Journal of International Development

J. Int. Dev. 10, 715±731 (1998)

IMPLEMENTATION OF SCIENCE AND

TECHNOLOGY POLICIES FOR GLOBAL
COMPETITION: KOREA'S ELECTRONICS
AND TELECOMMUNICATIONS
INDUSTRIES
ROY W. SHIN*
School of Public and Environmental A€airs, Indiana University, USA

INTRODUCTION

This study examines the process of industrial transformation from the system±
institutional perspective. This paper cortically evaluates current proposals to target
industries with trade and industrial policies. Industrial transformation is the process
in which an industry changes its production technology, product scope, market
distribution and location due to changes in internal and external factors, and also
involves a continuous, interactive decision-making process by industry and the
government in response to information and capability constraints. Both the market
mechanism and the institutional interaction between the public and the private sector
are important to successful industrial transformation, especially in the context of
developing countries. The major feature of the Korean technological path was the
fostering of indigenous technology through research centres established in both
public and private sectors. Thus Korea's industrialization success has actually been
derived from how well imported technologies were absorbed into its own indigenous
R&D e€orts. Korea's electronic industries are attributable not only to the enormous
capital invested, but also to heavy reliance on imported technology.
A case study of South Korea's (hereafter called Korea) electronics and telecom-
munications industries illustrates how government and industry can interact to
overcome the common problems in industrial transformation faced by many
developing countries. Many studies have been done to analyse how and why an
industry transformed from the strategic perspective of business. For example, Porter
(1990, pp. 6±7) analyses the mechanism of transformation and suggests that the
pressure of new entrants, product substitution, suppliers' power, buyers' power, and
the rivalry between competitors are the driving forces for industrial transformation.

* Correspondence to: Prof. Roy W. Shin, School of Public and Environmental A€airs, Indiana University,
Bloomington, Indiana, USA.

CCC 0954±1748/98/060715±17$17.50
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716 R. W. Shin

This paper, on the other hand, focuses on the institutional interaction between
industry and the government in maintaining industrial competitiveness. The study
illustrates how the active interaction between the private and the public sector can
help overcome the problems of externalities, risk bias against infant industries, and
capability constraints in developing countries.

STRATEGIC CHOICES FOR GLOBAL COMPETITION

The mode of interaction between industry and the government is subject to the
in¯uence of contextual changes in society and the economy. As an industry becomes
more mature and the legitimacy of state leadership is eroded, as in the Korean case,
the interaction between the government and industry also changes, and the govern-
ment has to assume di€erent roles to build the competitiveness of a domestic industry
in the world market.
To maintain competitiveness in the world market, domestic industries need to
transform their production technology, market foci, product quality and location
continuously. Table 1 illustrates the process of industrial transformation from the
system±institutional perspective in which, industry and the government are the actors
in the model. Both actors make strategic choices that tailor a particular sector to best
®t the social, economic and political situations in the external environment. There are
two categories of inputs in the decision-making process: capability constraints and
information inputs. According to standard economic theories, all production is
subject to possible frontier constraints. By understanding the existing capability
constraints, an industry continues to try stretching the limit by utilizing various
strategies, such as performance monitoring, new investment, and technological
innovation to break down production bottlenecks.
Lawrence and Dyer (1983, p. 297) suggest several elements of resource constraints
that are important in the process of industrial adaption: human resources, physical
resources, ®nancial resources, information/decision ¯ows and energy/matter ¯ows.
These constraints can be generalized as factor supply constraints. In addition to these

Table 1. Model of continuous industrial transformation.

Inputs
Social Economic, Political, and Industrial Contexts:
A. Information
Domestic demand
Foreign demand
Factor supply
Technological requirements
B. Capability Constraints
Factor supply capability
Market demand capability
Technological capability
Process
Industry/market assesses:
(a) protiability
(b) risks
j
ˆ ) j )
Government assesses:
(a) social bene®ts & costs
(b) political bene®ts & risks
Output
Investment decisions
(a) no investment
(b) development
(c) new investment
Policy options:
(a) non-intervention
(b) incentive policies
(c) regulatory policies
(d) ®scal policies

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 Korea's Electronics and Telecommunications Industry 717

constraints, an industry faces market demand and technological constraints. Market

demand constraints, such as limitations in the consumption power of domestic and
foreign buyers, export quotas tari€s, and price controls by governments, can signi®-
cantly in¯uence the development of an industrial sector. Technological capability
constraints also alter the performance of an industry. There are three types of
technology capabilities. The ®rst concerns investment capability, which is important
when identifying feasible investment projects. A second type is production capability,
which is needed for the operation and improvement of a plant. The third type, linkage
capabilities, concerns maintaining connections with other ®rms and institutions. By
releasing the constraints on technological capabilities, mainly through education and
R&D, an industry has a stronger transformation capability to maintain competi-
tiveness in the market.
All the capability constraints are subject to direct in¯uence of many domestic and
foreign factors within the social, political, and economic context of a country.
Changes in living standard, income level, government regulations on factor supply
(capital, land, manpower education and training), industrial structure, and the
willingness of foreign investors to invest and transfer technology are some factors that
directly a€ect the capability constraints (Dahlman, 1991, p. 53).
The other category inputs concerns information. Lawrence and Dyer (1982, p. 300)
suggest ®ve elements of information complexities that are vital to organizational
adaption: competitive variations, technical variations, customer variations, product
variations and government regulatory variations. From a more generalized
perspective, these variations a€ect three information concerns of industries regarding
information: market demand, factor supply and technological requirements of the
market. These information concerns are important to a ®rm's strategic planning and
the process of industrial transformation. For example, Stiglitz (1989, p. 198) suggests
that the appropriation and utilization of information determines the willingness of
®rms to invest in research and development. Kim (1993, p. 3) suggests that prior
knowledge increases the absorptive capability of an organization and stimulates faster
and smoother transformation of an industry. Besley and Case (1993, p. 399) also
suggest that lack of information about technology pro®tability leads to hesitation in
technology adoption, which implies a stickier process of industrial transformation.
Both industry and government respond to capability constraints and information
inputs by making various investment and policy decisions. The key concern of an
industry in this process is the pro®tability as well as the extent of risks involved when
an industry determines a particular investment's feasibility. Given the considerations
of pro®tability and risk, an industry basically has three options. It can make no
investment, which may lead to a gradual decline of the industry, continue to upgrade
the existing production technology, or make new investments to explore di€erent
alternatives.
The government, on the other hand, has di€erent concerns. Its major concern is to
oversee public interests and ensure that there are net social bene®ts from the process
of industrial transformation. The model assumes that social costs and bene®ts are
de®ned by the institutional setting of the government. If the government is operated
under a democratic system, social costs and bene®ts are de®ned by elected repre-
sentatives in the process of legislative formulation. If the government is operated
under an authoritarian system, social bene®ts and costs are de®ned by political
leaders and the bureaucratic system with limited inputs from the general public.

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718 R. W. Shin

Political risks and bene®ts are also considered by the government in assessing the
information inputs and capability constraints. If it takes heavy political risks to
impose certain policies to alter the transformation process, the government will
hesitate to implement such policies.
There are four kinds of industrial policies available to government. The ®rst one is
non-intervention, which implies the absence of any direct intervention by the govern-
ment to alter the production technology, factor supply, location, and market focus
of the industry. The second policy option is to o€er direct subsidies to the industry,
such as low-interest loans and free land allotment. The third policy option includes
such regulatory measures as export performance targets, environmental regulations
and product standard requirements. Finally, the government can use tax incentives
(e.g., tax holidays and tax exemption) and direct expenditures on R&D and education
to alter the process of industrial transformation.
The government and industry are interdependent in the model, and can be closely
interlocked in the institutional decision-making process to an extent that an industry
may have its own members in the government representing its interests. Regular
meetings, circulation of reports, and policy conferences between business leaders and
politicians can also enhance the communication and understanding between govern-
ment and the industry. Through these institutional linkages, the government's assess-
ment of social bene®ts and costs is in¯uenced by the interests of business, and
conversely, business' evaluation of bene®ts and costs is altered by government ocials.
The impact of these policies and investment decisions is re-evaluated by industry and
government through an interactive, institutional decision-making process.

THE PROBLEMS OF INDUSTRIAL TRANSFORMATION

IN DEVELOPING COUNTRIES

Market versus Government

The system±institutional model suggests that industrial transformation is the result of

a continuous decision-making process by industry and the government, given the
information and capability constraints. This model may help us to understand the
nature of industrial transformation in developing countries. For the past decade,
there has been much debate as to whether the market mechanism is sucient, or
whether the government intervention is necessary to secure successful industrial
transformation (Haque, 1991, pp. 10±12). The debate is especially controversial
within the study of the rising economies in East Asia, where the approach centres
around a strong state in¯uence on economic development. From the system±
institutional perspective discussed above, the debate surrounds one particular
issue Ð whether the government is needed to facilitate the decision-making process
by industry. As Ranis (1991, p. 72) points out, the answer depends on the context of
industrial transformation of a particular country. If the government can facilitate
information ¯ows and alleviate some capability constraints on industry, intervention
is desirable. On the other hand, if the government does not have the institutional
capability to reduce the constraints for its industries, and its policies will confuse and
degenerate the information ¯ows in the market, government intervention should be
kept to a minimum.

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 Korea's Electronics and Telecommunications Industry 719

In the context of most developing countries, government intervention is necessary

for several reasons. Due to market uncertainties, a limited capital supply, the in-
adequate understanding of technological requirements and political instability,
investors may be reluctant to make continuous investments to upgrade an industry.
Such risk barriers lead to limited entries of ®rms into the technology- and capital-
intensive sectors. The vicious cycle of under-investment constrains the potential
learning externalities (Stiglitz, 1989, p. 200) which are important in the process of
industrial transformation. Hence, state-created rents are necessary to lessen the risk
burden, thereby stimulating private investment (Chang, 1993, pp. 144±145).
A second justi®cation for government intervention concerns the nature of informa-
tion concerning technology. As technology information exhibits characteristics of
publicness and non-appropriateness, private investors may under-invest in obtaining
such information (Besley and Case, 1993, p. 399). The disincentive to seek more
information apparently hinders the process of industrial transformation. This
problem can be reduced by: (i) having a legal-contractual system that protects
information property; (ii) gaining advantages of a head start in the market; (iii) reduc-
ing the asset requirements necessary to gain information; and (iv) maintaining
secrecy (Teece, 1992, p. 195). However, these conditions usually do not exist in
developing countries. Often insucient resources create a barrier to the enforcement
of intellectual property. Obtaining a head start does not give much advantage to
developing countries because the domestic market is small and as latecomers, are
poorly positioned in the world market. Private investors may also need to commit a
huge irreversible investment to develop an information infrastructure because the
existing public infrastructure is poor. As a result, secrecy is usually the only means
to resolve the problem of information non-appropriateness. However, this implies
the loss of learning externalities. Therefore, without any non-market intervention,
problems of inadequate information are severe in most developing countries.
Stiglitz (1989, p. 202) points out that the ultimate remedies to the problem are
improving the industrial organization of developing countries. Non-market institu-
tional remedies are needed to compliment the market mechanism to appropriate
information to the industry. The third reason for desiring government intervention is
that the government can alleviate the stringency of capability constraints on an
industry through various subsidies, taxation, expenditure and regulatory policies.
Governments may be in a better position to alleviate capability constraints due to
their ability to use long-term debt ®nancing with lower interest costs, and help an
industry to invest in projects that have high publicness and yield small, short-run
pro®ts.
Even though government intervention may be desirable for developing countries,
what form the interaction between the government and the private sector takes, still
depends on the institutional, social, economic and political context of a speci®c
country. In particular, the institutional arrangement between government and
business depends a lot on the structure of an industry and the political leadership of
the government. The extent of government control varies with the institutional
capabilities and the legitimacy of the government. The study shows that in the late
1970s and the 1980s, the Korean government helped the electronics industry to
overcome the problem of information externalities and capability constraints success-
fully by establishing close linkages between the public and the private sector for
industrial upgrading.

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720 R. W. Shin

GROWTH AND STRUCTURE OF THE KOREA'S INDUSTRY

The Rise of the Electronics Industry

In the late 1960s, Korea began to develop its electronics industry. However, most
Korean manufactures at that time were operated under American companies or had
joint ventures with them to assemble low value-added products for exports. In 1968,
for example, foreign companies were responsible for 71 per cent of the electronics
exports from Korea. 97 per cent of Korea's integrated circuits and transistor exports
were made by American companies or their venture partners (Bloom, 1992,
pp. 27±28). The industry was highly labour-intensive and limited in technological
sophistication. It wasn't until the early 1980s that the country suddenly emerged in
the world electronics market. For example, electronics exports grew at an annual
average of 30 per cent. The products were no longer predominantly integrated circuits
or transistors, but consumer electronics products which had higher values. The
production of solor TVS for example, rose from 2 million units in 1982 to 13 million
in 1991. VCR production also increased from only 50 thousand units in 1982 to
9 million units in 1991. By the end of the 1980s, Korea had become the second largest
producer of VCRs, microwave ovens and video cassettes, and the third largest
producer of color TVS and telephones in the world. They were also becoming an
increasingly signi®cant producer of some industrial electronics products, such as
microcircuits and digital computers. By 1990, they had about 4 per cent of total world
exports in digital computers and 9 per cent in electronic microcircuits.
Although some scholars suggest that Korea's success in its industrialization stems
more from entrepreneurial saving and investment than from government policy
directives, this paper argues that it is the institutional arrangement between the
Korean government and the electronics industry that made the rise in the world
market possible. First, we compare Korea with several developing areas which had a
more established electronics industry in the late 1960s and the early 1970s. If Korea
outperformed most of them in the world market during the 1980s, it will
demonstrate that Korea was more competitive in the world market than most
developing countries. The di€erences in growth leads to the second question Ð why
was Korea more successful (or less successful?) The answer lies in whether Korea
was better able to utilize the market mechanism to maintain its competitiveness, or
it had other non-market mechanisms to achieve its remarkable performance in
exports. Therefore we will then examine the development of the electronics industry
in Korea, Hong Kong and Singapore. All three countries were characterized as
export-oriented economies. However, Hong Kong adopted the laissez-faire policies
in economic development, while Singapore and Korea maintained active state
intervention in industrial development. If we are able to show that Singapore and
Korea were more successful than Hong Kong, we can support that state
intervention was important to the export growth of Singapore and Korea, and
may be desirable under certain contexts for other developing countries. The major
electronic producers are mainly operating divisions of the Korean Chaebol. With
the support of the parent group these ®rms usually take a long-term view, and when
necessary, can sacri®ce immediate pro®ts for a perceived advantage for some years.
They can also utilize the trading arms of the parent group to market their products
overseas.

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 Korea's Electronics and Telecommunications Industry 721

Cross-National Comparison of Export Performance

According to the International Trade Statistics Yearbook, the export value of major
consumer electronics products by Korea in 1969 was only $7 million, which was less
than 0.2 percent of the world total. The amount was substantially lower than that of
Hong Kong ($150 million), Mexico ($21 million) and other developed countries.
However, by 1992, Korea's export value rose to $6,536 million, which was 5.6 per cent
of the world total. The amount was higher than that of Brazil ($371 million) and
Mexico ($114 million), and was close to Hong Kong ($8,886 million) and Singapore
($7,307 million). Tables 2 and 3 give additional evidence that the growth of the
Korean electronics industry was more stable than Brazil's, Mexico's and Argentina's,
and was more successful in maintaining a continuous growth of exports. On average,
the annual export growth of major consumer electronics and telecommunications
products by Korea was 19.3 per cent in 1977±92. That of major industrial and oce

Table 2. Trade statistics of selected electronics products. Source: International Trade

Statistics Yearbook, various years (1970±1977).

Export from: 1969±73 1973±77 1977±83 1983±87 1987±92

Growth Growth Growth Growth Growth
Korea 111% 34% 18% 34% 6%
Other Asian developing areas:
Hong Kong 27% 15% 13% 24% 21%
Singapore 121% 33% 23% 22% 21%
Other developing countries:
Brazil 246% 9% ÿ2% 43% ÿ6%
Mexico 47% ÿ47% 99% ÿ1% ÿ34%
Import to:
United States 22% 17% ÿ1% 16% 4%
Developed Europe Ð 15% 5% 20% 10%
World Market Ð 19% 9% 15% 12%

Table 3. Trade statistics in selected electronics products. Source: International Trade

Statistics Yearbook, various years (1970±1977).
Export From: 1969±73 1973±77 1977±83 1983±87 1987±92
Growth Growth Growth Growth Growth
Korea Ð 122% 75% 77% 13%
Other Asian developing areas:
Hong Kong Ð Ð Ð 39% 19%
Singapore Ð 51% 118% 67% 33%
Other developing countries:
Brazil 47% 10% 12% 1% ÿ6%
Mexico Ð Ð Ð 120% 12%
Argentina 14% 21% Ð ÿ2% 1%
Import to:
United States Ð Ð Ð 39% 26%
Developed Europe Ð 19% 19% 24% 10%
World Market Ð 25% 28% 23% 15%

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722 R. W. Shin

electronics products was 55 per cent in the same period. Hence, we conclude that
Korea outperformed many developing countries in the electronics industry during the
1980s despite its late start in 1969.
Next we compare Hong Kong's electronics industry to those of Korea and
Singapore to contrast laissez-faire oriented policies with more state interventionist
ones. We ®nd that Singapore and Korea, in general, performed better than Hong
Kong. For example, the annual average growth of consumer and telecommunications
electronics exports by Hong Kong in 1977±92 was 19.3 per cent, which was lower
than Singapore's 22 per cent and the same as Korea's 19.3 per cent. The annual
average growth of industrial and oce electronics exports of Hong Kong in 1983±92
was 29 per cent, which was also lower than Singapore's 50 per cent and Korea's
45 per cent. Let us just compare the import percentages (import relative to domestic
production) of the electronics sectors of the three countries. Korea was apparently
better able to develop its domestic capabilities to support the industrial and con-
sumption needs for electronics products than Singapore and Hong Kong. Compared
with Taiwan, Korea is still signi®cantly better than Taiwan in terms of import
percentage. For example, Taiwan's electronics imports was 46.6 per cent of its total
electronics production in 1986, and 123.7 per cent in 1988. That of Korea was only
36.9 per cent in 1986 and 30.2 per cent in 1988. In the sector of industrial control and
electronic components, which are the more advanced sectors in the electronics
industry, the import ratios were 91.2 per cent and 55.1 per cent in 1988, respectively.
The numbers were also lower than the import percentages for Taiwan, which were
95 per cent and 97.6 per cent, respectively. From the above cross-area comparisons, it
can be observed that Korea has been relatively more successful than most developing
countries in the development of the electronics industry. It was not only able to catch
up with the earlier starters in the industry and attain continuous export growth
throughout the 1970s and the 1980s, but also developed successfully the domestic
capability to support its consumption and industrial needs. By the cross-area
comparison with Hong Kong, Singapore and Taiwan, we conclude that the success of
Korea cannot solely be attributed to the market force. This is congruent with some
past studies which suggest that the Korean government had important contributions
in stimulating rapid industrialization and export growth (Pietrobelli, 1994, p. 131;
Kim, 1993, pp. 9±10).

Reaction to Trade Barriers: The Case of Foreign Direct Investment

The rising trade barriers and anti-dumping regulations in the United States were
adversely a€ecting Korean electronics manufacturers. Faced with growing trade
protectionism, the electronics industry looked for a new way to approach market
access. Technological improvement, shifting to higher quality, and the establishment
of assembly plants in the United States are major e€orts the Korean industry has
exerted over the years. In particular, Korean manufacturers have consistently
expanded their R&D investments. The major feature of the Korean technological
path was the fostering of indigenous technology through research centres established
in both public and private sectors.
The policy scope also included support for scienti®c research and education,
product innovation and development, technology transfer and di€usion of

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 Korea's Electronics and Telecommunications Industry 723

technology. In the mid-1970s, the Korean government began to focus its science and
technology policies to advance the capacity of the electronics industry (Bloom, 1992,
pp. 55±58). For instance, the Law for Promotion of Industrial Technology Develop-
ment, enacted in 1973 and amended in 1977, stressed public±private co-operation as a
means of stimulating R&D e€orts in Korea. These e€orts by the government laid the
foundation for Korea's emergence in the world electronics market during the 1980s.
Another endeavor to note is the liberalized foreign investment policy of the Korean
government. Particularly in technology intensive industries, Korea has bene®ted from
advanced technologies embedded in foreign investment. The industries had also
actively recruited Korean-national scientists residing abroad.
In the following section, we will show that the success of these policies depends on
the following factors: (i) the close institutional linkage between the government and
the industry, which increased learning externalities and reduced information gaps;
(ii) mandates and incentives for private R&D (iii) public±private collaboration
and direct public investment in R&D and (iv) encouragement of the acquisition of
technology from abroad so as to be infused and to generate incremental improvement
as its competitive weapon.

GOVERNMENT POLICIES DIRECTED AT INDUSTRIAL

TRANSFORMATION

Institutional Linkage Between Government and Industry

An important contribution of the Korean government in facilitating the transforma-

tion of the electronics industry was the establishment of close linkages between ®rms
and the government as well as within the business community (Leipziger and Petri,
1993, p. 35). Inadequate market information and information non-appropriateness
hinder entrepreneurs to seek continuous upgrading of an industry. At the outset, the
Ministry of Science and Technology carried out two types of research. One was
government-funded projects, which mainly dealt with high-risk research. The other
was industry-initiated projects, which involved core industrial technologies that
individual companies could not develop alone owing to the scarcity of investment
funds and R&D capabilities. They were jointly funded by the government and
participating companies on an equal basis. One of the major R&D programmes
initiated by the government is the Strategic National R&D Project that supports the
development of core industrial technology and research on science, in order to
improve national competitiveness over the long term. To overcome such problems,
the Korean government established an institutional network that linked the public
and the private sector closely together (Chang, 1993, p. 146).
To reinforce the linkage with industry, the Korean government established a
number of organizations to target the needs of various electronics sectors. For
instance, under the Ministry of Science and Technology, there were the Information
and System Development Bureau and the Electronics and Telecommunications
Research Institute. They not only co-operated with private business to execute special
research projects, but also facilitated technology transfer from foreign companies and
promoted the exchange of ideas with foreign nations. Another e€ort that facilitated
communication between the government and the private sector in R&D was the

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724 R. W. Shin

establishment of the Technology Transfer Center of the Korean Advanced Institute of

Science and Technology.
The Korean government maintained close communication with the private sector
through intermediate associations. The Korea Electronics Industry Promotion
Society (KEIPS) was an example. It was an important link between the government
and private industry (Shin, 1993, pp. 117±120). It not only reported to the govern-
ment necessary industry information for policy formulation, but also communicated
industry concerns to the government. KEIPS has successfully galvanized the co-
operation e€orts between the government, science and technology experts, and the
business community to create a positive framework for continued government
support in science and technology.
Market information was appropriated more eciently through the network to all
major ®rms. With the government as the co-ordinator and mediator, the network
reduced costs of communication and strategic behavior (Watkins, 1991, p. 95).
A reciprocal relationship in information exchange was also assured by the involve-
ment of the government, which increased the eciency of technological information
sharing among all ®rms. Moreover, ®rms were put into more equal-based competition
in product development, and as a result, faced stronger impetus to compete and
upgrade their production technology continuously. For instance, the entry of the
private sector into the telecommunications industry (once monopolized by the
government) has telecommunications services changed from public goods to private
goods. The blurring of di€erent technologies and networks will make the old type of
regulation regime virtually obsolete. Mobile networks can easily substitute wired
basic telephone service, and on the other hand, networks can be extended with
wireless features (Min, 1996, p. 28). Eventually, the digitization of network tech-
nology is outstripping regulator's ability to enforce formerly stringent rules and
regulations. Digital voice and data trac on the same line have rendered once clear-
cut regulatory distinctions outdated and ine€ective. Thus, in order for the govern-
ment to adapt to these newly created environments, its roles need to be changed from
a regulator/service provider to a promoter/catalyst, and co-ordinator in the future.

Role and Direction of S&T Policy in Industrialization

From the early stages of economic development in the 1960s, S&T was recognized by
policy makers as an essential element of industrialization. However, in relation to
industrial policy, S&T policy played an extremely limited role during the take-o€ and
development stages. The technological capability needed for labour-intensive export
industries in the 1960s and for heavy industry and chemicals in the 1970s could be
easily acquired from foreign sources. Technology transfer was obtained through
imports of capital goods, reverse engineering, foreign direct investment, and tech-
nology licensing. Domestic technological capability building was mainly for adoption
and assimilation of imported foreign technology.
Signi®cant changes occurred in the late 1980s. Many Korean export industries
shifted from producing for original equipment manufacturers (OEM) and began to
market internationally under own brand names (e.g., Goldstar and Samsung).
Although price was the key component in their competitive strategy, Korean ®rms
realized the importance of product di€erentiation and quality improvement as they

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 Korea's Electronics and Telecommunications Industry 725

matured in their product development. This transition called for in-house R&D
capability. Changes in ®rms' competitive strategy created new challenges for S&T
policy. In the past, S&T policy had been supply-oriented, and this suggested that the
objectives of S&T policy were to strengthen S&T education, reinforce the S&T
infrastructure, and provide foundations for adopting foreign technology. Since the
late 1980s, however, the direction of S&T policy has turned towards encouraging
domestic R&D activities. National R&D programmes, inaugurated in the 1980s,
were designed to meet the new demands of industry, and attempts were made to
rede®ne the role and status of the major R&D players. As the globalization process
expands and intensi®es, it is believed that the future of Korean S&T depends on the
e€ective co-ordination and implementation of policy measures for S&T development
and research functions. As industrial policy becomes more industry-neutral and
technology-oriented, however, S&T policy seeks a new model for institutional
innovations and an optimal solution.

Absorptive Capacity and Adaptation of Technology: Telecom Inc's Strategy

Korea assimilated imported technologies and upgraded its technological capabilities,

with emphasis on consumer goods for expanding exports. For instance, as Korea
embraced Code Division Multiple Access technology (CDMA) for its mobile tele-
phone system in 1993, albeit advanced but unproved technology invented in the U.S.,
it is poised to compete with global heavyweights Lucent Technologies Inc. and
Motorola Inc. in the development of advanced digital communication. CDMA is a
type of digital transmission technology that converts voice into the computer
language of ones and zeros so it can be compressed, greatly increasing the number of
voice channels carried on a cellular network.
Much as Korea's industrial policy had previously helped create world leaders in
industries such as shipbuilding, the development of CDMA shows how Korea Inc.
Works. Adopting CDMA had a key advantage for Korea: a chance to lead in a
technology rather than follow; if they could commercialize CDMA ahead of others,
they could solidify their hold on the rapidly expanding domestic market and
strengthen their ability to compete internationally.
In 1992, the government-run Electronics and Telecommunications Research
Institute and Qualcomm Inc. of the US which developed the technology signed a
technology-transfer agreement. It provides for a CDMA system that could handle a
handful of phone calls. About 150 of the above research institute's engineers joined by
cohorts from Korea's three largest business groups Ð Samsung Electronics, Hyundai
Electronics Industries Co. and LG Information & Communications Ltd Ð went to
work trying to develop a commercially viable system. By 1994, the institute devised a
prototype system and tested it; three companies then used this research to develop
their own systems. In early 1996, SK Telecom in Korea its CDMA cellular-phone
service, and today it runs the largest CDMA network in the world, with 2.5 million
subscribers expected by 1997 (Ministry of Trade, Industry and Energy, 1997). The
Korean companies were among the ®rst in the world to build and launch a CDMA
system. Having succeeded in the development of next-generation telecommunication
technology, the three Chaebols endeavour to muscle into world mobile communica-
tion markets.

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726 R. W. Shin

Mandates and Incentives for Private R&D

Another role of the Korean government in facilitating the transformation of the

electronics industry was to pull technological development by the industry through
encouraging and mandating private R&D (Szyliowicz, 1981). Under the Law for the
Promotion of Industrial Technology Development, the Korean government required
large companies to set up research centres, and encouraged small and medium-size
companies to establish research consortia. In the mid-1980s, Korea had 129 private
research institutes and 18 research consortia in operation. Technological and ®nancial
assistance were given to private research centres by government research institutes,
the National Council for Science and Technology, and the Korea Technology
Development Corporation.
In addition to R&D mandates, the government o€ered various incentives to
companies for conducting private R&D. Thus companies investing in high-tech and
large-scale production techniques received tax bene®ts and other ®nancial incentives
like policy loans. New industries secured tax breaks for the ®rst ®ve years and reduced
tax rates in the following three years. Reserve funds that were used for R&D, capital
investment, and training expenses were all tax exempt. Foreign R&D personnel could
enjoy exemption from individual income tax, and patent payment could receive tax
credits. Furthermore, the government established the Small and Medium Industry
Promotion Corporation in 1980 and the Korea Technology Development Corpora-
tion in 1981 to assist private R&D. The former was a public organization that gave
long-term loans for R&D to small and medium-sized businesses. The latter was a
privately operated, government invested, ®nance corporation which provided loans
and venture capital for small research projects, such as software development.
Both R&D mandates and incentive policies helped to reduce the problems of
publicness in R&D information. The mandates ensured that no ®rms could free-ride
other companies' R&D e€orts, thus reducing the strategic behaviour of ®rms leading
to under-investment. Various subsidies and assistance further reduced the costs of
R&D. Technical assistance and coordination by public research institutes also
strengthened the innovative capabilities of private companies. All these policies
stimulated the industry to invest in R&D, so that it could improve its technological
level continuously to stay competitive in the world market. The mandate and
incentives policies seemed quite successful. According to the annual report on R&D
activities by the Ministry of Science and Technology (1996), private R&D expend-
itures rose signi®cantly in the past decade, from 165,200 million won in 1981, to
6,500,000 million won in 1996. In 1996, the private sector contributed over 82 per cent
of Korea's national R&D expenditures, compared with only 45 per cent in 1981.

Private±Public Collaboration in R&D and Public Investment

The third reason for the success of the Korean government's policies is that they
resolved the problem of public goods in R&D through public±private collaboration
in R&D and public investment in research and education. It may be argued that in
Korea, R&D investment, facilities, and manpower are not evenly distributed among
industry, academia and research institutes. Universities' emphasis has been on
education rather than research. Industries have primarily depended on technology

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 Korea's Electronics and Telecommunications Industry 727

transfer or reverse engineering rather than in-house innovation. In light of this

imbalance, the government has tried to maximize national R&D capabilities by
exchanging or sharing complementary assets among major actors.
Under the S&T Promotion Law of 1991, the government supports industrial tech-
nology research consortia by purchasing products manufactured by them and by tax
credits. A major e€ort to facilitate private±public collaboration was the establishment
of the Daeduk Science Town. The government o€ered a low-cost site for many high-
tech ®rms and research institutes to facilitate exchange of technological information
and research co-operation. The government-run Korea Advanced Institute of Science
and Technology also organized advanced research activities and trained top-quality
scientists and researchers to serve industrial needs, and promoted pure research and
mission-oriented basic research.
The education policies of the Korean government was another contributing factor
to the remarkable growth rate of the value-added product industrialization. In the
1980s, the government realized the pressing need to provide more competent tech-
nicians and researchers for industrial upgrading. As a result, the government directed
more resources to enhance national science education. Science and technology
education as well as vocational training at both the public school and university levels
were reinforced to meet the requirements of industrial development. The Korean
government targeted more than 80 graduate-centered universities for developing S&T
personnel and conducting basic research. The number of graduate students in these
universities was designated to be more than the number of undergraduates, and the
professor±student ratio was kept at 1 : 10 (Ministry of Education, 1988). This elitist
approach, coupled with return and utilization of many overseas trained scientists and
engineers, was successful in supplying the necessary manpower for R&D within a
short time. As a result of the policies, the number of personnel engaged in R&D
activities in Korea jumped from 29,578 in 1975 to 141, 257 in 1995. The number of
scientists and engineers engaged in R&D for the productive sector also increased
signi®cantly, from 10,275 in 1975 to 80,345 in 1995.

Encouragement of Technology Co-operation with Foreign Firms

The fourth reason for the success in the policies to assist the electronics industry is
that the Korean government encouraged the utilization of foreign technology and
investment to shorten the learning curve of the domestic industry. As Enos and Park
(1988) point out, the Korean government was highly successful in incorporating and
di€using foreign technology for domestic industrial development. Various strategies
to incorporate foreign technology, such as acquisition of foreign production system,
encouragement of OEM, subsidies for the Chaebols to enter technological coopera-
tion with foreign companies, and inviting foreign direct investment in Korea, helped
to reduce the capability constraints as well as enhance the eciency and quality of
technology information ¯ows.
The Korean government shifted its development policies from highly inter-
ventionists to more liberal in the early 1980s. The liberal policy re¯ected a change in
Korea's comparative advantage being shifted from labour-intensive goods to capital-
intensive goods. Because Korea's future competitiveness depends on technological
advancement, the issue of FDI plays an important role in the improvement and

# 1998 John Wiley & Sons, Ltd. J. Int. Dev. 10, 715±731 (1998)
728 R. W. Shin

application of the new technology. In the 1980s, the Korean government o€ered
many incentives for foreign investment and technology transfer. For example, it
modi®ed its restrictions on foreign direct investment and created a negative-list system
in 1984. The system listed the industries which were protected against foreign invest-
ment. Potential investment which was not on the list was automatically approved.
Data available from the Ministry of Finance (1990) suggests that electrical/electronics
absorbed the single largest share of total FDI in all manufacturing sectors during the
past decades. Moreover, the three Korean Chaebols were able to obtain considerable
numbers of cooperation with foreign companies, which included Lucky-Goldstar
(LG) and AT&T's joint-venture in manufacturing telecommunication products,
Samsung and Hewlett Packard co-operation in computer manufacturing, and
Samsung Semiconductor's 64K DRAM technology licensing and its VLSI tech-
nology from various American companies. Likewise, Hyundai received technology
transfer in its VLSI development from several sources abroad, and Goldstar is a
licensee of Fairchild, AMD, and AT&T (Mowery and Steinmueller, 1991).
The Korean government further encouraged foreign transfer of technology
indirectly by relaxing the regulations on overseas investment by Korean companies
in the 1980s. The policy allowed Korean companies to invest abroad more easily. At
present, LG, Hyundai and Samsung have already set up U.S. subsidiaries in Silicon
Valley, California and many places in Europe. Foreign subsidiaries allowed Korean
companies to utilize the more competent manpower and researchers in other
countries. In addition, they reduced the transaction costs in technology transfer and
learning, and increased the possibility of collaboration with foreign companies and
governments. Overseas investment reduced the risk barriers, information uncertain-
ties, and capability constraints faced by Korean companies in the world market.
When the acquired technology was transferred back to parent companies in Korea,
the domestic industry was transformed in a more ecient and less risky way.

CONCLUSION

The contextual changes in Korea have brought about a new partnership between
government and industry, collaborating to overcome problems in industrial trans-
formation and maintain the competitive edge in the global marketplace. The common
problems faced by developing countries in the process of industrial transformation
are information inadequacies, information non-appropriateness, and capability
constraints. Relying solely on the market mechanism fails to deal with these problems
successfully as private ®rms are mainly concerned with pro®tability and risks, and
certain bene®ts and costs in their investment are not internalized in their decisions.
Remedies for these market failures depend on institutional mechanisms that can
appropriate information and resources more eciently. Government intervention is
an option. In Korea, government funding of S&T activities and programmes to
promote innovation takes place under circumstances di€erent from those of most
other nations. Korea's economic growth has been dynamic, a situation that generates
more revenues for public investment. Growth has been guided by an industrial policy
that requires developing indigenous S&T capabilities that can create a competitive
industry at world levels.

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 Korea's Electronics and Telecommunications Industry 729

Although past research suggests that the government also can have failures in
policy making and create more costly ineciencies, the study suggests that govern-
ment action to facilitate industrial transformation is desirable if: (i) the government
establishes close linkages between an industry and the government, which can help
reduce information gaps and prevent failures in policy making; (ii) the government
can utilize a wide array of policy tools, such as mandates, incentive policies and direct
investment in R&D, to resolve the problems of non-appropriateness and externalities;
(iii) both actors, the government and industry, are outward-oriented and open to
information and resource in¯ows from foreign countries and the world market.
Recent literature have suggested that the institutional interaction between the
government and industries are subject to the in¯uence of political leadership, institu-
tional dynamics between the bureaucracy and the private sector, and socio-political
interests of business in society (Bright, 1996, pp. 293±300). This implies that the
interaction between the government and industry does not remain stagnant over
time. Rather, it changes as the contextual factors Ð social, economic and political
factors Ð are transformed gradually. For example, the successful mechanism between
the government and the Chaebols that helped the Korean electronics industry in the
1970s and the 1980s may not work in the future. We have already seen several
contextual changes in Korea which have been challenging the traditional decision-
making mechanism between the industry and the government. Moreover, a changing
role of government in the national development will be a policy question in the future.
The process of democratization in the parliament and the reduction in the legitimacy
of authoritarian leadership by the bureaucratic system have started to shake the
state leadership in making industrial policies. The result of ®nancial liberalization
has exposed the problems of non-performing assets (NPAs) in commercial banks
resulting from the government's failures. The NPA overhang delayed the liberal-
ization of the ®nancial sector, banks in particular. They also caused X-ineciencies
for bank management, as improved pro®tability through better management was
more than o€set by larger losses due to those NPAs (Sakong, 1993, p. 181). The
traditional linkage between Chaebols and the government is also under pressure
to change. It is being criticized as a hindrance for Korea to absorb new technology
and adapt ¯exibly to market challenges (Kim, 1993, p. 22; Leipziger and Petri, 1993,
p. 23). This further erodes the legitimacy of state leadership in directing business
development.
The Korean government still plans to invest signi®cantly in R&D in the ®elds of
electronics and telecommunications. The focus of public investment seems to be
shifting to the provision of basic and intermediate R&D and education, which
demonstrates strong externality e€ects and non-appropriateness. Nevertheless, the
interactive mechanism between industry and the government will still be important,
because the mechanism helps to reduce information costs and facilitate learning
externalities.
To conclude, the process of industrial transformation is a continuous decision-
making process by the government and industry in response to information inputs
and capability constraints. Di€erent contexts of social, economic and political factors
may make certain interactive modes between the government and industry more
advantageous to the transformation process. In the context of developing countries
government intervention is desirable to help industry overcome the problems of
information externalities and capability constraints. However, as an industry matures

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730 R. W. Shin

and contextual factors change, the mode of government intervention and interaction
between the government and industry will also change.

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