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Keun Lee

Chapter 10 deals with the question of why making a catch-up is even more difficult in capital goods industries that are usually led by small or middle-sized companies. It relies upon the sectoral systems of innovation as a theoretical framework for analysis. From the findings, the chapter has identified three sources of difficulties in the catch-up of the capital goods industry, particularly in machine tools. First, while small firms in the capital goods industry are usually specialized suppliers to big final goods assembly firms in the consumer goods industry or other industries, and thus the tacit knowledge accumulated from the interface between the producer and the customer firms is very important, a serious difficulty lies in the fact that local client firms are reluctant to use locally made capital goods due to their poor quality and low precision level. Second, while a successful catch-up first requires the ability to produce goods of better quality and lower prices than those produced by incumbent firms from advanced countries, a typical difficulty arises because incumbent foreign firms often react by charging predatory prices upon news of the local development of capital goods by latecomers . Third, if the catch-up firms overcome this barrier, then the next strategy used by incumbent firms is to charge latecomers with legal actions for patent violations. Despite these intrinsic difficulties, the Korean economy has achieved a very slow but gradual catch-up in the capital goods industry. The chapter attributes such achievement to several factors, including the strenuous efforts of the government, niche markets in general-purpose machine tools and emerging economies, and finally, the increasing introduction and adoption of IT or digital technologies in machine tools.
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Keun Lee

Chapter 14 develops a new sequential internationalization theoretical framework to explain the processes of internationalization by SMEs from a dynamic emerging economy. It is applied to 18 FDI cases of Korean SMEs in China to analyze the changing map of the division of labor between parent firms in Korea and subsidiaries in China. We have found that the internationalization process has been sequential, reflecting the cautious behavior of SMEs with more resource constraints compared to the case of large firms. They proceeded from a product-based division of labor to a value-chain-based one, and finally to a market-based division of labor between the parent firm and its local subsidiaries. In the first stage, Korean SMEs establish production subsidiaries in China to manufacture low-end goods for re-exportation. In the second stage, the subsidiaries expand production scope to high-end goods, while the parent firm administers R & D, marketing, and production of some high-end goods. In the third stage, as the Chinese market grows in importance with local consumers’ increasing purchasing power, the subsidiaries integrate marketing and local-market-specific R & D with the existing value chains.
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Keun Lee

Chapter 11 explains the success by Korean business groups in the Chinese market, despite their late entry. It uses the concept called “project execution capability” of diversified business groups, which has led to another strategic capability of “vertical integration” (VI) among affiliates. It examines Samsung’s electronics businesses in China as an excellent case of resource sharing and coordination among affiliates in the execution of a project despite late entry into a new market. The chapter finds that the VI network was first created in the early 1970s in Korea and has since been replicated in many parts of the world such as Mexico, Malaysia, and, most recently, China. The VI network has three tiers consisting of Samsung Electronics at the top as the final assembler, Samsung Electro-Mechanics and Samsung SDI in the middle, and finally, Samsung Corning at the bottom. In the rapidly changing display market, Samsung’s stable component sourcing among affiliates has played a critical role in developing new products at lower costs to meet changing market needs. This case shows that business groups can upgrade their capabilities rather than simply lose their advantages with the maturing of market mechanisms.
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Keun Lee

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Keun Lee

Chapter 12 examines the effects of establishing factories abroad on domestic jobs and the issue of technological hollowing out, using the case of Samsung Electronics’ mobile phone business. It finds that the offshoring of mobile phone assembly to China, India, Brazil, and Vietnam did not result in a reduction of domestic jobs. On the contrary, Samsung’s domestic employment increased from 5,960 persons in 2002 to 20,500 in 2012. This increase mainly reflects a net increase in high-paying jobs (R & D, engineering, design, marketing) while the number of low-paying jobs (assembly) remained stagnant. To cope with possible technological hollowing out, Samsung kept its core engineers/technicians in a special unit, instead of firing them, whenever domestic assembly lines were reduced or foreign lines were established. They were kept inside the so-called “global manufacturing technology center,” with the number of its employees increasing from 80 in 2006 to more than 1,103 in 2011. These employees visit overseas factories to conduct activities such as maintenance, monitoring, re-modeling of assembly lines, and automation. In terms of strategy, Samsung engages in offshoring, but not outsourcing. This is in contrast to Apple which does both offshoring and outsourcing by contracting with Foxconn.
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Keun Lee

In Chapter 6 a structuralist macroeconomics perspective is taken to interpret the two recent financial crises in Korea, and a new policy framework and reform measures are suggested to build a crisis-resilient macro-financial system in Korea. The chapter focuses on the so-called “Frenkel-Neftci” cycle and the two kinds of expected spreads, namely, interest spread and capital gain spreads, which initially motivate foreign investment in emerging economies. To establish a crisis-resilient macro-financial system, a new macro policy framework that can be described as “an intermediate system” is proposed, with full capital mobility but with an explicit option of Tobin taxes, a flexible basket, band, and crawl exchange rate system, and relative independence in monetary policy making with a new balance between interest rates and exchange rate targeting. A justification for the intermediate system proposed in this chapter is made because it is not easy to prevent the “two kinds of spreads” from happening simultaneously in a standard (orthodox) open macroeconomic policy setting.
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Keun Lee

Chapter 3 proposes a “capability-based view” on the Korean experience in catching-up development. This approach may be considered as an extension of the technology-based view but wants to keep a distance from the government–market dichotomy as it has a more sound microeconomic foundation. The reason we are taking this view is that the real lesson from the Korean achievement is not from the role of government in economic development but from the fact that it was able to build firms’ capability and thereby sustained growth for several decades. Sustained growth for several decades is not easy, and there are numerous cases where macro-based reform brought in immediate recovery but was not sustained, and eventually the economy fell into another round of crisis. The most fundamental factors for sustained development is whether to build local capabilities or not. We contend that without some critical degree of capabilities, growth which is based on lower wage rates or simple price competitiveness tends to be short-lived or not sustained. The discussion in this chapter suggests that the Korean economy had laid the basis for a transition from a middle- to high-income country by building up technological capabilities around the early to mid-1980s. The early to mid-1980s is when the R & D/GDP ratio surpassed 1%, the share of private R & D exceeded half to reach around 70%, and the share of corporate patents became larger than that by individual inventors. Based on these capabilities, Korea was able to make the transition from an upper-middle income to a high-income country. We argue that it is not more openings but capability building associated with tertiary education and private R & D that has made the transition possible. The final section of the chapter discusses the issue of the transferability of the Korean model, focusing on the role of the government, the possibility of state activism in the World Trade Organization environment, and the role of locally owned firms.
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Keun Lee

Chapter 7 argues that North Korea can achieve an economic catch-up after decades of economic isolation and stagnation if it tries a specific type of economic opening (leapfrogging) focused on foreign trade and investment in a sustained manner. An analogy is been made with the case of Fujian Province in China, which has accomplished economic catch-up, mainly due to Taiwanese investments. To realize its potential, it is argued that North Korea should treat its foreign direct investment from South Korea as intra-Korean investment. The chapter also discusses the diverse modes of engagement with foreign capital that are available for North Korea considering its own capability (absorption or management capabilities), rivalry among possible foreign investors, implications for market structure (monopoly or more competition), the nature of target technologies or facilities, opportunity for learning and transfer, and so forth. Finally, the chapter discusses the economic and political preconditions for such economic catch-up.
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Keun Lee

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Keun Lee

Chapter 4 investigates the role of the intellectual property rights (IPR) system in Korea’s technological catch-up. The detailed overview of the evolution of the Korean system of IPR shows Korea’s dynamic perspective on IPR policy. During the early stages, IPR were granted even to minor inventions or adaptations by local residents while there would be less need for domestic recognition of foreign IPR. However, during the later stages, with the growth of technological capacity, the need for international technology transfer and the local market for technology increased. Thus, protection of both domestic and foreign IPR needed to be provided. From the late 1980s, Korea increased substantially the level of the IPR protection and expanded the scope of patentable subjects. Korea has now attained the most developed level in terms of the scope of subject matters, including the most recent IPR like biotechnological inventions and business method inventions. Since then, as big business reached the technological frontier, the focus of government policies has turned to the following issues: encouragement of more IPR attainment by SMEs, commercialization/utilization rather than production of IPR, and utilization of R & D capabilities and the role of universities. We have also found some interesting facts in the trend of several IPR variables over the course of catch-up in Korea. First, in the early days of catch-up, Koreans filed mostly petit (utility) patents and few regular (invention) patents. Only at the later stages did the share of invention patents grow to exceed that of petit patents. Second, in the early days of catch-up, individual inventors filed patents. Corporations accounted for a small share. Later, the share of corporate assignees grew to exceed that of petit patents. Third, the relative shares between domestic and foreign patents in Korea show more dynamic patterns. In the early days, foreigners had no interest in Korean IPR and thus filed no patents, which led to the dominance of the domestic patents. This was reversed at a certain point in time when foreigners were filing the most number of patents. With the growth of the capabilities of domestic inventors (usually firms), the share of domestic inventors increased and eventually they registered a bigger number of patents than those filed by foreigners. The three facts suggest that the importance of patents and IPR had not been seriously recognized by Korean firms until the mid-1980s. Before then, Korea had been accumulating its absorptive technological capacity with focus on utility model patents. Then, only beginning in the mid-1980s, they began to aggressively invest in their own in-house R & D which led to the rapid building up of indigenous R & D capabilities.