How to Succeed Without Really Flying: A Comparative Analysis of the
Development of the Aerospace Industries of Japan and South Korea
Gamal Ibrahim, David Smith and Michael Zhang
Nottingham Trent University, Nottingham, UK
Abstract
This paper reviews the development of the aerospace industry in Asia. The growth of the
aerospace sector across the region is first considered, together with the nature and types
of industrial policy used to foster aerospace capabilities. A comparative analysis is used
to contrast the different forms of industrial policy that have been employed. This analysis
is based on case studies of the aerospace industries of Japan and South Korea. The
development of the aerospace industry in each country is traced together with the forms
of policy used. It is found that while both countries have followed broadly similar three
stage strategies, they have been implemented very differently. This has led to different
patterns of development particularly in relation to the relative importance of the military
and civil sectors. Overall the study concludes that South Korea has made markedly less
progress than Japan in developing its aerospace industry. The reasons for this in terms of
both institutional and economic factors are examined and assessed.
Theoretical Context
The ideological shift towards neo-liberalism has gained significant momentum following
the slowing down of the Japanese economy in the late 1990s and the 1997 East Asian
financial crisis, and many commentators have come to advice the discarding of
developmental role of the state in industrial transformation and equitable growth (Noland,
2007, Mok and Yep 2008). Industrial policy is seen as a problem not a solution. Close
state-business relations are treated as a sign of crony capitalism, which is underpinned by
inefficient state intervention leading to structural deficiencies and corrupt regimes (Luo,
2002; Kang, 2002).
1
Against this background, the emphasis of state-business relations falls largely on
promoting good governance based on clear property rights, checks and balances to
control for rent seeking and corruption, and other measures which serve to reduce
transaction costs. In this paper, we provide a different perspective, one which rejects the
forced separation between states and markets. We build on the crucial insights by Evans
(1995) and Weiss (1995, 1998) into state-business connectedness to understand the
dynamic relation between the two social institutions. As Weiss (1998, p 64) points out,
‘state connectedness without insulation is likely to breed rent-seeking and distribution
coalitions that can smother industrial vitality. By contrast, insulation without
connectedness may widen information gaps that encourage policy failure. But states
which combine both insulation and connectedness…. are equipped with greater
institutional assets for minimizing these changes and for achieving policy successes’.
There is a clear developmental role for the connected state that goes beyond a market
failure approach advocated by the neo-liberal approach, which reduces the role of the
state to merely establishing market institutions and adopting macro-economic
stabilisation policies. Rather than simply appealing to private property rights, the policy
recommendations advocated in this paper recognise that markets, particularly those
involving advanced technology based products, involve more than the exchange of
existing resources. There is a prime emphasis on creating incentives for production and
investment. This links the study of economic organisations to the institutions
surrounding them, such as government agencies, financial institutions and universities
supporting R&D in industry. Underlying the effective role of institutions in development
across different national states lies conscious decision making by the state (Nelson,
1998). This surpasses the abstract notion of the market as solely a form of exchange to
concentrate on the complex set of national institutions that sustain or constrain
development and technical change (Abramovitz, 1952). As Weiss (1995, p 591) notes,
‘many recent studies fail to pay sufficient attention to the possible importance of cooperation in a theory of state capacity…. The danger is that in trying to bring capital back
in, the state is being marginalized or diminished, in a negative-sum manner’.
2
Competing in international markets needs trained, qualified labour as well as producing
products of high standards. Indigenous technological capabilities seem vital for
industrialisation, a process which is carried out through learning by doing (the development
of competitive capabilities may be costly and prolonged, depending on the complexity and
scale of technology). It involves interactions with other firms and institutions, and apart
from physical inputs, it calls for various new skills from the education system (Nelson,
1993). An active policy requires a state capable of fostering technological capability,
picking up the promising industries and breaking them into the market. This fits in with
Kaldor’s model (1981) of endogenous growth where the accumulation in human capital
and technology creates externalities within the economic system through increasing returns
to scale and the social or industry wide returns of R&D. Kaldor recognised the
complementarities that exist in the real world between the demand for products, the
demand for factors of production and activities in general, in contrast to equilibrium theory
in which goods and factors of production are competitive and price is the prime signal for
allocation of resources (Kaldor, 1972). Producer behaviour seems to be affected mainly by
quantity signals rather than mere price signals.
Building on the above, one could see the fallacy of the forced separation between the
state and the market. As Landesmann and Abel (1995, p.137) argue, ‘the vital question is
not whether the state should or should not intervene but rather, what are the types of state
intervention which can increase the response rate of agents (firms, households, workers)
to a newly market environment and equip them with ‘capabilities’ allowing them to
respond more flexibly to market signals’.
Latecomers and the Catch-up Process in the Aerospace Industry
Across Asia, several nations have for a long time harboured powerful ambitions to be
major players in the global aerospace industry. A senior Ministry of International Trade
and Industry (MITI) official in Japan summarised these ambitions very effectively when
3
he noted, ‘a nation without an aircraft industry will never pass as an industrial nation of
the first rank’ (Samuels, 1994). And yet despite these ambitions the aerospace industry
globally has been dominated by the US throughout the period since World War 2 (Smith,
2001). As table 1 shows even in the mid-1990s some 60% of global aerospace sales
(excluding Russia) were accounted for by the US. This position reflects both the military
and technological power of the US and in the commercial sector the success of the US in
the development of commercial jet airliners (Heppenheimer, 1995).
Table 1
Aerospace Industry Sales 1975-97
US
UK
France
Germany
Japan
Canada
Italy
1975
($billion)
29.7
3.6
3.6
1.6
1.1
0.7
0.7
1980
($billion)
54.7
9.3
8.3
4.9
1.8
2.0
1.8
1985
($billion)
96.6
8.0
8.1
5.1
3.5
2.1
2.4
1990
($billion)
134.4
19.1
18.5
15.0
7.6
4.9
6.3
1997
($billion)
133.7
24.7
18.8
11.2
11.5
5.4
5.2
Source: Kimura (2006)
Other nations have in recent years begun to challenge the US in some sectors of the
industry with the result that US domination in aerospace has begun to be eroded. The
success of the Airbus consortium in the civil aviation sector has helped the main
European players, namely the UK, France and Germany, increase their share of the global
aerospace industry to a little over a quarter. However the Europeans were building on a
position of strength since they already had established aerospace industries and could
even match the US in some fields. Asian nations in contrast were latecomers seeking first
to establish an aerospace industry before they could contemplate trying to catch-up.
Against this background, Japan’s achievement of having built a significant presence in
the aerospace industry (table 1) is all the more remarkable.
The extent of the Asian challenge is detailed through case studies of the aerospace
industries of Japan and South Korea. The development of the aerospace industry in each
4
of these latecomer economies is traced over the period since World War 2. In each case
the phases of the catch-up process are outlined together with the forms of policy designed
to foster catch-up. It is notable that the catch-up process has been similar in both
countries in so far as each has loosely followed what Goldstein (2002) describes as a
three phase process involving:

Co-production usually involving. license production to gain familiarisation with
aerospace requirements

Sub-contracting to develop a robust subcontractor capability

Systems integration and assembly
Significantly while both countries have loosely followed this process, the policies
designed to implement it have been very different.
The paper examines the development of the aerospace industries in Japan and Korea and
sets out the institutional mechanisms through which firms evolve. This requires an
approach which recognises the role of historicity and path dependence. This does not
mean a single unique route needs to be followed. It simply means that a limited set of
paths can be followed in the future and that these depend fundamentally on where the
existing path has already reached (Ibrahim and Galt, 2002). Further down whichever
route is followed other changes can be taken on board. But such changes require the
prerequisites to be in place and to be accepted. This notion of path-dependency contrasts
sharply with the neo-classical economics notion of historical efficiency (Hodgson, 1993),
as free markets may lock-in a development path that does not settle to equilibrium. The
Anglo-Saxon model based on inter-rivalry firms down plays the critical aspects of
organisational learning and adaptability, networks and other determinants of product
quality and industrial excellence (Amin, 1996). The acquisition of knowledge of
manufacturing technology is often a lengthy process, which warrants government
encouragement. Access to technology and a healthy surrounding national system of
innovation is essential for corporate competitiveness (Nelson and Rosenberg, 1993,
UNIDO, 2002).
5
Japan’s Aerospace Industry
Japan was banned from engaging in aerospace production from 1945 to 1952. This 7 year
period was critical as it was a time of massive technological change in aerospace as
piston-engined aircraft gave way to jets. Despite the ensuing hiatus, three of the largest
pre-war aerospace firms, Mitsubishi Heavy Industries (MHI), Kawasaki Heavy Industries
(KHI) and Fuji Heavy Industries (FHI) re-emerged in the mid-1950s as aerospace
manufacturers, albeit on a very much reduced scale. At the same time in order to
facilitate the re-building of the industry, aircraft production was placed under the strong
control of MITI. Re-entry into the aerospace industry ironically came with the help of the
US government which actively encouraged Japanese manufacturers to undertake repair
and maintenance contracts for the US air force stationed in Japan in the aftermath of the
Korean War (Mowery and Rosenberg, 1985). This helped aircraft manufacturers advance
their engineering skills rapidly but at the same time highlighted just how far they had
fallen behind (Kimura, 2006).
In order to advance their capabilities all three Japanese manufacturers quickly moved to
undertake licenced production of US military aircraft. MHI undertook licenced
production of the North American F-86 fighter and KHI the Lockheed T-33 trainer. Both
aircraft allowed the Japanese industry to gain badly need expertise in the area of jetpowered aircraft (McGuire, 2007). In the case of the North American F-86 fighter the
indigenous element eventually reached 60%.
Although licenced production helped Japanese manufacturers build basic manufacturing
capabilities and facilities for the production of jet aircraft, by the late 1950s MITI was
concerned at Japan’s passive dependence on licenced production of military aircraft
(Kimura, 2006). MITI began to promote the idea of an indigenous civil airliner project.
This duly emerged as the YS-11 national project, designed to provide a replacement for
the ageing Douglas DC3 airliner still widely used in Japan at the time. The YS-11 began
in the mid-1960s and a feature of the project was very close cooperation between the
6
main Japanese manufacturers, MHI, KHI and FHI in a consortium (known as NAMCO)
under the direction of MITI.
Although more than 180 YS-11s had been built by the time the project finished in 1974,
it was not a success in purely commercial terms. However in technological terms it
helped greatly in advancing the Japanese aircraft industry’s design, development and
manufacturing skills and capabilities. From the mid-1970s the major aircraft
manufacturers, MHI, KHI and FHI, began undertaking small scale subcontracting work
on programmes such as Boeing’s B747SP. As ‘piece part subcontractors’ their work was
largely confined to component manufacture. Another very significant feature of the
project was that it helped to create a dense industrial network involving close
collaboration between Japan’s leading aerospace manufacturers. According to Kimura
(2006: p132) this industrial network based on trust and collaboration, ‘became an
important organising basis on which Japanese aircraft manufacturers were able to
upgrade their status’.
The YS-11 was followed by a proposal for a more advanced jet airliner, the YX in the
early 1970s. However the lack of commercial success for the YS-11 led MITI to seek less
risky routes to market. Under MITI’s guidance the YX was quietly dropped in favour of a
different form of collaborative project this time involving the Japanese manufacturers
working with the US aerospace giant, Boeing, on its proposed new wide-bodied twin jet,
the B767.. Launched in 1978, the B767 involved the Japanese partners taking a 15%
share in the programme which MITI directed as a consortium called the Civil Transport
Development Corporation (CTDC). The manufacturers’ role involved much more than
being piece part subcontractors. They were involved not just in manufacturing, but design
and development as well. The aircraft was a big commercial success, with almost 900
aircraft built, and the Japanese manufacturers gained production experience of a cutting
edge modern airliner.
By the mid-1980s, MITI began to look for the next development project and the YXX, a
100-150 seat airliner (Kimura, 2006) was proposed. However Japan abandoned
7
indigenous development at an early stage. Keen to for Japan to engage in upstream
design and downstream marketing activities, negotiations began with Boeing with a view
to full scale collaboration. This came to nothing when Boeing decided to develop a
derivative of its existing B737 airliner instead. However in 1988 Boeing put forward
plans for a B767 derivative, the B767X (Lawrence and Thornton, 2005). This project
eventually became an all new and significantly bigger airliner, the B777 and agreement
was reached for Japanese involvement in the development of this 350 seat wide-bodied
airliner. Working again through the CTDC consortium (now renamed the Japanese
Aircraft Development Corporation (JADC), its share of the programme was raised to
21%, with its status raised from ‘project participant’ to ‘programme partner’. Not only
was the Japanese consortium involved from the very start of the programme, with several
hundred Japanese engineers in Seattle for the intensive design phase, instead of
producing shipsets its involvement covered the life of the programme. As Samuels (1994:
p295) noted, the Japanese were no longer, ‘simply bending metal to spec.’
Figure 1.1
Japan’s Changing Involvement in Boeing Programmes
Outputs
Components
Role
Subcontractor
Sub-system/modules
Participant
Scale and scope
of activities
Partner
Risk Sharing
Full Partner
Revenue Sharing
2005 -
Large
B787 (35%)
1990 -
B777 (21%)
1978 -
B767 (15%)
Late 1960s -
B747SP
Smal
Upgrading
Source: Kimura (2006)
8
The B777 proved highly successful commercially and in 2003 Japan’s development of its
aerospace capability through MITI coordinated collaboration entered a new phase, when
it was announced that on Boeing’s new 250 seat B787 Dreamliner, that Japanese
involvement would amount to 35%. The 787 represents a significant step for Japan. Not
only does it have a one third share in the programme, it is a full risk sharing partner and
significantly has been entrusted with the design, development and manufacture of some
of the important parts of the plane. MHI for instance is building the main wing, one of the
most critical parts of an aircraft.
One of the reasons for Japan’s increased involvement, is the particular skills and
expertise it has in the field of composite materials. While Japanese aerospace firms
cannot match their US rivals like Boeing, they have made significant progress in terms of
catching up. Table 1 shows that in the last 20 years they have doubled their share of the
global market. They are key players in leading aerospace projects. In addition they have
not merely been successful at catching up as far as skills and capabilities are concerned.
Participation in Boeing’s B767 and B777 programmes has contributed greatly to the
expansion of the Japanese aerospace industry. Total aerospace production increased from
270 billion yen in 1980 to one trillion yen in 2001 (Kimura, 2006: p147). During the
same period aerospace exports jumped from around 180 billion yen to about 360 billion
yen, while the share of aerospace work covered by military programmes declined from
80% to 60% (Kimura, 2006: p147).
And yet the catch-up process has come about without the Japanese actually building a
complete commercial aircraft, prompting Friedman and Samuels (1993) to refer to the
growth of the Japanese aerospace industry as, ‘succeeding without really flying’.
South Korea’s Aerospace Industry
9
Like many of its Asian neighbours, South Korea’s aerospace industry has progressed
through a series of distinct and identifiable stages. Although some routine maintenance
work was undertaken in the country in the 1950s following the Korean War, the origins
of the industry lie in licensed production first undertaken in the 1970s.
Korea entered the aerospace industry in the mid-1970s, some 20 years behind Japan.
Entry into the aerospace industry was linked to the South Korean government’s decision
in 1976 to switch its aircraft procurement policy from direct purchase from abroad to
domestic production (Cho, 2003). The move to domestic production led to US aircraft
being built under licence. Initially this involved a licence agreement negotiated by the
government under which 220 Hughes 55MD helicopters were to be built under licence
(Texier, 2000) by Korean Air. Six years later in 1982 Korean Air began producing the
Northrop Grumman F-5E/F fighter under licence. The involvement of Korean Air was
significant. Even by the late 1970s not one Korean firm had experience of aerospace
manufacturing. The involvement of Korean Air which was part of the Hanjin chaebol was
very much at the government’s direction though it did have the best technological assets
because of its experience in aircraft repair and maintenance which was derived from its
airline activities. The second firm to become involved in aerospace was Samsung, which
ventured into producing aero engines under licence. In the period up to the mid-1980s the
government’s policy was highly directive and in the case of both Korean Air and
Samsung the decision to diversify into aerospace was at the government’s behest and part
of its policy of promoting national champions.
The mid-1980s marked a significant policy shift as the government encouraged rivalry
among the major Korean chaebols in relation to military aircraft projects, instead of
supporting national champions. In 1984 Daewoo Heavy Industries was allowed to enter
the aerospace industry followed three years later by Hyundai. However the emphasis was
still on licensed production as Hyundai reached agreement with Kawasaki of Japan to
build a small helicopter under license. Building on existing expertise and in a protected
market, Korean Air and Samsung managed to learn about the less problematic aspects of
10
the industry, in the form of the assembly of military aircraft under licence from foreign
manufacturers (Texier, 2000).
During this phase Korean firms had the opportunity to acquaint themselves with the
institutional arrangements in the industry and begin to learn about the specific
requirements of aerospace manufacture. In addition, they were able to learn about the
technologies required if they were to move to the second phase and obtain manufacturing
contracts from foreign aerospace manufacturers. However while the first phase involved
heavy state intervention, the second phase was to be based on a quite different policy, one
based on fierce competition between the chaebols.
Competition increased in the 1980s when Daewoo Heavy Industries was awarded a
contract to manufacture major parts of the General Dynamics F-16 fighter as part of an
offset programme associated with South Korea’s purchase of the fighter. Daewoo
invested heavily in staff and equipment to enable it to carry out the work, including
building a new manufacturing facility at Changwon. Then in the late 1980s the Korean
government, as part of a plan to purchase new military aircraft, proposed the Korean
Fighter Programme (KFP) under which a modified US aircraft would be co-produced in
Korea. This programme marked a clear move forward for Korea from the licence
production phase of industry development to co-production (Oh, 2000). The programme
was seen as the cornerstone of Korea’s programme to develop an indigenous aerospace
industry. The contract was worth $5.2billion and resulted in intense competition between
three of the chaebols: Daewoo, Samsung and Hanjin (the parent of Korean Air) to win the
contract. An evaluation committee comprising researchers and civil servants examined
the three bidding firms. The evaluation covered not only technological competence but
financial robustness. Although the evaluation committee acknowledged that Daewoo was
best suited to the project, the contract for the KFP was awarded to Samsung, following
last minute representations by Samsung’s chairman to South Korea’s president, Jun Doo
Hwan. In the event Samsung had to enlist the help of Daewoo to enable it to complete the
KFP contract. With Samsung running the KFP, the other Korean aerospace firms, Korean
Air and Daewoo increasingly sought subcontracting work from leading aerospace firms
11
like Boeing. In 1985 Deawoo was awarded a contract by Boeing to build 48 stretched
upper decks for the B747. In 1986 Korean Air was awarded a contract to produce the flap
track fairing for the B747 and following year it won a contract to produce extended wing
tips for the B737-200.
In 1990 the South Korean government initiated something of a policy reversal when it
announced a number of ‘localisation’ programmes designed to clarify the roles of the
leading aerospace firms. Korean Air was selected as prime contractor for the UH-60
helicopter, Samsung granted prime contractor status for the KTX-2 advanced jet trainer,
while Daewoo was designated prime contractor for the KTX-1 turboprop trainer.
The KTX-1 was the first aircraft fully developed in South Korea. In the early stages the
Swiss manufacturer Pilatus, which had extensive experience of building trainer aircraft,
was heavily involved. However disagreements about the extent to which the new aircraft
was to be based on existing Pilatus aircraft, led to this arrangement eventually being
abandoned. The first prototype flew in 1991. By 1997 development and testing had been
completed and the aircraft was ready for production. This began the following year when
the Korean air force announced an order for 105 aircraft.
Although the KTX-1 project succeeded in developing an indigenous aircraft purchased
and used by the Korean air force, the value of the programme was somewhat limited.
Training aircraft of this type represent a small market niche, furthermore the scope for
export sales is extremely limited. Not only that, the specialised nature of this type of
aircraft means that the scope for transferring expertise gained to other projects is limited
too.
Korea’s other major aerospace programme presents a not dissimilar picture. The KTX-2
is an advanced jet trainer. Samsung was designated the prime contractor for the KTX-2
which has been developed in association with Lockheed Martin of the US. The KTX-2
flew fore the first time in 2003 and though it has been bought by the Korean air force, its
export prospects too seem limited.
12
The limited prospects of these two flagship programmes, combined with the Asian
financial crisis of the late 1990s forced the government into another policy shift when in
1999 it ordered the three chaebols, Daewoo, Samsung and Hyundai to merge their
aerospace interests. The result was the creation of Korean Aerospace Industries (KAI).
While pooling these separate aerospace interests into a single organisation will
undoubtedly strengthen the country’s aerospace industry, it is belated recognition that
South Korea’s policy of developing its aerospace industry through competition has
proved markedly less successful than Japan’s policy of fostering collaboration and the
building of well developed industrial networks. This is particularly evident in table 2
which shows the relative size of the newly merged Korean Aerospace Industries in
relation to the major Japanese aerospace manufacturers.
Table 2
Turnover of Asian Aerospace Manufacturers 2001-6
Manufacturer
Mitsubishi
IMI
Kawasaki
Fuji
Singapore Technologies
Engineering
Korean Aerospace Industries
Hindustan
Country
2001
Japan
Japan
Japan
Japan
Singapore
$m
$m
$m
$m
3,883 4,047 3,382 3,639
1,916 1,910 2,082 2,050
1,779 1,237 1,498 1,679
546
530
488
662
575
582
627
662
Korea
India
554
508
2002
761
493
2003
2004
2005
2006
$m
4,050
2,402
1,998
743
743
$m
4,256
2,518
2.382
808
1,055
670
653
n/a 1,002
695
738
1,218 1,657
Source: Flight International
Industrial Policies Compared
As latecomers, the aerospace industries of Japan and Korea have followed a similar three
stage strategy in their attempts to catch-up. Despite its initial backwardness in the new
technology of jet aircraft compared to the United States and Europe, Japan has developed
and enhanced its aerospace technology base, though it has yet to complete the final stage
13
of fully acquiring the competences associated with systems integration, Japan has
however developed expertise in key aerospace technologies such as the use of composite
materials and with the new Boeing 787 programme has emerged as a major player in the
commercial sector. Korea in contrast, while it has made progress in catching up, has
largely confined its activities to small scale military projects, with few applications
beyond its domestic market and small scale subcontracting work in the commercial
sector. Its aerospace industry has yet to emerge as a major player in the commercial
sector, and remains a piece part subcontractor, confined to the less technologically
demanding task of component manufacturing.
Though their strategy for catch-up has followed a similar process, the two countries have
followed quite different paths in industrial policy, especially in terms of state-industry
collaboration. The difference, it is argued in this paper, reflects and explains the
divergence in performance of the two industries. State-business collaboration in Japan
has been grounded in what Evans (1997) refers to as, ‘a vision of economic
transformation’ i.e. a search for both profit and productivity enhancing investment.
However, as Evans (1997, p 63) shows in a world of increasing returns, path dependence
and multiple equilibrium, there is no guarantee that the two objectives coincide.
Japan has used formal and informal mechanisms as part of its industrial policy, which is
underpinned with effective communication and consensual policy making between
government and business. The unquantifiable role of informal mechanisms has led
sceptics to underestimate the importance of industrial policy in Japan (Chang, 1994,
Okimoto, 1989 ).
Another very significant feature of aerospace projects in Japan was the part they played
in creating a dense industrial network involving close collaboration between leading
aerospace manufacturers. According to Kimura (2006: p132) this industrial network
based on trust and collaboration, ‘became an important organising basis on which
Japanese aircraft manufacturers were able to upgrade their status’. This is anchored in
what Hayami (2001, p 328) calls, ‘a multistandard nexus of communities’. Firms are
14
grouped together under, ‘a community spirit’ and establish close community relations
with government agencies. Such collaboration has become an essential feature of
commercial aerospace in recent years, not only in Europe but also in the US.
Japan has also been successful in promoting technological capabilities via governmentsponsored R&D consortia. The promotion of cooperative R&D in Japan started in the
1960s, when MITI and the aircraft makers launched the YS-11 turboprop airliner and
more recently has continued with the development of composite materials for projects
such as the Boeing 787.
Industrial policy in South Korea stands in marked contrast to what has taken place in
Japan. No sooner had the aerospace industry in Korea taken root than a significant policy
shift in the mid-1980s led to the government encouraging rivalry among the major
Korean chaebols in relation to military aircraft projects, instead of supporting national
champions. Not only was this the opposite of the concensual collaborative type of policy
pursued in Japan, the promotion of domestic rivalry marked the decline in the Korean
State’s relative autonomy vis-à-vis the chaebols. This in turn facilitated the rise not of
concensual but of cronyistic state-business relations in the aerospace industry, as
exemplified by the selection of Samsung for the KFP project.
Not only has Korean industrial policy been non-concensual and non-collaborative, it has
also been what Landesmann and Abel (1995) term a reactive policy. A reactive policy is
one set in response to social and political pressures that have emerged from the burdens
of economic reforms. Following the Asian Financial crisis, The main reaction of the
government to the problem of domestic rivalries was manifested in the Big Deal. This
policy framework aimed to reduce the diversification of the business groups in Korea by
encouraging each chaebol to focus on a limited set of activities. Implementation was
undertaken by the merger of specific units across the chaebol under the leadership of
either one business group or an assigned controlling body (Yoo, 1999). In the case of
aerospace this involved the creation of Korean Aerospace Industries (KAI). These post
1997 reforms were undertaken out of fear and necessity and not as part of a well designed
15
and coherent industrial policy, underpinned by a strong consensus between government
and business. As Cherry (2005, 341) shows, ‘critics accused president Kim of riding
roughshod over democratic principles and compromising the rule of law by conducting
business with the chaebol in closed, informal meetings, which they suspected, were little
more than a forum for the government to gain endorsement for its plans and strategies’.
This highlights the mistrust that existed between the government and the chaebol, which
puts the Korean model of industrial policy in marked contrast to its Japanese counterpart.
The comparatively poor performance of the Korean aerospace industry is also a reflection
of the dismantling of the investment coordination mechanisms in a high technology
industry, which had been a feature of the old Korean model of development. The strength
of the old Korean model rested on its power to coordinate investment, mainly through the
Economic Planning Board, which was absorbed within the Ministry of Finance and the
Economy in the mid 1990s (Mathews, 1998; Chang, Park and Yoo, 1998). With the
capacity of the state thus weakened decision making was dispersed across various
agencies, increasing the scope for rent seeking behaviour (Atkinson and Coleman, 1989).
Conclusion
If the aerospace industry in Asia is anything to go by, reports of the demise of industrial
policy would appear to be premature. The contrast between the aerospace industries of
Japan and South Korea brings into stark contrast the difficulty of developing a
technology-based industry without a coherent industrial policy. On the basis of the
evidence presented here, technology-based industries dependent on extensive R & D,
high levels of capital expenditure and lengthy product lifecycles, cannot be left to the
vagaries of the price mechanism, if they are to develop and flourish.
The success of aerospace industries is almost invariably linked to close state-industry
relations. Such relations are partly a matter of financial support. Between the 1950s and
the mid-1990s, US federal government funding accounted for 50-70% of the country's
16
total R&D funding (Chang 2008). Lacking such assistance, Chang notes, the US would
not have been able to maintain its technological lead over the rest of the world in key
industries like aerospace. However it is also about fostering the growth of inter-firm
industrial networks. It was true of the US in the 1960s and 1970s where close stateindustry relations enabled Boeing to rise to its prominent position in the commercial jet
airliner market. It was true of Europe in the 1980s and 1990s when the Airbus consortium
(McGuire, 1997) was developed as a rival to the dominance of Boeing. And it was true
of the two other newcomer aerospace nations, Brazil and Canada, when they entered the
regional jet market in the 1990s (Goldstein, 2002).
The case of Japan provides another textbook example of this process. South Korea on the
other hand provides a sharp contrast. Encouraging domestic rivalry among the chaebols,
prevented the development of the sort of collaborative industrial network that has become
such a vital feature of the global aerospace industry and would have facilitated the
development of the major Korean aerospace firms as potential collaborative partners for
Western firms.
17
References
Abramovitz, M (1952). Economics of Growth. In Haley, B (ed.) A Survey of
Contemporary Economic, Vol 2. Published for the American Economic Association by
Richard, D. Irwin. Inc.
Amin, A (1996). Beyond Associative Democracy, New Political Economy, 1 (3), pp, 30933.
Atkinson, M.M and Coleman, W.D (1989). Strong States and Weak States: Sectoral
Policy Networks in Advanced Capitalist Countries, British Journal of Political Science,
19 (1), pp47-66.
Chang, H-J (1994). The Political Economy of Industrial Policy, Macmillan: London and
Basingstoke.
Chang, H-J (2008). Bad Samaritans: The Myth of Free Trade and the Secret History of
Capitalism. Bloomsbury Press: New York.
Chang, Park H-J and Yoo, C G (1998). Interpreting the Korean Crisis: Financial
Liberalization, Industrial Policy and Corporate Governance, Cambridge Journal of
Economics, 22, pp 735-46.
Cherry, J (2005). ‘Big Deal’ or Big Disappointed? The Continuing Evolution f the South
Korean Developmental State, The Pacific Review, 18 (3), pp 327-54.
Cho, M-Y, (2003) Restructuring of Korea’s Defence Aerospace Industry: Challenges and
Opportunities? Paper 28, Bonn International Centre for Conversion, Bonn.
Evans, P (1995). Embedded Autonomy: States and Industrial Transformation. Princeton
University Press: Princeton, NJ.
Evans, P (1997). States Structures, Government-Business Relations and Economic
Transformation, in Maxfield, S and Schneider, B.R (eds.). Business and the State in
Developing Countries, Cornell University Press: Ithaca and London.
Friedman, D.B. and Samuels, R.J. (1993) How to Succeed without Really Flying: The
Japanese Aircraft Industry and Japan’s Technological Ideology, in Frankel, J.A. and
Kahler, M. (eds.) Regionalism and Rivalry: Japan and the US in Pacific Asia, Chicago
University Press: Chicago.
Goldstein, A. (2002) The political economy of high-tech industries in developing
countries: aerospace in Brazil, Indonesia and South Africa, Cambridge Journal of
Economics, 26 (4), pp521-538.
18
Hayami, Y (2001). Development Economics: From the Poverty to the Wealth of Nations.
Oxford University Press: Oxford.
Heppeneimer, T.A. (1995) Turbulent Skies: The history of Commercial Aviation, John
Wiley: New York.
Hodgson, G. M. (1993). Economics and Evolution: Bringing Life Back into Economics.
Polity Press: Cambridge, UK.
Hwang, C-Y, (2000) The Aircraft Industry in the Latecomer Economy: the Case of South
Korea, unpublished PhD thesis, May 2000, University of Sussex, Brighton.
Ibrahim, G. and Galt, V (2002). Bye-Bye Central Planning, Hello Market Hiccups:
Institutional Transition in Romania, Cambridge Journal of Economics, 26, pp 105-118.
Kaldor, N (1972). The Irrelevance of Equilibrium Economics, Economic Journal, 82 (4),
pp 1237-55. Reprinted in Targetti, F and Thirwall, A, 1989, (ed.). The Essential Kaldor.
Duckworth.
Kaldor, N (1981). The Role of Increasing Returns, Technical Progress and Cumulative
Causation in the Theory of International Trade and Economic Growth, Economie
Appliquée, 34 (4), pp 539-617.
Kang, D.C (2002). Transaction Costs and Crony Capitalism in East Asia, Tuck School of
Business Working Paper, no. 2/11.
Kimura, S. (2006) The Challenges of Late Industrialization: The Global Economy and
the Japanese Commercial Aircraft Industry, Palgrave Macmillan: Basingstoke.
Landesmann, M. A. and Abel, I (1995). The Transition in Eastern Europe: The Case for
Industrial Policy, in Chang, H-J and Nolan, P (ed.), The Transformation of the
Communist Economies: Against the Mainstream, Macmillan Press Ltd: Basingstoke.
Lawrence, P.K. and Thornton, D. W. (2005) Deep Stall: The Turbulent Story of Boeing
Commercial Airplanes, Ashgate: Aldershot.
Luo, Y (2002). Corruption and Organization in Asian Management Systems. Asia Pacific
Journal of Management, 19, pp 405-22.
Mathews, J.A (1998). Fashioning a new Korean Model out of the Crisis: the rebuilding
of Institutional Capabilities, Cambridge Journal of Economics, 22, pp747-59.
19
McGuire, S. (1996). Airbus Industrie: Conflict and Cooperation in US-EC Trade
Realtions, Macmillan Press, Basingstoke.
McGuire, S. (2007) The United States, Japan and the aerospace industry: from capture to
competitor? The Pacific Review, 20 (3), pp3 29-350.
Mok, K. H and Yep, R (2008). Globalization and State Capacity in Asia, the Asia Pacific
Review, 21 (2), pp109-20.
Mowery, D. and Rosenberg, N. (1985) Commercial Aircraft: Cooperation and
Competition between the US and Japan, California Management Review, 27 (4), pp7092.
Nelson, R.R (1993). National Innovation Systems: A Comparative Analysis, Oxford
University Press: New York.
Nelson, R.R (1998). The Agenda for Growth Theory: a Different Point of View,
Cambridge Journal of Economics, 22, pp497-520.
Nelson, R.R and Rosenberg, N (1993). Technical Innovations and National Systems, in
Nelson, R.R (ed.). National Innovation Systems: a Comparative Analysis. Oxford
University Press: New York.
Noland, M. (2007). From Industrial Policy to Innovation Policy: Japan’s Pursuit of
Competitive Advantage, Asian Economic Policy Review, 2, pp251-68.
Oh, K. (2000) US-Korean Aerospace Collaboration and the Korean Fighter Project. In
Wood, P.C. and Sorensen, D.S. (eds.) International Military Aerospace Collaboration:
Case studies in domestic and intergovernmental politics, Ashgate: Aldershot.
Okimoto, D.I (1989). Between MITI and the Market: Japanese Industrial Policy for High
Technology, Stanford University Press: Stanford.
Smith, D.J. (2001) Planning and Partners: The Growth of the Aerospace Industry in
South East Asia, in Thorpe, R. and Little, S. (eds.) Global Change: The impact of Asia in
the 21st century, Palgrave: Basingstoke.
Texier, F. (2000) Industrial Diversification and Innovation: An International Study of the
Aerospace Industry, Edward Elgar: Cheltenham.
UNIDO (2002). Industrial Development Report 2002/2003. United Nations Industrial
Development Organization, United Nations: Vienna.
Weiss, L (1995). Governed Interdependence: Rethinking the Government-business
Relationship in East Asia, The Pacific Review, 8 (4), pp589-616.
20
Weiss, L (1998). The Myth of the Powerless State: Governing the Economy in a Global
Era. Polity Press: Cambridge and Cornell University State: Ithaca.
Yoo, S. M (1999). Corporate Restructuring in Korea. in Korea and the Asian Economic
Crisis: One Year Later, pp 131-200, Vol 9, Joint-US Academic Studies, KEI and George
Town University: Washington D.C:
21