Strategic, Policy and Social Innovation for a Post-Industrial Korea

Beyond the Miracle

Joon Nak Choi, Yong Suk Lee, Gi-Wook Shin, Joon Nak Choi, Yong Suk Lee, Gi-Wook Shin

• Publisher: Routledge
• Year: 2018
• Print ISBN: 9780815395997
• eBook ISBN: 9781351183000
• Edition: 1
• Topic: Business
• Subtopic: Management
• Index: Business

Export-oriented industrialization has transformed the Korean economy so profoundly that it has become known as the "Miracle on the Han." Yet, this industrial model has become fragile, as Korea's chaebols are being challenged by Chinese competitors. Attempts to seek out new engines of economic growth have failed, or remain underdeveloped, while a looming demographic crisis threatens to exacerbate Korea's problems.

This book outlines a blueprint for overcoming these challenges, moving beyond the business strategies, government policies, and socio-cultural patterns established under export-oriented industrialization. Written by a stellar line-up of international contributors, its central proposition is that social change is needed to support the strategic and operational transformation of the chaebol and SMEs. Specifically, it stresses the need for an appreciation of the gender, national, and ethnic diversity emerging within the Korean workplace today. If properly leveraged, such diversity has the potential to reduce the groupthink that hampers the creativity and responsiveness of Korean firms today, as well as facilitating greater success in overseas markets.

Taking an interdisciplinary approach, this book will be useful to students and scholars in Korean Studies, as well as those studying business, economics, and sociology more broadly in East Asia.

1 Introduction

Joon Nak Choi

Export-oriented industrialization has transformed the Korean economy so profoundly that it has become known as the “Miracle on the Han.” In 1957, South Korea had a similar per capita GDP to Ghana, about $490 (in 1980 US dollars). In 2016, Korea’s per capita GDP approximated that of Japan at purchasing power parity.¹ Unlike most other parts of the developed world, the Korean economy has grown robustly since the 2008 recession, with per capita GDP growing at a 6.4 percent compound annual growth rate. It is worth emphasizing that Korea’s economic achievements have been accompanied by social achievements, as Korea scored higher than a large proportion of developed countries across many measures of social development.

Although Korea’s industrial model has been successful to date, it has become increasingly fragile. Korea achieved growth through export-oriented industrialization, where the state orchestrated Korea’s move into textiles in the 1960s, heavy and chemical industries (e.g., steel, shipbuilding and chemicals) in the 1970s, and electronics in the 1980s. In each of these sectors, the state selected national champions (i.e., the chaebol) and funneled capital into these firms. Through these efforts, the chaebol emerged as key actors in global markets, driving exports and economic growth (see Woo 1991; Moon 2016); in 2016, Korea is the country with the seventh largest number of Fortune 500 companies by revenue (i.e., the Fortune Global 500). Despite their success to date, the chaebol now face existential challenges. For instance, a rising China has produced competitors to the chaebol, benchmarking the Korean model and appropriating its strengths. Foreseeing this challenge, Korean policy-makers proactively sought new engines of economic growth in business services and entrepreneurship. Yet, attempts to move into business services have either failed or fizzled, and the entrepreneurial push remains at an early stage of development. These problems will be exacerbated by a demographic crisis. Decades of economic development, sex selection, and gender inequality have contributed towards Korea having one of the lowest birthrates in the world. The effects of this demographic change will soon hit the Korean economy, as the labor pool will not only begin shrinking, but also become older and presumably less productive. Taken together, these three challenges constitute a crisis, and how Korean policy-makers, executives, and civil society leaders respond to them will affect Korea as strongly over the next 50 years as the developmental state did over the past 50.

Competition from a rising China

In recent years, the chaebol have begun to face stiff competitive challenges from Chinese firms that have emulated them. As Chinese firms upgraded their industrial competitiveness, Korean firms have lost ground in industries that they dominated not long ago.² The steel industry exemplifies this trend. Much as POSCO once benchmarked Nippon Steel, Hebei Steel, and Baosteel in China benchmarked POSCO and Nippon Steel. These firms started with import substitution, largely replacing Korean imports in the Chinese domestic market. In recent years, however, they have flooded global markets with low-cost steel. In 2014, Chinese steelmakers increased their global exports 63 percent and even captured nearly 40 percent of the Korean domestic market.³ While POSCO remained important globally, it nevertheless ranked below Hebei Steel and Baosteel in steel production that year.⁴ While a surge in Chinese domestic demand captured the attention of Chinese steelmakers in 2016 and provided some relief to Korean competitors, the durability of these favorable conditions remains unknown.⁵ Other heavy and chemical industries appear to be following the same trajectory. Korean petrochemical exports in 2014 declined for the first time since the 2008 financial crisis; exports into China dropped 6.2 percent from 2013 and China’s share of these exports dropped to 45.7 percent from 48.6 percent, indicating a pattern of import substitution.⁶ A similar pattern is emerging in the automotive industry. For instance, Hyundai has continued to do well globally but has lost market share in China, which Hyundai only recently considered a linchpin of its future growth.

In shipbuilding, Chinese firms are already posing existential threats to chaebol. Korean shipbuilders grew by winning market share from Japanese competitors in the 1990s and early 2000s. Around 2003, Chinese firms also began winning market share, starting in technologically undemanding segments such as bulk carriers and container ships; as of December 2015, these types constituted 66.3 percent of unfilled orders for Chinese builders. In response, Korean builders moved into more technologically complex (and profitable) market segments, including liquefied natural gas and oil tankers; as of December 2015, these types constituted 50.4 percent of unfilled orders for Korean builders.⁷ Although moving into these defensible niches seemed an effective competitive response, it nevertheless made demand for Korean ships susceptible to energy shocks. These concerns materialized in 2014 and 2015, when declining energy prices reduced demand for tankers and hit Korean builders hard; in the first quarter of 2016, two of the three top Korean shipbuilders failed to book any new orders, and the third (Hyundai Heavy Industries) only booked two orders totaling US$129 million.⁸ While Korean shipbuilders won Iranian orders totaling US$2.4 billion in the second quarter of 2016, Chinese firms remain a long-term threat, as they upgrade their technology and move into more sophisticated segments.⁹ Indeed, of the 205,000 people that the industry employed as of 2014, about 10 to 15 percent are expected to lose their jobs.¹⁰

Even in industries where Chinese firms are not yet challenging chaebol dominance, they are still creating strategic problems. For instance, Samsung Electronics remains a market leader in smartphones, winning 23.2 percent of the global market in the first quarter of 2016 alongside 14.8 percent for Apple, and Chinese manufacturers Huawei, Oppo, and Xiaomi collectively won only 17.2 percent.¹¹ Chinese competitors have nevertheless disrupted the smartphone industry. Operating at low or even negative margins, they have created downwards prices pressures that have eroded profits across the industry. As Samsung slashed prices on mid-range smartphones to compete against lower-cost Chinese phones, the profit margin for its mobile division declined to 10.6 percent in the second quarter of 2015 compared with 15.5 percent a year earlier.¹² This figure nevertheless beat LG’s margins on smartphones, which shrank to roughly US$0.01 per phone.¹³ In semiconductors, Samsung Electronics and SK Hynix retain technological advantages and scale economies over Chinese competitors. Yet, their ongoing reliance on the Chinese market, which spent more importing semiconductors than petroleum as recently as 2013, is a real strategic vulnerability. The Chinese will invest US$161 billion into semiconductors over the next few years, and will likely generate scale economies beyond what Samsung and SK Hynix can match.¹⁴ Overall, these competitive threats confirm Korean fears that their current industrial model is becoming unviable, and that “…an attempt to compete with China on cost or scale is bound to fail.”¹⁵ Recognizing the reality of these fears, The Economist described the Korean economy as “a tiger in winter” and “a once fearsome economy.”¹⁶

A failed search for new engines for economic growth

Policy-makers in Korea have long been aware of these problems, and have sought to find new engines for economic growth. As Jung (2015) suggests, “… the rapidly changing environment has left Korea with no other alternative but to change its industrial structure.” While such a restructuring has not yet taken place, it has not been for a lack of effort. In April 2002, the Kim Dae-Jung administration announced a roadmap to develop Korea into “the hub of Northeast Asia.” Although the first component of this roadmap focused on the development of a logistics hub, which has proven highly successful, longer-term components of this roadmap focused on attracting multinational firms’ regional headquarters.¹⁷ This was expanded under Roh Moo-hyun to that of a business and financial hub. While advocates of this plan recognized that Korea would be competing against established financial hubs in Hong Kong, Singapore, and Tokyo in addition to a rising Shanghai, they argued that Korea had key advantages including the presence of large domestic companies needing financing, a central geographic location within East Asia, a large population with a high savings rate, and momentum for financial reform.¹⁸ The Ministry of Finance and Economy devised a three-stage plan. In the first phase (2003–2007), it would improve the financial regulatory infrastructure, support the growth of asset management firms, and create a sovereign wealth fund using foreign currency reserves. In the second phase (2007–2010), Seoul would emerge as a financial hub specializing in the asset management business. In the third and final stage (2012), Seoul would grow into a major financial hub, with the world’s 50 largest asset management companies locating their Asian headquarters in Seoul.¹⁹

These initiatives have unequivocally failed. None of the major asset management firms have moved their regional headquarters to Seoul. On the contrary, Western banks are retreating from Korea, closing offices established as long ago as the 1970s. Banks that have closed or sold major units in Korea include Barclays Capital (investment banking), Citigroup (consumer finance), Royal Bank of Scotland (retail banking), HSBC (retail banking, asset management), and Standard Chartered (two retail banking units). In addition to the need to react to global earnings shocks and meet higher capitalization and deleveraging requirements back home, their reasons for leaving Korea include excessive regulation and the lack of a strong economic incentive to locate in Seoul, especially in comparison with a rising Shanghai.²⁰ Another factor was the lack of top-end human capital (i.e., “global talent”). While Korea had a deep pool of skilled university graduates, it nevertheless faced a shortage of workers ready to function as professionals in corporate finance, management consulting, and other high-end business service roles. Reflecting this shortage, the French business school INSEAD ranked Korea only 29th out of 103 countries in the 2017 Global Talent Competitiveness Index—one rank below a less highly developed Malaysia.

Acknowledging the reality that the business and financial hub strategy has failed, the former Park Geun-hye administration shifted its focus towards entrepreneurship, announcing a three-year plan to jump-start a creative economy. Park created the Ministry of Future Planning and founded 17 incubators (i.e., “creative economy centers”) that offered space, funding, and advice to entrepreneurs.²¹ This approach highlights both Korea’s progress and the constraints that it still faces. On one hand, state support may have contributed towards a recent flowering of start-ups, as state agencies like KOTRA and Born2Global have become “smarter and more selective.”²² On...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright page
• Table of Contents
• List of figures
• List of tables
• Notes on contributors
• Acknowledgments
• 1 Introduction
• 2 Corporate strategy and the competitiveness of Korean electronics firms versus their Japanese and Chinese counterparts
• 3 Competitive strategy and challenges for the chaebol
• 4 SME productivity and export promotion policies in Korea
• 5 South Korean SMEs and the quest for an innovation economy
• 6 College major and female labor supply
• 7 Brain drain, circulation, and linkage: sequence analysis of Korean nationals graduating from Stanford University
• 8 A comparative analysis of Asian versus Asian American entrepreneurship: evidence from Stanford University alumni
• 9 Bridging and the success of Korean firms in China: an entrepreneurial understanding
• Index