1. Science, Technology, and Innovation Policy for Structural Transformation: Korean Experiences Sung chul Chung Professor University of Science and Technology (UST) schung@ust.ac.kr chungsc@stepi.re.kr

2. Note The term “innovation” is receiving hot attentions from both theoreticians and practitioners as S&T and innovation are critical to national development. But there is no such thing as an optimal or best innovation system. National innovation system is a product of the national context which is determined by various factors, including culture, history, political system, natural environments and others that affect human behavior.

3. Korean development Over the past five decades, Korea has transformed itself from one of the poorest countries in the world into one of the most dynamic industrial economies…  GNI P/C: $ 87(’61) → $23,000(‘12)  Exports: $55 M(’61) → $552 B (‘12)  Unemployment: 22.3%(’61) → 3.2% (‘12) How has Korea been able to make the transition ? One of the Key factors is science and technology.

4. 4 Structural Transformations of the Korean Economy Traditional agrarian society Industrial economy High- Technology industries Creative knowledge economy 1960s-80s 1980s-2000s 2000s -  Technology learning: Learning by imitating foreign technologies  Duplicative imitation  S&T capacity building  Indigenous R&D:  Creative imitation: Emerging new technologies + domestic R&D  Institutional reforms  Creative innovation: Development of new growth engines, creative research  Creativity education

5. 5 Technology Learning for Industrialization 1960s-1980s “In the beginning, R&D was not the major element of STI policy… Lacking in technological capability, Korea had no option but looking outward for technologies required for industrialization -- an “outward-looking development strategy.”

6. Where Korea was in the early 60s……  Socio-political situation: Unstable, recovering from the Korean War  Economic situation: Traditional agrarian society, relying on primary sectors for more than 60% of GDP One of the poorest economies then in the world suffering from all the problems that poor countries in those days were facing……So, the most urgent challenge for Korea as a nation was how to liberate its people from the chronic poverty  But Korea had neither capital nor technology required for industrialization. The only resource it had was human resources – “well-educated but under exploited” workforce.

7. Korean strategy  No option but “outward-looking development strategy,” But Korea could not rely so much on foreign direct investment and foreign licensing for the acquisition of capital and technology as other developing economies, because  shortage of foreign exchanges,  people’s desire for economic independence, and  the hesitance of foreign investors to invest in the then economically uncertain and politically unstable Korea. The government took very restrictive policy toward FDI and FL, such as ownership restrictions, technology transfer requirement, export requirement, etc. … Thus, FDI and FL had a minimal impact on the economic development of Korea …

8. Technology acquisition via informal channels Instead of depending on FDI for capital and technology, “the g overnment brought in large-scale foreign loans and allocated them for investments in selected industries, which led to massive importation of foreign capital goods and turn-key plants. Industries later reverse-engineered the imported capital goods for the purpose of acquiring the necessary technologies, while, at the same time, building a base for scientific and technological development…”. Channels for technology acquisition: 1962-81 (M US$) FDIFLCapital Goods 1962-66 45.40.8316.0 1967-71 218.6 16.3 2,541.0 1972-76 879.4 96.68,841.0 1977-81 720.6 451.4 27,978.0

9. How industries acquired technologies ? Light industries, such as shoes, apparels, etc. learned technology mainly through OEM production arrangements, as OEM buyers provided everything from raw materials to design, to production knowhow, and to quality control. Chemical industries relied very much on turn-key base importation, which provided technical training programs as part of the package. They later internalized the technology by implementing and operating the imported factories and attained technical capability to maintain and further improve upon the imported technologies…. Machineries and, to a lesser extent, electronic industries resorted relatively more to formal licensing for technology acquisition than other industries… learning by imitating and implementing foreign technologies (Duplicative imitation)

10. 10 To help the industries in technology acquisition And to build up S&T capacity …..  Establishment of the Korea Institute of Science and Technology (KIST, 1966): Korea’s first R&D institute in modern sense  Creation of the Ministry of Science and Technology (MOST, 1967): Responsible for S&T policy formulation and implementation  S&T Promotion Act (1967)  Establishment of GRIs in the strategic areas (1970s)  Creation of the Korea Advanced Institute of Sciences (KAIS, 1971): S&T graduate school (US system)  Construction of the Daeduk Science Town (Ground-braking 1974): Home for the government R&D institutes and industrial technology research centers (Now, known as DaedukTechno-Valley)

11. Achievements: Industrialization with high growth  1960s-’80s: Average annual growth rate: over 9%  Source of growth: Abundant human resources, high investment rate, plus latecomer advantage  Transformation from an agrarian society to an industrial economy, which was based on low- and medium-tech industries. 11

12. Benefits and costs of the Korean strategy Korean strategy: Restrictive policy toward FDI and FL, relying more on informal channels for technology acquisition than formal channels.  Benefits: (1) Less costly, but require higher capability of technology recipients in not just identifying and selecting technologies but also absorbing, assimilating and improving upon the transferred technologies. (2) Independence from the technological predominance of MNCs,  Costs: Korea had to forego the opportunities that direct foreign investment offers..  Lesson: For this strategy to succeed, technology recipient has to have strong absorptive capacity, meaning that Korea could succeed in acquiring technologies for industrialization largely owing to the rich pool of well- educated human resources….

13. Key factors behind the growth 1.Political leadership: vision and strategy  Consistent linkage of S&T to socio-economic development 2.Promotion of demand for innovation  Outward-looking development strategy  Challenge-led approach: Heavy and chemical development strategy 3.Human resources  Investment in education  HRD linked to socio-economic development

14. Indigenous R&D for Structural Transformation 1980s-2000s In the early 1980s, the government shifted its policy from promoting technology learning to technology development, as the technological requirements for further development could no longer be met through learning by implementing and imitating.

15. 15 Economic situation: Transition toward a low-growth phase  The high growth phase was coming to an end around the end of the 1980s Exhaustion of latecomer advantage in growth Changing socio-economic environments: Change in trade regime(WTO), democratization, union movements, increasing wages – decline in growth potential and urgent need for alternative sources of growth  Need for structural transformation toward high-tech, high value-added industries A new challenge for Korean development

16. 16 Source: OECD Money spent on technology licensing (Money spent on R&D) Policy shift: From learning to indigenous R&D  Launching of the National R&D program (1982)  Promoting private firm’s research: financial, tax and other incentives to stimulate R&D investments in the private sectors  Private industries began to change their technology acquisition strategies from learning to developing, increasing investments in indigenous R&D Rapidly increasing R&D expenditures, while reducing royalty payment

17. 17 STI Policy policies for structural transformation (1) Expansion of R&D and l aunching of mission-oriented national R&D programs:  HAN Project launched in 1992 Aiming at developing strategic technologies to fuel the growth in the next decade (emerging new technologies + domestic R&D) A.Product-oriented: Semiconductor, HDTV, ISDN, New drugs/agro- chemicals, Advanced production system, Electric cars B.Core technologies: New materials, Next generation nuclear reactor, New energy, Environmental technology, New functional bio-materials Formulation process: Technology foresight > PP joint committee > Inter- ministerial agreement > Implementation Format: Large, long-term industry-government collaborati on  The HAN project was followed by other similar large target-oriented programs involving private companies

18. 18 (2) Promotion of ICT development  Creation of the Ministry of Information and Communication (‘95)  ICT Promotion Fund (Government budget + telecom companies’ contributions, ‘96)  App 1-1.5 Billion US dollars for ICT R&D per year  Funding PP collaborative R&D  Informatizaton Promotion Act (‘96)  Korea Information Infrastructure Initiative (KII, ‘95)  10 year 3 stage Plan for the construction of Info highway)  The Informatization Promotion Committee (‘96)  Chaired by the Prime Minister

19. 19 (3) Strengthening policy incentives to promote and facilitate RDI in the private industrial sectors  Promoting private firm’s research: strengthening financial, tax and other incentives to stimulate R&D investments in the private sectors  Opening of a stock market for new technology-based firms: KOSDAQ (Korea Securities Dealers Automated Quotations) as a division of KRX (1996)  Promotion of venture capitals  Information infrastructure

20. 20 ( 4 ) Institutional reforms  In the early 1990s, in response to the changing economic environments:  Liberalization and deregulation (foreign trade and investment)  IPR regime (in compliance with the TRIPS)  Competition policy (in particular, in the communication industry)  Around the end of the 1990s, in response to the Asian Financial Crisis:  Public sector reform: Smaller, efficient government  Labor market reform: Flexibility of labor market  Financial sector reform: Opening and deregulation  Corporate sector reform, etc.

21. 21 Policy results (1): Remarkable growth of R&D and innovation activities, in particular:  Rapid increases in private R&D centers, in particular, SME R&D labs.  Increased share of industrial R&D expenditures in the gross national R&D expenditures to 80% (around the end of 1990s)  Massive investment in high-tech fields by large Chaebol companies No of industrial R&D centers Source: KOITA Private industries’ share in GERD: 75% SME LEs

22. 22  Outputs from the R&D investments(1): massive increases in scientific publications (SCI), making Korea visible in the international science and technology community Starting from nowhere, Korea now is 12 th producer of SCI publications… No of SCI publications World share Source: KAIST

23. PCT applicationsUS patents NoShareRankNoShareRank 19931280.4197790.811 19951960.6189430.910 20001,5801.7103,3142.18 20022,5202.393,7862.37 20043,5582.974,4282.75 20065,9484.055,9083.45 20077,0804.546,2964.04 23  Outputs from the R&D investments(2): increased patents, both international and domestic, opening new technological opportunities for industries.. Source: KOITA

24.  Economic impacts (1): Young entrepreneurs took the increased technological opportunities to start new businesses. New ideas (R&D results) + improved business environments (institutional reform) + KOSDAQ No of new start-ups Source: KOITA 24

25. 25  Economic impact (2): Productivity growth in high-tech industries Increased R&D investments have resulted in higher productivity growth in high-tech industries (Estimation: STEPI 2007) ICT and hi-tech industries have shown higher productivity growth (Labor productivity) Source: KIET ICT HT MH MLT LT

26. 26 Top 10 exports 1980s Apparels Ships Knit wear Shoes Semiconductors Automobiles Polyester Leather Textiles Radio sets Top 10 exports 2000s Semiconductor Automobiles Ships Mobile handsets Synthetic resin Auto parts Monitor Com. Equip. parts Flat display Computer parts National R&D projects for GRI-Industry collaboration: D-RAM memory chip: ’86-97, 92-97 CDMA technology: ‘89-’96 Flat display:’95-’01 Auto engine: ‘92-01 Ship design system: ‘01-05 Mobile internet(Wibro): ‘03-05 Next generation display: ‘95-’01 ICT promotion, Plus improvement in business environments Economic impact (3): Structural transformation

27.  Economic impacts (5): Establishing world prominence in several high-tech areas Semi-conductors: 3 rd (2006) Electronic products: 4 th (2006) Mobile handsets: 2 nd (2008) Display (TFT LCD): 1 st (2008) Automobile: 5 th (2006) Steel: 5 th (2006) Shipbuilding: 1 st (2006)

28. 28 Key factors behind the structural transformation  Human resources  Focused strategy: Focused R&D coupled with institutional reforms  Private sectors’ RDI capability: financial and technological  National consensus: sense of crisis

29. 29 Creative Innovation 2000- Toward creative innovation

30. 30 Korea at a crossroad

31. 31 Policy challenges 1.Creating new jobs and markets based on creative innovation 2.Enhancing global STI cooperation for creative Economy 3. Establishing innovation eco-system where creativity is fully rewarded

32. 32 Moving toward a creative innovation-based economy: An exploration  Increased focus on creative basic research  Development of new growth engines  9 strategic industries: 5G mobile communications, Ocean plants, Smart car, Intelligent robot, Wearable smart devices, Smart safety system, etc.  4 base industries: Intelligent semi-conductor, Big data, New materials, Internet of things  Improvement of the regulatory framework to promote and facilitate creative innovation

33. 33 Conclusion Would Korea be able to make another transition toward a creative innovation-based economy?

34. 34  Korea has been successful to a certain extent in making structural transformations from an agrarian society to high-tech, high value-added industrial economy  Factors behind the success: Early stage (1960s-80s): Political leadership, HR, outward-looking development strategy, sense of crisis, social cohesion Later stage (1980s- ): HR, private industries’ RDI capability, focused strategy(proactive government), and national consensus (sense of crisis)  The institutional reforms in response to the Asian financial crisis also made an important contribution to the structural transformation by improving the regulatory frameworks and business environments (public sector, labor market, financial system, corporate sector).

35. 35  But to complete the transformation, Korea has to make another transition toward a creative innovation-based economy, which will be much harder to achieve  To achieve the goal, Korea has to solve the following problems, among many others:  Reconciling the Confucian tradition which is characterized by vertical social order, strict ethical norms, conservative values, etc. with the culture of innovation which is founded on horizontal relationships, diversity, tolerance, openness, trust, etc.  Education for creativity  Correcting concentration and imbalances of ST system  Internationalization of the S&T system

36. 36 Thank you for the attention