Steel Automobile Shipbuilding Semiconductors Telecommunications Automobile Shipbuilding ? 37
Concept of the Selection of Growth Engines Hierarchy of the World industry Criteria Domestic industrial competitiveness Demand projections in the world market Next generation growth engines are the products or industries that upgrade present status in the world market Major base industries Changes in the technology Commercialization Emerging core industries feasibility Effect on employment Enhancing competitiveness Knowledge-based service industry Source: Park, J. K. Mimeograph. 2003. 38
£ Promotion of national R&D projects for new growth technologies - To prompt the early realization of national per capita income of 20, 000 dollars, the government selected 10 new-growth industries in 2003, which will increase international competitiveness and lead job creation for the next 5~10 years. - New growth industries will be promoted through developing some 80 key technologies under the coordination of National Science & Technology Council. 39
The Next-Generation Growth-Engine Technologies Product/Technology (Non-Exhaustive) Digital TV/Broadcasting system, DTV, DMB, set top box, multi-equipment Display LCH, LED, PDP, glass EL, electronic paper, related material Intelligent robot Home service robot, IT-based service robot, micro work robot, metal robot Future automobiles Intelligent automobile, automobiles Next-generation semiconductors Next-generation memory, Son. C, nanoelectronic chips, related material Next-generation mobile communications 4 G terminal equipment/system, telematix Intelligent home network Digital content/software environment-friendly Home server/home gateway, home networking, intelligent information home electronics, Ubiquity computing Digital content provision use distribution system, cultural content, embedded software, Intelligent total logistics system. Next-generation batteries 2 nd batteries, fuel batteries, related material Biomedical products New medicine, bio-internal organs, biochips Source: MOST. 40
High-tech SWOT of Korea’s Industry 41
Targets of Major High and Medium-Tech Industries in Korea ( %) 2001 Share in World Market (%) 2010 Rank Share in World Market (%) Rank Automobile 5. 2 5 10. 0 4 Machinery 1. 4 15 5. 0 7 Semiconductors 5. 7 3 15. 0 3 Digital Electronics 5. 1 4 20. 0 2 Electronic Medical Equipment 1. 5 13 10. 0 5 Bio 1. 4 14 10. 0 7 Aerospace 0. 4 15 1. 0 10 Environment 1. 2 16 2. 1 10 Shipbuilding 32. 4 2 40. 0 1 42
5. Regional Cooperation
Evaluation of Korea’s Potential for a Business Hub - Overall, Korea ranked last after Hong Kong, Shanghai, Singapore, and Tokyo. In general, MNC executives who participated in an AMCHAM survey perceive Korea to be an unattractive place to do business. Overall Survey Result of Seoul by Category Overall Result Very Good Tax Average* Good FX Control Labor Work Permits Bad Very Bad Seoul Shanghai HK English Singapore Tokyo Country Image Microeconomic Environment Very Bad • The averaged value does not include Seoul Source: American Chamber of Commerce in Korea 2002. Bad Good Very Good 44
Korea’s Strategic Alliance by County (Unit : Case) Source: Hong, Y. S. 2002. 45
High-Tech Indicators by Country in Asia Number of Scientists (per 10, 000 person) Number of Experts (per 10, 000 person) R&D/GNI (%) 1990 -2000 1990 -2001 1989 -2000 China Japan Korea Singapore Hong Kong Singapore Philippine Thailand Malaysia Vietnam 545 5, 093 2, 319 4, 140 93 156 74 160 274 187 667 564 335 100 22 74 45 - 1. 00 2. 98 2. 68 1. 88 0. 44 0. 10 0. 40 - 49, 427 99, 398 40, 427 62, 572 3, 716 4, 473 21, 032 15, 286 40, 939 - United States 4, 099 - 2. 69 World - - 2. 38 High-Tech Export Royalty & License Payment ($million) Amount ($million) Share of the Manufactured good (%) Revenue ($million) 2001 20 26 29 60 20 13 70 31 57 - 110 10, 462 688 107 1 9 21 - 1, 938 11, 099 3. 221 461 158 823 751 - 178, 906 32 38, 660 16, 360 - 23 72, 356 73, 148 Source: World Bank, World Development Indicators, 2001, 2002, 2003 46
Basic Concept of Proposed Strategy Domestic internal reforms and new NIS Growing and more competitive Chinese economy Northeast Asian Economic Integration Specialization in selected areas for an advanced innovation economy Exploitation of the geographic advantages and competitiveness Recovering Japanese economy 47
The Structure of the East Asian Intra-regional Economic Cooperation and FTA Phases APEC East Asia Greater ASEAN Malaysia Indonesia Philippine Brunei Northeast Asia N. Korea Russia Japan Korea Thailand Singapore Laos Cambodia Myanmar Notes: Canada Mexico Chile China Hong Kong Macao Taiwan Vietnam US Peru New Zealand Australia Chinese Economic Area = negotiations expected to start in 2004; = negotiations underway; = completed negotiations or agreements coming into effect. 48
Framework for Tri-lateral Cooperation £Korea - Can benefit from market (China, Japan), capital (Japan) and technology (Japan) - Interested in both Japan and China £Japan - Can benefit from market (China), business models (Korea) and technological collaboration (Korea) - More interested in China for the market, but also interested in Korea for strategic alliance to gain leverage £China - Can benefit from market, technology and capital (Japan, Korea) - More interested in western countries. However, cooperation with Korea is important for the development of the Northeast corner of China. 49
Directions and Areas for Cooperation Directions - The Digital Economy, the Knowledge-based Economy and the New Economy are all characterizing the 21 Century world economy as one based on high-tech. - The technology gap between the three countries has been narrowed rapidly and it will continue. The opportunities for technological and industrial cooperation will increase. - One country cannot do everything in high-tech development. Strategic technological alliances including joint R&D should be strengthened. 50
What and How Can We Cooperate? £ Clustering and networking in the Northeast Asian region £ Collaborative R&D £ Strategic alliances combining complementary assets and resources (capital, know-how, manpower, technology, facilities, markets) £ We can cooperate in terms of technology, manpower, capital, management, markets, standards, etc. £ e-Trade and FTA £ ‘Partnership for 21 C’ - Not political verbalism or symbolic gesture, but a pragmatic joint strategy for Asia on the basis of mutual interests and recognition is needed. £ Trust-building 51
6. Concluding Remarks
£ The Korean economy is at a crossroads: To 20, 000 dollars per capita income or 5, 000 dollars? - At present, Korea is facing several serious domestic and international economic challenges. In fact, the Korean economy is at a crossroads. If these challenges are mishandled, the economy may lose its dynamism and growth engine, which, in turn, would result in a long-term recession similar to Japan in the 1990 s. - Eventually the economy will return to the right track. The question is when. There is a strong possibility that Koreans will pay high costs for the misjudgment of the situation, which may delay real dynamism of the economy. 53
£ Domestic reforms - Korea’s future ability to utilize the opportunities of Chinese economy depends on the results of several economic, social, and political reforms underway. -The most substantial reforms should be implemented in the area of education and R&D to encourage innovation. The strengthening and redesigning of the science and technology policy governance with increasing and enhancing power and role of the Ministry of Science and Technology is a much desirable solution for the ‘selection and concentration’ for the next generation engine of growth. 54
References Korea Industrial Technology Association. 2003. Major Indicators of Industrial Technology 2002/2003. Seoul. (In Korean) Hong, Y. S. 2002. Strategic Alliances of IT Industries in Korea, China and Japan : With an Emphasis on Knowledge Networking. KIEP. (In Korean) Hong, Y. S. et al. 2003. Development of the High-Tech Industry in Chin and Korea’s Response. KIEP. (In Korean) Hong, Y. S. 2003. The Transition Toward Innovation-driven Economies in East Asia and Korea’s Innovation Strategy. KIEP. (In Korean) MOSTa. 2003. Science and Technology Framework Plan. (In Korean) MOSTb. 2003. Science and Technology in Korea: Past, Present and Future. Republic of Korea. 2002. Human Resources Development Strategies for Korea: Human Resources, Knowledge, and New Take-off. Seoul. 55
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