IPE-K <Lecture Note 3> 2013.03.22
*Some parts of this note are borrowed from references for teaching purpose only.
Semester: Spring 2013
Time: Friday 9:00~12:00 am
Class Room: No. 322
Professor: Yoo Soo Hong
Office Hour: By appointment
Mobile: 010-4001-8060
E-mail: yshong123@gmail.com
Home P.: //yoosoohong.weebly.com
1

 IT Industry
Strong Engines for nation’s development
- Broadband Internet
- Digital Multimedia Broadcasting
- Wireless Broadband Internet
- HD/LCD TV
- IT Application to Automobile, Shipbuilding & Machinery
 Shipbuilding Industry
World’s 1 st Shipbuilding country, Market Share 40 %, Drill ship
 Korea’s World Class Enterprises
• SAMSUNG
• HYUNDAI
• LG
• SK
• POSCO
2

(% in the world)
Memory
(45.0%)
CP
(28.8%)
TFTLCD
(41.3%)
DTV
(13%)
GDP (14%) and Export (30%)
MP3
(20%)


High accelerated growth
- Exports
- Rapid industrialization
- Technological achievement
- Education boom
- Rapid urbanization
- Exponential rise in living standards
 ‘Miracle’
Rapid development of post war Korea into the 13th largest economy of the world
- A role model for many developing countries

14
12
Thousands of constant
1995 US dollars
Rep. of Korea
10
8
Difference attributed to knowledge
2
0
6
4
Ghana
1960 1965 1970 1975 1980 1985 1990 1995 2000
Difference due to physical and human capital
5

S&T & R&D
Stages
Development
Stages
Creation
Improvement
Assimilation
Acquisition
Imitation
Developing
Country internalization
Newly-Industrializing
Country generating
Advanced
Country
6

Government-Driven
Economic System (P-I)
Government and
Market Compromised
System (P-II)
Government
Enterprises
Government
Finance
Market Field
Enterprises Finance
Market Field
7

 Export-driven economy
- 39.4% to the GDP from exports
 Leading export sectors
- Semiconductors
OLED, LCD, plasma screens and CRTs.
Biggest manufacturing conglomerates of semiconductors in the world.
- Wireless telecom equipment
40 million subscribers
20 million fixed lines one of the fastest broadband networks
8

- Motor vehicles
Revenues of $25.4 billion
CAGR of 13.7% (2003-2007)
- Ships
Produces more vessels than the entire world’s production put together
The biggest shipbuilding yard in the world, a new vessel every four days
- Computers
- Steel
- Petrochemicals

Agri-
Year \
Industries culture/
Fishery
1960 36.8
Mining
2.1
Manufacturing
Electrics/
Gas/
Water
Supply
Construction
Service
Structure of
Manufacturing
Industry
Light
Industry
Heavy
Industry
13.8
4.1
43.2
76.6
23.4
1970
1980
29.2
16.2
1.8
2.0
17.8
24.4
1.4
2.2
5.1
8.0
44.7
47.3
58.4
42.5
41.6
57.5
1990
2000
8.9
4.9
0.8
0.4
27.3
29.4
2.1
2.6
11.3
8.4
49.5
54.4
30.7
22.4
69.3
77.6
2007 3.0
0.4
27.9
2.3
8.9
57.6
16.9
83.1
* Note : 1) Data before 1950 are based on the criteria of 1975, and data after 1970 are based on the 2000
& total amount of value added.
2) Data before 1960 include construction industry ※ Source : The Bank of Korea
10

Source: Bank of Korea. National Accounts and Statistical Yearbook

1
2
3
4
5 st nd rd th th
Tota l
12
1970
Textiles
(40.8%)
Plywood
(11.0%)
Wig
(10.8%)
Iron Ore
(5.9%)
Electronics
(3.5%)
1980
Textiles
(28.8%)
Electronics
(11.4%)
1990
Clothing
(11.7%)
1995
Semiconductor
(14.1%)
Semiconductors
(7.0%)
Automobile
(6.7%)
Iron &
Steel
(9.0%)
Footwear
(6.6%)
Ship
(4.5%)
Footwear
(5.2%)
Ship
(3.5%)
Media
Equipment
(5.6%)
Ship
(4.4%)
Artificial
Fiber
(4.3%)
Media
Equipment
(3,9%)
2000
Semiconductor
(15.1%)
Computer
(8.5%)
Automobile
(7.7%)
Petroleum
Products
(5.3%)
Ship
(4,9%)
2005
Semiconductor
(10.5%)
Automobile
(10.4%)
Mobile
Phone
(9.7%)
Ship
(6.2%)
2009
Ship
(12.4%)
Semiconductor
(8.5%)
Mobile
Phone
(8.5%)
Display
(7.0%)
Petroleum
Products
(5.4%)
Automobile
(7.0%)
72.0% 57.9% 35.2% 33.6% 41.4% 42.2% 43.5%

1960s 1970s 1980s 1990s 2000s
Industry for
Promotion
Light
Industry
Heavy and
Chemical
Industry
Technologyintensive
Industry
New Industry
Including
ICT
Knowledge-
Intensive
Industry
Factors of
Competitiveness
Simple
Labor
Skilled
Labor
Capital Technology Innovation
※ Source : Hwang, Yongsoo (2007), “Role and Performance of S&T Policy to Cope with Transitional
Needs of
Economic Development”, Symposium for the Forty Anniversary of S&T Administration in Korea, 2007.
10. 29,
13
MOST & STPEI, Seoul

 How Korea acquired technology for industrialization
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
14

 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
 FDI and FL played relatively less important role in technology transfer in the process of industrialization of Korea. Korea relied on its HR for learning from foreign technologies transferred through informal channels.
15

 How Korea built up an indigenous R&D system
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.
16

1960s 1970s 1980s 1990s 2000s 2010s
Competitive
Development
Stage
Source of
Competition
Factor Driven Stage
Cheap labor
Investment Driven Stage
Manufacturing capability
Innovation Driven Stage
New Growth Engine
Driven Stage
Innovative capability
Convergence capability
Major direction of
Industrial
Policy
Expand export oriented light industries
Expand heavy and chemical industries
Expand technology
Intensive industries
Promote hightechnology innovation
Technology
Commercialization
Green Growth
&
New Growth
Engines
17

1960s 1970s 1980s 1990s 2000s 2010s
Scientific
Institution
Building
S&T
Role of
Government
• Establishment of ministry of
S&T
• S&T promotion law
• Human resource development
Scientific
Infrastructure
Setting
• Establishment of government research institutes
• R&D promotion law
• Highly qualified personnel development
R&D and
Private
Research
Lab
Promotion
• National R&D funds
• Promotion of the establishment of private research labs
• Promotion of industrial R&D
Leading
Strategic
Area
R&D and
Investment
Promotion
Green
Technology
Promotion
• Strategic program
(highly advanced national project)
• Enhancing university research capability
• Linkages universityindustry-government research institutes
•
• Strategic program for tech. Business
(R&BD, TBI, NTB)
• Strategic increase of R&D investment in GT
Globalization of technology
• Promoting GT transfer and commercialization
• Pursuit newly launched technology business and investment
• Strengthening incentive schemes for inducing private investment in GT
Innovative
Capability of
Private secret
18

1960s
1970s
1980s
1990s
2000s
• Establishment of KIST (1966), MOST (1967)
• S&T Promotion Act (1967)
• Establishment of GRIs in the field of chemical & heavy industries from mid-1970s
• Construction of Daeduk Science Town (Started in 1974)
• Launching of the national R&D program (1982)
• Promoting private firm’s research institutes by reforming financial & tax incentives to stimulate R&D investment
• 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
• Introduction of National Technology Road Map (NTRM)
- To suggest TRMs for key technologies to secure products/functions.
• Introduction of overall coordination system
- Office of S&T Innovation in MOST was created in Oct. 2004
19

20
Labor
Capital
TFP
R&D
Stock
Real Growth
1971-1989
Growth by (%)
Share
(%)
2.22
29.1
3.24
42.5
2.16
28.4
1.77
7.62
23.3
100
1990-2004
Growth by (%)
Share
(%)
1.17
20.4
2.58
45.0
1.98
34.6
1.74
5.73
30.4
100
1971-2004
Growth by (%)
Share
(%)
1.75
25.9
2.95
43.4
2.08
30.7
2.07
6.79
30.6
100

100%
80%
86.3%
77.2%
60%
41.9%
40%
20% 13.1%
2.9%
8.4%
12.2%
4.4%
17.7%
5.1%
0%
Technology Design Brand Image
Multiple choice
Labor production costs
Single Choice
Distribution and financial costs
Source: Korea Exim Bank
2.0% 2.0%
No ans.
21

22

100
(%)
Business Sector
76.9
71.1
70.3
50
60.4
39.6
64.6
35.4
28.9
29.7
Public Sector
23.1
0
1975 1980 1985 1990 1995 2000 2005
Note: The public sector includes CGRIs, universities, and non-profit research institutes.
Source: KISTEP, DB (2007)
23

Ratio of R&D to GDP
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
%
R&D Expenditure by Organization
R&D Expenditure by Source (2006)
%
Researchers by Degree by Organization
Person
24

25

26

 Outward-looking development strategy  Pressure for R&D investment
- Government policy toward FDI and TT  Focus on indigenous R&D
Government-led industrial development
- Industry-targeting  Inter-industry R&D imbalance
- Favoring large enterprises

R&D system biased for large firms/Financial capability to invest in R&D
- S&T for industrialization  R&D system biased toward technology development
- Rich pool of well educate HRST  High absorptive capacity
- Government-led development of S&T infrastructure  Relative importance of GRIs
27

 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
28

29

30

 Large firms dominating export structure
Although the number of SMEs and MSEs is 99.9% of the total, their export of share is only 39.4%.
 Desirable growth of SMEs
SME → MSE → Global Hidden Champion
Number
High Dependency on Large Firms
99.55%
0.13%
0.32%
Large ent.
Mid ent.
Small ent.
30.50%
60.59%
8.91%
Source: K-Biz. Small Biz Economic Institute. KITA. 2007
Exports

Total Exports
(Unit: Million US dollars, %)
2002 2003 2004 2007
162,471
(100.0)
193,817
(100.0)
184,883
(100.0)
371,489
(100.0)
SMEs
Large Enterprises
68,309
(42.0)
94,053
(57.9)
81,699
(42.2)
112,015
(57.7)
72,208
(39.1)
112,460
(60.8)
113,676
(30.6)
257,813
(69.4)
Other
(Public sector)
110
(0.1)
103
(0.1)
Note: The numbers in the parenthesis are the shares in total exports
Source: The Export-Import Bank of Korea
216
(0.1)
(0.0)
32
32

 Korean and Japanese companies in crises
- Korean companies experienced growth in business and profits in 2009 while
Japanese companies suffered sales declines and deteriorating profits.
- Japanese companies in the past served as benchmarks for Korean rivals but in 2009 the situations have reserved.
 From local to global after one decade
- The recent successes of Korean companies can be partially attributed to the painful lessons learned during the 1997 Asian currency crisis . Having witnessed nearly half of the country’s top fifty companies collapse, the remaining companies have since developed a keen sense of how to handle crises .
- Korean manufacturers maintained rapid growth averaging 15 percent in the ten years leading up to the 1997 crisis.
- This rapid growth was possible due to large investments in Korea’s major industries of steel, automobiles, and electronics.
- The Asian currency crisis fundamentally changed the management paradigm in Korea’s corporate community.
33

- Companies shifted focus to profitable growth and management efficiency and adopted a management mode that enabled continuous corporate restructuring.
- As a result, the restructuring led to a marked improvement of internal core competencies, while at the same time the rate of company growth slowed significantly.
34

 Current Market Leader
- The combined market share of Korean electronic makers Samsung and LG surpassed 50% in USA, the largest TV market in the world, for the first time in 2011.
- In the flat panel TV market, Samsung came in first with 37% market share in the third quarter. LG came in second with 13%, followed by Panasonic of
9%, Sony of 9%, and Toshiba of 7%.
- Korean electronic makers show stronger performance in the high-end TV market in USA, with Samsung selling the most expensive TV.
On the other hand, Sony’s market share decreased from 28% in the first quarter to 15% in the second quarter, and 12% in the third quarter.
35

70%
60%
50%
40%
30%
20%
10%
0%
Samsung
LG
Sony sharp
Vizio
Source: MD

 Increasing Market Share of Korean Makers
In the first quarter of 2011, combined market share of Samsung and LG was
57% (Samsung 51%, LG 6%)
In the third quarter, it increased to 71% with LG increasing its share by 9%
(Samsung 56%, LG 15%)
Korean makers are also taking the lead in the European market. Samsung ranked number one in the European display market in the second quarter with 32%, followed by LG in the second place with 19% market share.
37

38

39

 Competitiveness of Korea’s top 100
- SERI CI consists of two axes: internal resources (physical structure) and differentiation (strengths). Derived from the three factors of traditional corporate management (human resources, materials, and financial capital), internal resources are defined as human capital, investment capabilities, and soundness of capital structure.
- Differentiation consists of operational excellence, product leadership, and customer intimacy. To measure the Key Success Factor (KSF), SERI elected corporate earnings, universality of data, and measurability as components of the
Key Performance Indicator (KPI).
Even if considered on the basis of internal resources alone, Korean companies seemed well positioned to take on almost any task.
Korea’s corporate ecosystem is led by a handful of globalized companies that have improved their competitiveness significantly over the years.
40

 Future Direction
- On top of competitiveness, two additional factors will play a positive role in the advancement of Korea’s global companies. The first factor is that the center of economic activity is shifting from the advanced economies to China and other emerging economies, where Korean companies are performing well.
- Second, Korean companies have traditionally been active in responding to change, via innovative investment and speedy action, meaning that they have plenty dynamic capabilities which is closely related to corporate growth during transition phases.
- If Korean companies could strengthen their networking capabilities and brand power, they could emerge in an even more dominant position on the global stage.
41

– Established in 1969 to manufacture black and white TV sets
– Purchased a Korea Semiconductor Business in 1974
– In 1980 dedicated most of its resources to semiconductor business and built its first manufacturing facility.
– By early 1990’s, was amongst the industry’s top contenders
– Brand value rank grew from 43 rd in the world ($ 5.2 billion) in 2000 to 21 st in the world ( $12.6 billion) in 2004 and 20 th in 2006 (16.1 billion)
– Ahead of many brands such as Pepsi, Google, and Siemens
– Total net revenue in 2004 was $78.5 billion, and $78.7 billion in 2006
42

 Spans 58 countries
 Samsung Electronics has 5 business divisions :
– Semiconductor
– Digital Media
– Telecommunications
– LCD
– Digital Appliances
43

 2nd Largest chipmaker worldwide (2006)
 Market leader in DRAM 1992 - 2007
– Total DRAM Volume 896.4M units (2003)
– Over 1,200 DRAM products
• “Frontier” to legacy products
• Specialty and customized products
– Versus competitors:
• Average price premium: 34%
• Average operating margin difference: +53%
44

 Cost Advantages
– Lowest raw materials cost (volume)
– Lowest depreciation
– Labor and SG&A (Selling, General and Administrative Expenses) not high
– Shared core designs
– Lower cost fabs (12%)
– Flexible production lines
– Higher yields (because of process quality)
 Highest Price
– Highest reliability in industry: >$1 premium
45

Lower Cost Differentiation
Broad
Range of
Buyers
Narrow
Buyer
Segment or Niche
Overall Low-Cost
Provider
Strategy
(Commodity DRAM)
Broad
Differentiation
Strategy
(Cutting Edge DRAM)
Best-Cost Provider
Strategy
(Samsung’s Strategy)
Focused
Low-Cost
Strategy
(Low cost flash memory)
Focused
Differentiation
Strategy
(Rambus DRAM)
46

Company
1 Samsung Electronics
2 LG Electronics
3 Hyundai Motors
4 GM Daewoo Auto
5 Hynix Semiconductor
6 LG Phyllips
7 POSCO
8 Samsung Electrical
9 Samsung SDI
10 LG Chemicals
Sum
Total Business Sector
Bil.Won
313
282
234
237
219
4,584
1,253
1,002
646
218
8,988
18,564
%
1.7
1.5
1.3
1.3
1.2
24.7
6.7
5.4
3.5
1.2
48.4
100.0
47

(Yen Billion)
Source: Compiled from Japanese Newspapers

(%)
Korea
UK
Germany
Japan
US
Mexico
1-9
88.6
71.7
62.1
50.9
48.3
95.9
10-49
8.3
21.0
27.3
39.2
33.0
3.1
Note: Mexico is 2004.
Source: OECD. Small and Medium Enterprise Outlook. 2005.
50-249
2.9
5.9
8.4
8.5
7.1
0.7
250-
0.2
1.4
2.2
1.4
11.7
0.31
49

50
- The weight (share) of SMEs has been steadily increasing in the 1980s, which reflects their positive role in economic development.
- SMEs contribute to employment creation and forming the basis of the economy. The terms of number of enterprises, their share is 99.9% and the share of employment is 87.5%.
SMEs and Employment
Thousand enterprises Million persons
No. of enterprises
No. of employees

51
- SMEs share of shipment (production) is 49.6%.
- Share of value-added is 51.2%
- Share of asset is 47.6%.
Importance of SMEs in Manufacturing
Number Employment
Value-added

Source: Korea Industrial Technology Association

 Steady Increase in R&D
- Since the 1997-8 financial crisis, the number of technology-based SMEs has been substantially increased.
- Investment in R&D has been also steadily increasing.
Trends in Technology based R&D
SMEs
No. of Enterprise %
R&D Investment of SMEs
Share of SME total
R&D investment
R&D intensity
53

 Technology development is the backbone of innovation-driven SMEs , which is emerging as a test bed for new technologies and new products. To take full advantage of this fact, SMBA provides a variety of technology innovation support programs.
Start-up technology development
SME technology transfer
SME technology innovation
Support for joint utilization of research equipment
Support for production-environment innovation technology
Support for industry-academia offices
Support for joint development industry-academia-research institute
Cooperative-type technology development
Support for establishment of research institutes attached to SMEs
54

55

GOVERNMENT
POLICY
Investment Fund
Technology
Development
Incentives : tax reduction/exemption for venture firms, angels and venture capitals
Credit security supports toward pre-start-ups
Fund for start-ups and encouragement of small and medium sized firms
Support for technology development plans
Laboratories to be registered as factories, and urban private building for venture complex
Permission for professors and researchers to work for venture firms
Venture Capital
Policy
Deregulation for venture capital investment operation
Tax reduction for venture capitals
Abolition of investment limitation on foreigner’s investment funds
KOSDAQ
Policy
Government announced ‘Policies to Activate the KOSDAQ Market’
Mitigated IPO conditions for venture firms
Tax support for KOSDAQ listed companies, etc.
Support for
Start-ups
Support for the cost of facilities and operation of incubating centers
Universities and research institutes designated as incubating centers

Category
Cases Total
Investment
(A) Amount
Cases SME
Investment
(B) Amount
SME Ratio
(B/A)
Cases
Amount
Source: The Bank of Korea
2004
13,157
6,670,813
7,157
2,053,169
54.4
30.8
2005
16,346
(Unit: No. of Cases, US $ 1,000, %)
2006 2007 2008
19,000 21,855 19,150
7,052,607 11,566,115 21,799,017 21,855,699
7,909 9,148 11,192 10,408
2,307,506
48.4
32.7
3,382,995
48.1
29.2
5,881,708
51.2
27.0
5,707,433
54.3
26.1
57

 On-site Facilitation Programs
Branch Programs : Support marketing and export-related activities through
KOTRA employees in local areas (operated by KOTRA)
Korea Business Development Center Programs (KBDC) : Relocate 10-20 export SMEs to each respective KBDC and support local marketing and export activities (by the Small Business Corporation)
I-Park Program : Similar to KBDC, but subject firms are limited to IT companies, and overseas bases are located in only six areas, including
Beijing, Tokyo, Shanghai, Silicon Valley, Boston, and London (operated by the Korea Software Industry Promotion Agency)
58

 The number of hidden champions (HCs) in Korea is relatively small.
 Although they are many potential hidden champions, the environment is not conducive to the growth of HCs.
- Enterprise having 300 employees and more are regarded as large enterprises and subject to regulations, rather than supports by the government.
 Recently Korea realized the need to support HCs.
For this purpose, two concepts of ‘high-growth enterprise’ and ‘mid-sized enterprise’(MSE) are emerged.
 Year 2010 is announced as the year of mid-sized enterprises for governments’ launching of various policies to promote the growth of these firms.
59

 Contributions
Enhanced SME policies made great contributions to economic growth by facilitating competition and innovation for SMEs and by strengthening production bases.
Especially, policies helped SMEs’ export performance and transform the economy towards an innovation-driven economy after the Asian Crisis.
As the role of the government has been reduced, a market-friendly policy paradigm has been needed.
 Inefficient Policies
- Although it cannot be denied that SME policies of Korea supported the growth of SMEs significantly, the policies have been criticized for being inefficient and ineffective in many cases.
- Government programs are too many and too much with complicated procedures in many cases.
60

 Strengths
- Consensus on the importance of S&T: Dynamism of Korea business enterprises plus strong commitment of the government to S&T-based national development
- Economic environments conductive 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
61

 Weaknesses
- Disadvantage of being small
Imbalances in innovation system

Basic scientific research vs. technological development


Large firms vs. SMSs
Regional concentration
- Excessive reliance on private investment: vulnerable to changes in markets
Weak industry-science relationship
- Insufficient internationalization: insufficient R&D-based FDI, international coinvention, etc.
62

 Adversary or recession is the period to drive
- It is the best time to leap forward when the rival is retreating.
 Discard egalitarianism (=everything is equally important)
- Concentrate on growing or emerging areas without worrying barriers or difficulties
 Commodities rather than products
- Instead of enforcing selling technologically superior products, develop commodities wanted by buyers
 Do not depend on the domestic market
- Always conscious of the world market
 Endlessly learning and practice
- Diligently learn superior techniques to re-create own capability
63

 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
64

Kim, Jong-Nyun. Korean Firms Come Out Winners from Global Crisis .
SERI. 2010.
Bendt, Flora and Sanne, Joakim . 2010. “The Korean Business Systems”.
School of Business, University of Gothenburg.
Hong, Y. S. 2011. “ Innovation Strategy and Management of the Korean
Electronics Industry: Focusing on Samsung”. (PPT). IGIE.
Kim, Suk Joon . “Korean Industrial Policy and the Role of Science and
Technology”. FEUISE Annual Conference 2010. (PPT).
65