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University Microfilms International 300 North Zeeb Road Ann Arbor, Michigan 48106 USA St. John's Road, Tyler's Green High Wycombe, Bucks. England HP10 8HR 78-1051
LEE, Ka-Jong, 1940~ TECHNOLOGY,TRANSFER AND DEVELOPMENTAL STRATEGIES:' THE ROLE OF LARGE FIRMS IN KOREA •. University of Hawaii, Ph•D.,. 1977 . Political Science, general
University Microfilms Intemational, Ann Ar.bor. Michigan 48106 TECHNOLOGY TRANSFER AND DEVELOPMENTAL STRATEGIES:
THE ROLE OF LARGE FIRMS IN KOREA
A DISSERTATION SUBMITTED TO THE GRADUATE DIVISION OF THE UNIVERSITY OF HAWAII IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY IN POLITICAL SCIENCE
AUGUST 1977
by
Ka-Jong Lee
Dissertation Committee:
Robert B. Stauffer, Chairman Youngi1 Lim Douglas Bwy Michael Haas Harry Friedman iii
ABSTRACT
Technological Change grows and flourishes in specific social
settings. Once it comes into being, it plays a pivotal role in trans
forming society. Therefore, technology transfer and developmental
strategies should be examined in terms of current international circum
stances in which technology is overwhelmingly concentrated in the hands
of a small number of multinational corporations. The problems of
technology transfer to developing countries stem not only from the widened technological gap but also from the very nature of the world
system which has been shaped by modern technology. This study concen
trates on technology's impacts on industrial concentration and the
international division of labor with the support of empirical data
drawn by means of a questionnaire administered to 40 large manufacturing
firms in South Korea.
Modern technology, which is available to a developing country
through technology transfer from industrialized countries, requires a
sizable commitment of resources and consequently results in industrial
concentration. An empirical analysis showed that the more modem the
technology transferred (technological dependence), the higher the
degree of industrial concentration in a developing country.
Exportation of manufactured goods from a developing country is
considered as one possible outlet of economies of scale demanded by
technological efficiency. Export, however, pushes a developing country
to participate in the international division of labor, hierarchically
structured in terms of technological change, which costs a developing
country formidably. An empirical assessment showed that exports of a iv developing country concentrate in the low level skill-intensity category.
It was also revealed that the higher the degree of technological dependence of an industry, the lower the export perfomance.
In this situation technological demand for resource concentration and giantism calls for state intervention and ~onsequently results in centralization of political power, which is, in tum, likely to take the fom of collective measures. In this respect, the pandora box of technology seems to promise no progress for human civilization: it is technical regression, viewed from the moral and humanistic standpoint.
We all must grapple with the technological issue. v
TABLE OF CONTENTS
ABSTRACT •••• •• ...... · .. · . iii LIST OF TABLES ...... ·.·. ·.. ·. ·.. vii LIST OF FIGURES ...... · . . ·...... viii
Chapter I. Introduction ••• eo. •••••••• 1
Chapter II. Social Function of Technological Change 2
(1) The Meaning of Technology ••••• 2 (2) The Theory of Technological Lead • • • • • • 10 (3) Modern Technology and Science Policy •• 19
Chapter III. Conceptualization: Technology Transfer 28
(1) Vertical Process •••••••••• 28 (2) Horizontal Process ••••••••• 37 (3) The Late-Camer Thesis and the Technological Gap • • • • • • • • •••••• 41 Chapter IV. Technological Dependence • ·. . ·.. · .. 47 (1) Internationalization of Science and Technology •••••••••••• 47 (2) Consumption Patterns and Technology · . · . Transfer ••••••••••••• 54 (3) Local Innovative Activities and Royalty· . ·. Payments ••••••••••••• · . 63 Chapter V. Technology Transfer and Monopoly · .. . · . . . 81 (1) The Theory of Product-Life Cycle •••• 81 (2) The Nature of the Market for Technology 91 (3) Industrial Concentration •••••••• 98 Chapter VI. Technology and the International Division ·.. 113 (1) International Trade Pattern • • • 114 (2) Technological Activities and Export· · · · · Performance . • • • 118 (3) Implications of the· ·International· ··· ··· ·· Division of Labor for Power and Wealth Distribution • • 125 (4) International Division··· of· ·Labor· ··and· · · · · Choice .... ·· · · · · · · · · 131 Chapter VII. Politics of Technological Change and Modernization ••••••••••• ·.. .. . 141 vi
(1) Politics of Modernization G • G • • • 141 (2) Political Goals and Modernization· • ·• ··•• 154 (3) Guided Capitalism: The Korean Style of· · Modernization. • .. • . • . ••• · • · • 158 (4) The Perspectives . . •• • • . · • · · • · • 173
Chapter VIII. Conclusion •••• 0.0 ••••••• 0.000 182
Appendix 1. Correlation Analysis of Technological and Economic Activities of Selected Industries (1975) ••.••• 0••••••••••• ·. .. 187 Appendix 2. Indexes of Teclmo1ogica1 and Economic Activities of Selected Industries (1975) · ... . 189 Appendix 3. Statistics of Teclmo1ogica1 and Economic
Activities of selected Industries (1975) D • D 190
Appendix 4. Survey Method and Questionnaire .00 0 • • • 0 0 191
Bibliography ••••••••••••••••••••••• •• 203 vii
LIST OF TABLES
Table 1 Motives of Technology Transfer ••• .. 59 2 Advantages of Foreign Technology •• . .. .. 62
3 R&D Activities and Royalty Payments of Japanese Industries •• •••••••••••• 67
4 Goal of R&D Activities of Korean Manufacturing Industries (1975) •••••••••••• .. 69 5 Foreign Investment in the Sample Industries 73
6 Technology Transfer Costs of Turn-key Projects in Korea (1970-75) •••••• 77 7 Motives of Foreign Capital Inducement ...... 86 8 GNP and Export Performance by Manufacturing Sector in Korea •••••••••• . ... . 121 9 Skill-intensity ...... 123 viii
LIST OF FIGURES
Figure Page 1 Model of Vertical Technology Transfer • .. 32 2 Model of Horizontal Technology Transfer • •• 40 Chapter I
Introduction
In the last decade, the transfer and development of technology have acquired a prominent place and have led to growing interest among social scientists. Increasing emphasis upon the role of science and technology in the development process stems not only from the appreciation of the major contribution of technological change to the
:..\ '''tQ:\1''''': •. aggregate economic growth but also from the perception that technological change exercises a decisive impact upon the socio-economic structures and the equitable distribution of wealth in the world.
On the other hand, it is very difficult to dissociate any discussion of the problems of technology transfer from big businesses (or multi- national corporations), and vice versa: both are often inextricably bound together, as a persistent theme in economic theory that has praised large firms' for their technological efficiency suggests. To quote Schumpeter: "They are essentially one and the same thing."l
Both began to emerge as economic phenomena around the beginning of this century and have grown with tremendous rapidity in 1950s and 1960s.
The strong association of technological progress and big business has, to a great extent, upset the classical theories of social science.
"The Age of Discontinuity" describes how
The world has become one market, one global shopping center, yet this world economy almost entirely lacks economic institutions: the only exception is the
1 Joseph A. Schumpeter, capitalism, Socialism and Democracx, (New York: Harper & Row, 1950), p. 110. 2
multinational corporation: And we are totally without economic policy and economic theory for a world economy••• Where the assumptions that govern what we expect and see are still those of the individualistic society of eightenth-century liberal theory, the reality that govern our behavior is that of organized, indeed over organized, power concentration.2
In international politics the agenda is changing, and the nature of power is undergoing a truly radical transformation. Public attention has begun to focus on the uneven distribution of technology and information. Inequality, long associated primarily with capital, is coming to be associated with technological factors and the political and economic control over the international exchange of information.
It has also become a major issue in international conferences including the U.N. General Assembly in the 1970s.3 In this context, power is
increasingly defined as "the ability in a specific situation, to translate resources into capability to compel a settlement of an objective conflict on terms favorable to the actor. ,,4 It is important to recall that this transformation has more to do with the deemphasis of punitive power (power of force and violence) in international
2 Peter Drucker, The Age of Discontinuity, (New York: Harper & Row, 1968), p. x.
3 For example, the Seventh Special Session of the U.N. General Assembly, held in September, 1975, adopted a resolution that a U. N. Conference on science, technology and development should be held in 1978 or 1979, and an international code of conduct on the transfer of technology should be developed. See Resolution 3362 (S-VII).
4 See Abdul A. said and Luiz R. Sinnnons, "The Politics of Transitions," in said and Simmons (eds.), The New Sovereigns: Mu1ti natioI'..a1 Corporations as World Power, (Englewood Cliffs, New Jersey: Prentice-Hall, 1975), p. 17. 3 politics than the growth of remunerative power (the power of having 5 goods) during the last decade. This allocative power has come to be viewed with even greater suspicion when it became clear tha~ the multinational corporations pursued their own business interests-- interests which were not necessarily identical with those of their host countries or, increasingly, even with those of their home countries. The growing body of literature, therefore, argues that a crucial factor in determining the future relations between the industrialized countries (or the multinational corporations) and the developing countries is the question of technology transfero
The purpose of this study is to investigate the questions of technology transfer from the industrialized to the developing countries, and to attempt to empirically assess the impact of modern technology on the socio-economic institutions of developing countrieso The approach used is to examine the relationships between technology transfer, industrial concentration, and the international division
of labor. Technology transfer is treated as an independent variable, and industrial concentration and the international division of Labox as dependent variables. Two tasks, however, have to be accomplished
before such an investigation can be undertaken. First, I have to
ascertain the importance of the function of technological change in
social change or the development process. Secondly, I have to identify
or develop a conceptual framework on the basis of which technology
transfer processes can be understood, and the areas of research can be
formulated.
5 The terms "punitive" and "remunerative" power are borrowed from Johan Galtung~ The Euro,ean Community, (London: George Allen &Unwin, 1973), pp. 33-~. 4
The first task is undertaken in Chapter II. There, I investigate the dimensions, structures and major characteristics of technological change and science policy in modern society. Special attention is given to the social function of technological change. Chapter III deals with the second task, i.e., the construction of the conceptual framework of the transfer of technology with which to approach the problems posed by the technological development of the recipient country. Chapter IV introduces the theory of "technological dependence" and in the later section of Chapter IV I submit the data which were collected from 40 large firms in the Republic of Korea (henceforth simply Korea). These data (the independent variable) are used for the analysis of correlation with the two major dependent variables
(i.e., industrial concentration and the international division of labor). I think that the conceptual investigation in Chapters II and
III are very important because technology and the transfer of technoLogy have been and are misunderstood subjects and because there is confusion over the complexities of the mechanics of technology transfer processes.
In Chapters V and VI two dependent variables are conceptualized and the relationships between the independent and dependent variables are measured. These two variables are long established and controversial subjects in political economy. However, conventional theories have quite ignored the impact of technological change. There, I will argue that technological change plays a pivotal role in any area of the subject. In these two chapte.rs two main hypotheses are to be formulated and tested: 1) the more technology transferred (technological dependence), the higher the degree of industrial concentration in a 5 developing country, because modern technology requires a sizable commitment of resources; and 2) the higher the degree of technological dependence of an industry, the lower the export performance, because of the characteristics of the world system of modern technology.
In Chapter VII, an attempt is made to examine the patterns of resource allocation open to the technological late-comer (developing countries) and to further explore the political tmp1ications of resource allocation for the development process in the context of the international milieu of technological change. In the concluding chapter, I summarize the major findings.
The data used in this study were collected by means of question- naires from 40 large firms in 10 selected branches of the manufacturing sector (4 largest firms in each branch) in Korea. The case of Korea is of particular interest because it represents a government of the
"right" achieving a remarkable 10 percent growth rate of real GNP over a 10 year period with a rapid expansion of manufactured exports, while relying extensively on a tool commonly associated with the
"left.,,6 I will argue that the driving forces behind this contradiction are basically due to technological demand. The investigation will focus on the most recent year (1975) largely due to the limited data available. Ten industries (food processing, cotton textile, synthetic fibre, industrial chemical, fertilizer, steel and iron, machinery, oil refining, electric and electronic equipment, and transportation
6 See Leroy P. Jones, Public Enterprise and Economic Growth: The Korean case, (Seoul: Korea Development Institute, 1975). This argument will be discussed in more detail in Chapter VII. 6 equipment) were selected on the basis of their weights in terms of strategic importance, i.e., economic growth performance, technological characteristics, export performance, foreign investment and technology transfer, etc. I found that, according to statistics officially released by the Korean govermnent, these 10 industries account for over
50 percent of the manufacturing sector in any area listed above. Here
I should note that the data of individual firm will not be divulged because of commitments to the respondents to protect proprietary secrets. For a more detailed description of the methodology, see
Appendix 4, Survey Method and Questionnaire.
Although I utilize case material, the fundamental aim of this study is to develop an analytical framework within which other case studies and international comparisons might be made. Chapter II
Social Function of Technological Change
(1) The Meaning of Technology
Technology is like a great mountain peak. It looks different according to the side from which one views it. It is double-edged and multifaceted. There are wide discrepancies in the use of the term, e.g., the economist's production technology, the sociologist's consump- tion technology, the political scientist's administrative technology, the engineer's engineering technology that never converge. However, as a first task an attempt will be made to define the term because much of the value of the analysis in this complex field depends on 1 clearing up a certain amount of terminological muddle.
Technology is here conceived as "the ensemble of practices by which one uses available resources in order to control or alter objects of the physical environment." More specifically, technology is the complex of physical tools (e.g. machine, instrument, equipment, 2 etc.), know-how (technique and skill), and technical knowledge (know-why).
1 For extensive elaborations on the definition of technology, see Jacques Ellul, The Technological Society, (New York: Vintage Books, 1964), pp. 2-22; William Ogburn, "The Meaning of Technology," in Francis Allen, et a1., Technology and Social Change, (New York: App1eton-Century-Crofts, 1957), pp. 3-11; and Keith Norris and John Vaizey, The Economics of Research and Technology, (London: George Allen &Unwin, 1973), pp. 19-25. 2 No doubt there are many other definitions and interpre~ttions of the word "technology": tools and machines; practical application of scientific knowledge; a set of techniques which defines a production function. Sometimes broader definitions identify with the aggregate of all means to achieve certain valued ends. Most definitions are hybrids of the previous illustrations. These illustrations are enough to demonstrate the protean nature of the matter. 8
The machine is the typical example of physical tools tbat is most obvious and massive. However, the machine is the product of the other parts of technology, i.e., technical know-why and know-how.
It is the machine which is now entirely dependent upon technical knowledge and know-how. There can, however, be machineless technology.
A. Zvorikine reports tbat science is working on the machineless
generation of electric power (magnetic-gas-dynamic transformers).3
All knowledge is not part of technology. When certain knowledge is applied to a particular task it becomes part of technical
knowledge. Know-why is the act of applying knowledge, whether directly
or with the aid of a tool. It is n~t necessarily systematic (science):
it is sometimes intuitive and comes fran practical experience. The
primitive technical activities of man--irrigation techniques, hunting,
plant growing, fishing, etc.--are examples. Science is a developed
form of knowledge: the sum total of the systematic and objective body
of knowledge which is usually cbaracterized as "accumulative." When this
accumulative knowledge (science) is applied in practice, know-why 4 (technology) becomes accumulative and objective. This is the case of \9 modern technology. In short, knowledge is concerned with "understanding,"
while know-why (technology) is concerned with "practicality."
3 A. Zvorikine, "The Laws of Technological Development," in carl F. Stover (ed.), The Technological Order, (Detroit: Wayne State University Press, 1963), pp. 71-72.
4 The concept of the accumulative know-why is similar to the concept of technology suggested by Galbraith: "The systematic application of scientific or other organized knowledge to practical task." See.1. K. Galbraith, The New Industrial State, (New York: New American Library, Second Rev. Edition, 1971), p. 31. 9
Know-how is movement of actions,5 which come closest to the individual or group of individuals, and which is retained in the subconscious memory. On the contrary, know-why is that part of knowledge which comes closest to the higher faculty of reason, being retained in the conscious memory, and hence most easi1y connnunicabLe,
Derek Price pointed out that "the cumulative nature of science is recorded in the scientific literature, but that the cumulative character of technology is embodied in artifacts and recorded not in the technical literature, but in engineers' handbooks, users' manuals, catalogues and the like. ,,6 Allen has underlined this separability by demonstrating the very limited reliance engineers place upon scientific literature in development work. 7 Nelson, et a1., reinforce this separability: When the technology of an industry is not well understood in the sense that it cannot be or is not described in books and articles, and cannot be or is not explained in terms of general scientific or engineering concepts, the engineers or scientists are at a disadvantage relative to the experienced industry technicians.
Hence, when aspects of the technology are formally understood, the
5 This definition is frequently identified with terms like "skill," "technique," or "art." See, for example, Ellul, .2E,. ~., p. 13, and David Dickson, Alternative Technology and the Politics of Technical Change, (Glasgow: Williams, 1974), p. 17.
6 Derek Price, "Is Technology Historically Independence of Science?" Technology and Culture, VI (Fall, 1965), pp. 553-568. 7 Thomas J. Allen, "The Differential Performance of Information Channels in the Transfer of Technology," William Gruber and Donald Q. Marquis (eds.), Factors in the Transfer of Technology, (cambridge, Mass.: The M.I.T. Press, 1969), pp. 137-54. 10 scientists or engineers can apply an entire stock of accumulated knowledge that even the most experienced workman does not have if 8 he lacks formal training. To sum up: the core of technology is know-why and know-how which are embodied in human beings.
(2) The Theory of Technologica.l Lead
Before we analyze the problems of teclmology transfer and its impact, it is essential to take a look at the broad concept of technological change and its impact on society. But these are weighty issues, to which no single paper could do justice--certainly this one has more modest aims.
The inter-relationship of teclmology and society is of two kinds: one is concerned with the social situation that gives rise to invention and discovery (the origins of new teclmology) and to their uses (innovation) by society. The other is in the effects upon society of the uses of invention and discovery. Representatives from different branches of science (disciplines) have contributed valuable ideas on these subjects. For many years social scientists have been probing the subtleties of the social structure and appraising effects of innovations upon the vast and complex array of social relationships.
The teclmological determinists have now come to assume commonly that technology is the base upon which the remainder of the society--the ideological (e.g. beliefs and norms) and organizational
8 R. R. Nelson, M. J. Peck, and E. D. Kalacheck, Technology, Economic Growth and Public Policy, (Washington, D.C.: The Brookings Inst., 1967), p. 39. 11 components rests. The sociologist Ogburn argued that material culture changes by a process which is fundamentally different from changes in norms and social organization. While material culture tends to grow exponentially, i.e., at an increasing rate of increase, non-materia1 culture is adaptive to the material culture. One cannot devise methods for controlling and utilizing new technology prior to the acceptance of technology. Hence cultural lags: the disparity between the newly innovated technology and the pre-existing ideological and organizational elements in that social relationships which cannot keep pace with the new conditions established by new material 9 instruments. Following this notion, the anthropologist explicity states that "social systems are in a very real sense secondary and 10 subsidiary to the technological system"
The idea of technological determinism may in part come from
Marxls materialistic interpretation of history. To Marx technology appears as the motive force and the foundation of the economy, though his concept of technology was drawn from the nineteenth-century industrial system. Without technology, there is no economy. For this reason a distinction can be made in economics between dynamic force, which is technical invention, and static force, the organization of the economy. He distinguishes between the system of production (the mode
9 William F. Ogburn, Social Change, (New York: Viking Press, 1922 and 1950). See also Francis R. Allen et a1., Technology and Social Change, (New York: App1eton-Century-Croft, 1959), an extensive text book in which a number of sociologists try to hypothesize and test the theory. 10 Leslie White, The SC'~nce of Culture, (New York: Farrar Straus, 1969), p. 365. 12 of production) and the system of distribution (production relations) : the former revolutionary, the latter necessarily conservative. It is technology which all the rest depends on. He wrote: "In acquiring new productive forces men change their mode of production: and in changdng their mode, they change their way of earning their 1iving- 11 they change all their social relations." But the distinction made by
Marx must be revised, for it is no longer true that technology plays its role in the realm of production alone. Distribution, too, is to a great degree modified by techno1ogy.12 For example, two socio1ogists- 13 Lenski and Heintz in separate analyses of social stratification and the historical development processes, argue that the distribution mechanism of the values of society is to a great extent modified by technological change.
Marx also noted that invention takes place within an environment which consists of institutions--mora1, legal, political, and others--all of which Marx contends change but slowly. These non- economic social institutions may have considerable bearing upon the time lag with which the changes ultimately to come from the invention are created. Thus non-economic factors may be operative in a time sense without affecting the vital casual connection between a change in the mode of production and the ensuing changes in social situation
11 Karl Marx, "The Poverty of Philosophy," Handbook of Marxism, compiled by E. Burns, (New York: Random House, 1935), p. 355.
12 Jacques Ellul, 22. ~., pp. 149-150.
13 See Gerhard E. Lenski, Power and Privilege: A Theory of Social Stratification, (New York: MCGraw-Hill, 1966; Peter Heintz, The Future of Development, (Bern: Hans-Huber, 1973), and A Macro sociological Theory of Societal §ystem, (Bern, Hans-Huber, 1972). 13 and processes. In another sense non-economic institutions may be
operative as independent forces modifying the mode of production, once 14 non-economic institutions have crysta1ized from basic economic forces.
In the case of science, Marx is aware of its paramount
significance, but denies it an independent existence. Science, to him,
is but a reflection of the systems of production. He also stressed
the importance of economic organization: the link between science
and production only became possible after the craft-based industries 15 were replaced by machine-based industries in the factory system.
In this he is at least partly wrong. The instances showing that science
is due to economic needs can be countered by citations pointing to
non-economic needs. As we shall see in the next chapters the link
between science and production (technological innovation) is rather
elusive and most nations suffer from the poor link between them.
Further, whatever its origins, once a science has gained a start, it
develops also, and very largely, of its own accord. In short, for
Marx the casual series began with changes in production technology
(independent variable) Which initiated changes in the economic structure
of society (dependent variable). In turn, the economic structure
(now an independent variable) shaped the "general character of these
social, political, and spiritual processes of life (dependent variable).
14 William N. Loucks and J. Weldon Hoot, Comparative Economic Systems, (New York: Harper eSc Row, 1948, 3rd ed.), p. 167.
15 See Karl Marx, Capital, (Chicago: Charles H. Kerr, 1906), Chapters xiii, xiv, xv, 14
Clarence E. Ayres, following Thorstein Veblen, clearly
identified the cumulative process of technology innovation and its
impact upon social institutions as the prime source of economic 16 progress through the course of human development. While differing with Ayres regarding the casual interplay between technology and
institutions, Simon Kuznets, in his extensive empirical studies of modern development, strongly reinforces the basic concept that a
country's economic growth is based on advancing technology and the
institutional and ideological adjustments that it demands. His major
contribution has been to generalize and support empirically the
structural changes that typically ensue when modern economic development
begins. 17 James Street, applying a combination of Ayres' and Kuznets'
16 C. E. Ayres, The Theory of Economic Progress, (New York: Schochen Books, 2nd ed. 1962), and The Industrial Economy: Its Technological Basis and Institutional Destiny, (Boston: Houghton Mifflin, 1952). It is interesting that Talcott Parsons and C. Wright Mills, two of the most important sociologists the United States has ever produced, were both students of Ayres and that both admitted to being influenced by him. See Rick Tilman, "Value Theory, Planning, and Reform," Journal of Economic Issues, VIII-4 (Dec, , 1974), p, 706.
17 Simon Kuznets, Economic Growth of Nations, (Cambridge, Mass: Harvard University Press, 1971, especially pp. 303-348, and Modern Economic Growth, (New Haven: Yale University Press, 1966). When Ayres speaks of "institution" and Kuznets of "institution and ideology," both are concerned not only with formal structures, such as the policy-making agencies of govermnent, the educational system, and business firms, but also with attitudes, and values that informally characterize the work ethic, inventive activities, and managerial practice, elusive as such attitudes and values may be to isolate. 15
ideas, argues that "the basic causes of the extended Argentine
stagnation problem are deeply cultural and involve a failure to
internalize the technological modes of behavior common to the advanced . ,,18 eountrr'Lea,
A noted political scientist, Harold D. Lassell, in his
analysis of elites and politics, remarks that the rise and fall of
elites is closely related to technological change and scientific
knowledge: the new technology passed from playing a passive role and
began to reshape the world pattern of power. He further contends
that social tensions arise from the gap between the rising levels of
technological development and the rate of social adaptation which they make necessary.19 David Apter also asserts that as societies modernize, the ideologies of socialism and nationalism can be expected
to give way to the generalized ideology of science. 20
The criticisms of technological interpretations of social
change have been voluminous, although less so than the literature
supporting them. Richard LaPiere points out that the prevalence of the
idea of technological determinism in modern western society both
reflects and implements its considerable preoccupation with the
18 James H. Street, "The Ayres-Kuznets Framework and Argentine Dependency," Journal of Economic Issues, VIII-4 (Dec, , 1974), pp. 707-728.
19 See Harold Dwight Lasswell, Politics: Who Gets What! Whet/., ....1!2!., (New York: World Publishing, 1972), and H. D. Lasswell, et al., The Comparative Study of Elites, (Stanford: Stanford University Press, 1952).
20 David Apter, Politics of Modernization, (Chicago: University of Chicago Press, 1965), p. 344. 16 technological component of society. One of the common intellectual errors of our age is to treat the social components of a social system, both conceptually and op=rationally, as distinct and quasi-independent entities, i.e., to take literally the abstractions, technology, ideology, and organization. But a component is not an entity, nor is it an operational unit. The operational units of a society are the assembles, complexes, and subsystems, each of which involves parts or elements from all three components.21
The role of technology in social change is not that of a determinant--i.e., not that of antecedent cause--but, rather that of what may be termed an inter-dependent variable. In many respects, technology operates within the social system. Change in ideology or organization or both may work changes in technology that in turn 22 implement further changes in the former. As J. K. Galbraith puts it:
"Technology not only causes changes, it is also a response to change.
Though it forces specialization it is also the result of specialization.
Though it requires extensive organization it is also the result of organization. ,,23
For example, the works of Charles Singer, et a1., suggest that ideological and organizational circumstances have fostered technological innovations, and repercussions on the former of the 24 1atter. J. Schmook1er has produced some important empirical evidence,
21 Richard T. LaPiere, Social Change, (New York: McGraw-Hill Books, 1965), pp. 250-262. 22 Ibid, p. 262.
23 J. K. Ga1briath, The New Industrial State, (New York: New American Library, Revised ed. 1971), p. 38. 24 Charles Singer, A History of Technology, (Oxford University Press, 1958), vol. V. 17 supporting the view that innovations appear in response to economic demands. 25 There is also the frequently asserted thesis that whereas the religions of medieval Europe, India, and China had operated as stabilized factors, that of the recent West--e.g.,
Protestantism--had operated to foster change. Joseph Needham's seven-vo1mne study, Science and Civilization in China, shows that the
Chinese have made a number of inventions and discoveries: the horse's harness, paper, gunpowder, the segmented bridge arch. Anti-small 26 pox vaccination was known in China as early as the eleventh century.
China transmitted a large number of discoveries and inventions to
Europe: the smelting and oxygenation of steel were transmitted to
Europe. Why did none of these inventions and discoveries find practical application in China? There are number of general answers: some argue that it is because the country never went through the capitalist stage, which in turn was probably due to the country's social system; the Chinese merchant class, being socially inferior, preferred to rise into the nobility by purchasing land which was the 27 only form of wealth and prestige at that time.
25 J. Schmook1er, "Economic Sources of Inventive Activity," Journal of Economic History, XXII-1 (March, 1962), pp. 1-20.
26 Joseph Needham, Science and Civilization in China, (cambridge University Press, 1954-71). 27 Jacques Ellul elaborated on these problems. He contended that application did not take place because the felicitous combination of factors was lacking. The joint occurrence of five factors explains the exceptional growth of techniques in the West. They are: 1) a long technical maturation; 2) population growth; 3) a suitable economic milieu; 4) the almost complete plasticity of a society malleable and open to the propagation of technique; and 5) a clear technical invention. See J. Ellul, .2E,. cit., pp. 44-60. 18
The relationships among these three components of a society lie at the heart of many of the great controversies in philosophy, history, sociology, and economics. Which is the chicken and which the egg? It is the predicament of mankind that despite his considerable knowledge and skills, he does not understand the origins, significance, and inter-relationships of its many components and thus is unable to devise effective responses. This failure occurs in large part because we continue to examine single aspects of the problem without under- standing that the whole is more than the sum of its parts, that change in one element means changes in the others.
However, we should note that in modern, almost innnediately recent time, the nature of technological change itself has been modified. We see this modified in the form of suddenly accelerated change in various applied fields. The recent acceleration is not a simple intensification of technological dynamics of earlier centuries.
Technological thrust has a different character. Except for J. Ellul, who characterizes modern technology as "automatism of technical choice, self-augmentation, monism, and teclmical universalism,II little attention has been paid to the system of research and development
(R&D) that distinguishes modern technology from its predecessors.
Science and technology have become an institutionalized establishment intimately affecting society and in turn affected by it. While, as
Robert K. Merton has observed, the impact of science on society has been greater than that of society on science,28 science and society
28 Robert K. Merton, Sciencea Technology and Society in Seventeenth Century England, (New York: H. Fertig, 1970). 19 are today so closely linked that it is difficult to speak of greater or less effect of one upon the other.29 J. Ellul has brilliantly 30 contended that science is increasingly subordinated to technology~
(3) Modern Technology and Science Policy
There are fundamentally different approaches to the study of teclmology's impact on society. As social scientists have become increasingly sensitive to the connection between technological innova- tion and social change, they have become more divided over their view of the future. The optimists believe that technological advances will perhaps allow man to resolve many of the social and economic problems which have plagued industrial societies over the past two centuries.
They view the question as how to organize society to take maxinnDll advantage of technology--whether by the extension of individual freedom unfettered by govermnent controls (liberalism), by state ownership of the means of production (socialism), or by the supremacy 31 of a single class (Marxism).
Not all observers share this optimism. The technologic euphoria which began about 1600 with Francis Bacon began to ebb with
29 Norman Kaplan, "Sociology of Science," in Robert E. L. Faris (ed.), Handbook of Modern Sociology, (Chicago: Rand MacNally & Co, 1964).
30 He writes: "In the twentieth century, the re1ationship between scientific research and technical invention resulted in the ens1avement of science to technique. In the nineteenth century, however, science was still the determining cause of technical progress." see J. Ellul, £E. ~., p. 45. 31 See William Kintner and Harvey Sicherman, Technology and International Politics: The Crisis of Wishing, (Lexington, Mass.: Lexington Books, 1975). 20 the Pandoran gift to mankind of the atomic bomb. A new public attention has risen. The pessimists focus on the invidious consequences of many technological developments: the human suffering produced by increasingly sophisticated weapon systems and air and water pollution produced by an expanding corporate capability. Even more frightening are the subtle dehumanizing effects of the system: the moral approach to technology pictures technological society as an Orwellian system in which personal freedom and identity will be sacrificed for greater efficiency and uniformity.32 More recently, Ellul has promoted the idea of technology as a closed system that encloses man and forces him to adopt to its demands: his profound pessimism stems from his conviction that technology is autonomous of human controls: man does 33 not shape teclmique, he respond to it. Robert Gilpin unwittingly substantiates Ellul's worst fear: regardless of the particular circumstances or setting, certain teclmiques are inherently attractive and man has no choice other than to adopt them.34
After World War II, science policy, and more generally the study of the impacts of science and technology on society, has 35 emerged as an active field of study. This broad field of study can
32 See George Orwell, Nineteen Eighty-Four, (New York: Harcourt Brace, 1971); and Aldous Huxley, Brave New World, (New York: Harper eSc Row, 1932). 33 See J. Ellul, £e. £!!. 34 Robert Gilpin, France in the Age of the Scientific State, (Princeton: Princeton University Press, 1968). 35 For reviews of this field, see William R. Kintner and Harvey Sicherman, Technology and International Politics: The Crisis of Wishin~, (Lexington, Mass.: Lexington Books, 1975); R. Rettig, "Science, Teclmology, and Public Policr,," World Politics, XXIII-2 (Jan., 1971),. pp. 273-293; Gene Coggsbal, 'Sources in the Field of Science Policy, ' Policy Studies Journal, 2-4 (Summer 1974) PP. 302-310; and Jeffrey o61er'/''Techn91ogy and Politiclj!," Eublic Administration Reyiew, No. 5 (sept. Oct., 197~), pp. 581-588. 21 be subdivided into three areas: national public policy, technology assessment, and the political interactions between the scientific and technological communities and the political-governmental system.
National public policy, a normative field, is usually concerned with problems of technological production: the most effective relationships among the academic community, industry, and government; the proportional support of pure research, applied research, and development: the planning and execution of education policies--these are all subject to intensive investigation as nations compete in technological innovation.36
The term "technology assessment" is relatively new. The purpose of this area is to alert both developers and policy makers to the possible impact of technology on the larger society, and to open the option of proper regulation before production and marketing has reached full scale. However, much of the literature is oriented more toward "technological forecasting" and "futures" study than to making moral judgements. On the other hand the growing environmental movement and many second- and larger-order effects (besides the impact on social change) of technology, e.g., the environmental impact of SST vapor, make "technological forecasting" more difficult and perilous.37 22
The Futurist movement proposes to anticipate social change and to discern the effects of rapid technological innovation on human life. Daniel Bell, Zbignew Brzezinski, and Herman Kahn, for example, have advanced the concept of postindustrial society where the potentials and problems are of a different order from those of industrial and agrarian society: the new issues are brought on by knowledge and techno1ogy.38
The discussion on the relations between the scientific community and the political realm began with Don K. Price and Co P.
Snow. 3'3 They fear that scientists have begun to playa role beyond that of research alone: they have whittled at politicians' authority.
However, this notion is another version of an older problem, that of the technicians, usually termed "technocrats," who owe their influence to their technical expertise.40
38 See Daniel Bell, "The Post-Industrial Society: The Evolution of an Idea," Survey, XVII (Spring, 1971), pp. 102-168; Zbignew Brzezinski, Between Two Ages: America's Role in the Technetronic Era, (New York: 1970); and Herman Kahn and Anthony J. Wiener, The Year 2000, (New York: Macmillan, 1967). For the political implications of postindustrial society, see Samuel P. Huntington, "Postindustrial Politics: How Benign Will It Be?" Comparative Politics, (Jan., 1974), pp. 163-192.
39 Don K. Price, Government and Science, (New York: New York University Press, 1954) and The Scientific Estate, (Cambridge, Mass.: Belknap Press of Harvard University Press, 1965); and C. P. Snow, Science and Government, (Cambridge, Mass.: Harvard University Press, 1966).
40 See Joseph Haberer, Politics and the Community of Science, (New York: Van Nostrand Reinhold, 1969); Jean Meynaud, Technocracy, (New York: The Free Press, 1969); and Victor C. Ferkis, Technological Man, (New York: George Brazi11er, 1969). 23
No doubt these sub-areas are inter-related, and emphasis and perceptions vary widely. The above discussions on science policy have been fundamentally limited to the advanced countries. It is interesting to speculate how these general notions of science policy which has burgeoned in the advanced countries have influenced the formulation of science policy in the developing countries. An expert in this field notes that in most countries, institutions, strategies and goals tend to follow the pattern set by a more "advanced" country, and not the needs and capabilities of the country for which this policy is intended. This imitation effect is generally accompanied by an important time lag: European countries copy what the United States was doing five or ten years ago, and the developing nations copy what the more advanced countries were trying to do ten or fifteen years 41 before. Partly as a result of this bias, science policy in developing countries tends to concentrate upon the "purer" end of the scientific spectrum, i.e., on fundamental research, and to neglect both the more mundane aspects of technological change, such as the role of imported innovation and the influence of the social enviromnent on technological change.
The practice of defining science policy primarily as govern- mental policy leaves out a substantial part of the scientific system.
Edward Shils gives the objective of science policy as "the deliberate effort to influence the direction and rate of development of scientific
41 Nicholas Jequier, "Science Policy in the Developing Countries: The Role of the Multinational Firm," in Gustav Ranis (ed.), The Gap between Rich and Poor Countries, (London: Macmillan, 1972), pp. 336 347. 24 knowledge through the application of financial resources, administrative devices, education and training in so far as these are affected by 42 political authority." It is, however, difficult to recognize the existence of these "science policies" unless a distinction is made between "explicit" and "implicit" science policies.43 "Explicit" science policy is the official policy which is expressed in laws and regulations governing science planning, in development plans, and in governmental declarations.
"Implicit" science policy is far more difficult to identify because, although it determines the real role of science and technology in society, it bas no formal structure: in essence it expresses the scientific and teclmo10gical requirements which are largely "blind forces" reflecting the set of national objectives. For instance in the u.S.A. the Defense Department bas been called "the real national science foundation.,,44 In Japan MIT! (the Ministry of International
Trade and Industry) handles and decides the policy of technology for industry, even though the responsibility for general policy in science
42 Edward Shi1s (ed.), Criteria for Scientific Development: Public Policy and National Goals, (cambridge, Mass.: M.I.T. Press, 1968), p. Ix,
43 See Ami1car Herrera, "Social Determinants of Science Policy in Latin America: Explicit Science Policy and Implicit Science Policy," The Journal of Development Studies, 9-1 (Oct., 1972), pp, 19-37: see also Nocho1as Jequier, .2£. ill.
44 See Bernard Udis, "The End of Overrun: Prospects for the High Technology Defense Industry and Related Issues," The Annals 406 (March, 1973), p. 71. 25 and technology is lodged officially in the Agency for Science and
Technology.45
These two science policies might be viewed as a result of history. The first great social impulse to science arose from the demands of the Industrial Revolution: in the latter part of the nineteenth century, industry began to need technology which were based on science. The second great impetus originated in the techno1o- gical requirements of the great powers because of military and industrial competition. These two stages of the science and technology revolution developed without an explicit science policy: they were the result of the pressure of social needs on the scientific and techno1ogi.cal systems, reflected in diverse and non-institutional ways. Explicit science policy appears latter, because of the need to create a structure and to institutionalize procedures, in order to achieve maximum returns.46 However the examples of the Defense
Department and MITl demonstrate that the strongest tendencies favor implicit science policies rather than explicit ones: explicit policies tend to be treated in relative isolation. Nevertheless, it seems that in advanced countries the mechanisms of implicit science policy become complementary to the explicit when the former pursues practical technological development and the latter is concerned with the
45 see Keichi Oshima, "Research and Development and Economic Growth in Japan," in B. R. Williams (ed.), Science and Technology in Economic Growth, (New York: John Wiley & Sons, 1973), pp. 310 334.
46 See Amilcar Herrera, .2£. £!!.., pp. 27-28. 26
promotion of the scientific base coordinated with ~plicit policies.
This is another version of the relationship between science and 47 technology.
The ~itation effect (especially the ~itation of explicit policy) is comparatively more damaging in the case of developing
countries. In the advanced countries science policy with the strong assistance of the implicit one tends to develop as a superstructure where the policies originated from social needs. On the contrary,
science policies in the developing countries where no pre-existing
scientific and teclmological systems exist have another role: they
should be a set of mechanisms and policies geared to create an
infrastructure where they could take full advantage of science and
technology for their development strategies. When the explicit policies
of the advanced countries are transposed into the very different
environment of developing countries, they have the opposite effects.
47 Most of the analyses of science policy argue that the convergency of implicit and explicit science policies is derived from "national consensus." Herrera states: " ••• in both cases (in developed capitalist countries and in socialist countries) the degree of consensus attained means that the content of explicit science policy coincides more or less with the scientific and teclmological demands of the prevailing national project. In general in underdeveloped countries there is no consensus about national projects which essentially embody the objectives of the ruling elite only." See Herrera,2£,. ill., pp. 28-29. Keichi Oshima also attributed Japan's success partly to the existence of a "national consensus" on the need to modernize the economy and advance economic growth. See Oshima, £E.. cit., pp. 319-323. However, targets of this sort and a consensus about them would seem to exist in many other countries both developing and developed, but somehow they do not produce results. They simply bypassed the complementary character of the two kinds of science policies. 27
If the social and economic organization of the developing countries is manifestly different from that of the advanced countries, the social functions of science and technology must be different too.
Furthermore, as the world increasingly becomes one we first should work out how the overwhelming international concentration of scientific and technological capability in the industrialized countries has affected the position of the developing countries: because of the way science and technology operate in international politics and the world economy, the science policy of developing countries should be as much concerned to defend these nations against the impact of modern science technology, as to use it for their own internal development.
This further implies that, as Keith Pavitt contends, all these problems are fundamentally political: they cannot be conjured away by
"technology assessment," "cost-benefit analysis," "social engineering,"
"systems analysis," or other social science equivalents of the
"technological fix. ,,48 Therefore, science policy in developing countries calls for an effort almost at the level of "autonomous theorization": in more realistic terms it require "model domestication. ,16
1:0 sum up, technical change grows and flourishes in specific social settings. Once it comes into being, it exercises a great influence on social change. As the world increasingly becomes one, therefore, the national policy for science and technology for developing countries should be examined in the context of the world system which has been shaped by modern technology.
48 Keith Pavitt, "Technology International Competition and Economic Growth: Some Lessons an<1 Perspectives," World Politics XXV-2 (Jan, 1973), p. 198. 49 "Autonomous theorization" comes from Latin America and the term "model domestication" from Robert B. Stauffer, "The Need to Domesticate Foreign Models," Solidarity (April, 1972), pp. 53-63. Chapter III
Conceptualization: Technology Transfer
The study of technology transfer is a subconcept of technological change and its impact on society. Without the broad concept of the latter, the study of technology transfer is likely to fail to explain properly the peculiar problems of the current technology transfer process from the advanced to the developing countries. Most studies on the subject in the last decade slur over this point. In this chapter an attempt is made to conceptualize vertical vs. horizontal technology transfer, and to examine the "late-comer" thesis which has prevailed in the analysis of technology transfer in the past.
(1) Vertical Process
Two types of technology transfer are usually distinguished.
Harvey Brooks proposed two dimensions of technology transfer as the key to understanding the transfer process, by which science and 1 technology are diffused throughout human activity. The first,
called "vertical transfer," refers to transfer along "the line from
the more general to the more specific" or the progression of technology
from a science to a final product. This is the process by which new
scientific knowledge or the "state of art" becomes embodied in a
technological system and by which the confluence of several different
1 Harvey Brooks, "National Science Policy and Technology Transfer," Proceedings of a Conference on Technology Transfer and Innovation, (Washington, D.C.: U. S. Govermnent Printing Office, 1967), pp. 53-69. 29 and apparently unrelated techniques leads to new technology. The second dimension, called "horizontal transfer," occurs through the 2 adaptation of a technology from. one application to another, and from one place, organization, or context to another place, organization, or context.3
Most of the "research on research" in the industrialized 4 countries has focused primarily upon the vertical transfer process.
The vertical transfer process involves a sequence of activities:
1) discovery (finding of new ideas about the physical universe or its organizing principles); 2) invention (the creation of new things which mayor may not be based on new discoveries); 3) innovati9-n (the creation of a new system or the introduction of new things to the market); 4) development (the improvements in products! process or engineering refinement); and 5) technological drift (the minor process 5 of improvement engineering).
2 ~, p. 56.
3 Edwin Mansfield, "International Technology Transfer: Forms, Resources Requirement," The American Economic Review, LXV-2 (May, 1975), p, 372.
4 For comprehensive reviews and overviews in this field, see Edwin Mansfield, Industrial Research and Technological Innovation - An Economic Analysis, (New York: Norton, 1968); R. R. Nelson, et al., .2£. cit.: William H. Gruber and Donald Go Marquis (eds.), Factors in the Transfer of Technology, (Cambridge, Mass.: M.I.T. Press, 1969); F. M. Scherer, Industrial Market Structure and Economic Performance,
(Chicago: Rand McNally, 1970); and K. Norris and J o Vaizy, The Economics of Research and Technology, (London: George Allen & Unwin, 1973). 5"Technological Drift" is a useful term, coined by J. P. Ruina, to denote the process of minor improvements in system and components, to cope with minor snags which have appeared during development, marketing, deployment, or servicing, but whose cumulative impact can amount to or make possible substantial system changes. See Ha~ G. GelberJ ''Teclrilical Innovation and Arms Control," World Politics, XXVI-q. (July, 1974), pp. 509-510. 30
Hall and Johnson's classification of technology has an important implication to the vertical transfer process, although they were mainly concerned with the horizontal: genera1-, system- and firm-specific technologies actually move "along the line from the more general to the more specific," which is defined as vertical transfer.6
These or any other divisions are of course an arbitrary way of dividing what is in reality a continum: the transfer process seldom follows the orderly sequence described above. Instead, there may be overlaping through feedback among the stages. 7 These difficulties in defining the vertical transfer process are naturally reflected in the categorization of activities designed to achieve them. A rough division between basic, applied r 7search, and development seems to be accepted both in the literature and in practice. But the definitions used in the literature differ in detail. Basic research means original investigation for the advancement of scientific knowledge without specific commercial objectives (possible output is discovery); applied research is investigation undertaken primarily for a practical
objective other than the advancement of scientific knowledge
(invention may be output); and development means the translation of research findings into products or process prototypes (innovation and
6 See G. R. Hall & R. E. Johnson, "Transfers of United States Aerospace Technology to Japan," in Raymond Vernon (ed.), The Technology Factor in International Trade, (New York: National Bureau of Economic Research, 1970), p. 308. "General technology" refers to information common to an industry, profession, or trade: "system-specific" to the information possessed by a firm or individuals within a firm which gives a firm competitive edge; "firm-specific" to information that is specific to a particular firm's experience and activities. 7 The difficulties and usefulness of the distinctions among the vertical processes are frequently expressed in the literature. For a good review, see Vernon W. Ruttan, "Usher and Schumpeter on Innovation, and Technological Change," Quarterly Journal of Economics, LXXII-4 (November, 1959), pp. 596-606. 31 development in the vertical transfer processes).8 In addition to these vertical transfer processes there are also the other technical activities that make up the minor process of improvement engineering
(i.e. the technological drift stage).9
These vertical transfer processes and the corresponding innovative activities are summarized in Figure 1. At a given point in time (t = 0) (stage 1) there exists a state-of-art situation or inventory of technical knowledge: this situation is dependent upon
"technological capability" or "technological opportunity."lO This state-of-art is embodied in various economic and cultural uses through educational and other cultural activities. Stages 2 and 3 indicate the advancement of the level of technical knowledge by means of
8 This is basically the definition used by the U, S. government. It has been applied to studies of other industrialized countries and the Soviet Union. See NSF, National Patterns of R&D Resources 1953 1972, (Washington, D.C.; U. So Government Printing O;fice, 1972), p. 21. For the practices of matching innovative activities (input) with innovational outputs, see B. R. Williams, "The Basis of Science Policy in Market Economics," Bo R. Williams (ed.) ~E.. illo, pp. 416-431; E. Mansfield (1975), ~. cit., p. 372.
9 Cf. Jorge M. Katz, "Industrial Growth, Royalty Payments and Local Expenditures on Research and Development," Urquidi (ed.), Latin America in the International Economy, (New York: John Wiley & Sons, 1973), p. 223.
10 "Technological capability" refers to the ability to solve scientific and technological problems, and to follow, assess and exploit scientific and technological development. "Technological Opportunity" refers to .the presence of basic knowledge, 32
Figure 1. Model of Vertical Technology Transfer
Input Output
Education & Current 1 Cultural Activ. State-of-Art
2 IBasic Research I__Discovery I
3 1Applied ResearchI 1 Invention 4 I J;)~ye1opment 110-----1Production 5 IImprovement I--rTech. Drift discovery and invention. There may be an increase in technical knowledge durIng stages 2 and 3 that will never reach utilization.
This technical advance would therefore not enter into the magnitudes of economic value calculated for the use of technical knowledge. If the technical advance achieved in stages 2 and 3 reaches at least one economic use the innovation takes p'lace, and the process moves into stage 4, the first use of a teclmica1 advance. In this stage the discoveries and inventions attain economic value. After this stage has been successfully reached, the economic value of the technology transfer will be increased. Stage 5 is a continuous process of technological ~provement and engineering refinement.
This sequence is really circular: technical knowledge and know-how in all these processes are accumulated as each new technological capability added to the state-of-art of a society in turn becomes a 33
11 new source of discovery and invention (feedback effects).
In much of the literature usual input measures include
R&D spending, R&D employees, scientists and engineers employed. Each of these, as well as other indexes of innovational effort, has recognized deficiencies. For instance, technical improvements may not only be developed in the R&D department but also in operating and other divisions. With these considerations in mind, I refined several indicators for use in field research in Korea (see Appendix 4 for a description of the methodologies emplqyed in the survey and for a copy of the Questionnaire). For "technical personnel," I employed the following as indicators: 1) R&D employment (scientists and engineers) engaged in R&D activities as percentage of the labor force of each industry; 2) the number of engineers engaged in operational activities other than R&D as percentage of the labor force; 3) the number of skilled and semi-skilled workers as percentage of the labor force. R&D employment (hereafter referred to as RS) together with
R&D expenditures was designed to measure the innovational activities, while the number of engineers (ENG) and the number of skilled and semi-skilled workers (SKL) as percentage of employment was meant to measure the "technological opportunity" and the "skill-intensity" respectively.
R&D expenditures as an indicator of innovational inputs are susceptible to institutional distortions. The tax treatment of R&D
11 Cf. Gruber & Marquis, Ope cit., pp. 255-281; Harold and Margaret Sprout, Foundation of International Politics, (Princeton, New Jersey: D. Van Nostrand, 1962), pp. 223-224. 34 expenditures provides an incentive for firms to classify additional activities as "research.,,12 In addition to the tax treatment the definitional problem causes another confusion: the bulk of money classified as "development" is actually expended for routine commercial activities in the name of marketing research and development without commensurate increase in R&D activities. In Korea most firms do not calculate the wages and salaries of scientists and engineers engaged in R&D activities: a tax and accounting expert said that in practice the laws prohibit the inclusion of wages and salaries into R&D activities. Taking into account these measurement problems, the figures presented by the interviewees in the field survey in Korea have been carefully investigated and readjusted. In this study the R&D activities are measured by the percentage of the sales volume (RD index). In some literature, innovational outputs have been measured by patents awarded (invention and development), sales of new products (innovation), scientific papers (discovery), blue-prints, formulae, design and operating manuals, etc. (invention, development, and technological drift). Since a great deal has been written recently on the dis- advantages of using these indicators as measures of innovational outputs, we shall not elaborate on this point here. In the study of
12 In Korea the Technology Promotion Law provides the incentive of tax exemption on R&D expenditures. Cf. J. M. Blair, Economic Concentration: Structure, Behavior and Public Policy, (New York: Harcourt, 1972), pp. 201-204. David Novick noted two significant jumps in reported R&D spending without R&D activities in the U.S. industries. He attributed these to: 1) the tax treatment; 2) the fashion aspect because of which R&D may be viewed favorably by stockholders. 35 developing countries these variables distort the facts in many ways. 13
Therefore, I prefer to use innovational inputs as a measure of technological change in this study to innovational outputs.
The transfer processes from the abstract concept of input to its concrete empirical embodiment and from the more general to the 14 more specific pose extreme difficulties. Numerous studies have shown that the correlation between innovational inputs and innovational outputs is at best inconclusive, at worst negative. However, other recent extensive studies of the industrialized countries conclude that the contribution of R&D to economic growth/productivity is positive, significant, and high. 15 Universities by carrying out basic research are major sources of the flow of basic knowledge. Many innovations rely on little in the way of science and are based largely 16 on old science. The TRACE study concluded that innovation and
13 For a review of this problem, see B. Sanders, "Some Difficulties in Measuring Inventive Activities," in The Rate and Direction of Inventive Activity, (New York: National Bureau of Economic Research, 1962); C. Freeman, ''Measurement of Output of R&D: A Review Paper," (Mimeo, Unesco, Jan., 1969). Deficiencies of patents as an innovational output measure are: 1) a patent recipient is not necessarily responsible for the invention; 2) patented inventions are of unequal importance; and 3) some important inventions are not patented. In the case of the developing countries, 1) a large proportion of patents granted are foreign patents; and 2) patents often serve as instruments for market control rather than for production. 14 No attempt is made to summarize, or comment on, other aspects of the problem of vertical transfer processes because most literature on the subject is concerned with these problems. However, the references provided in subsequent footnotes provide discussions of other important aspects of the subject. 15 See NSF, Papers and Proceedings of a Colloquimn: R&D and Economic Growth/Productivity NSF 72-303, (1972).
16 F. Lynn, IIAn Investigation of the Rate of Development and Diffusion of Technology in Our Modern Industrial Society," in Report of the National Commission on Technology Automation and Economic Progress, (Washington, D.C.: The U. S. Government Printing Office, 1966). 36 development are often based in part on science Which is 30 years old or older: that most inventors rely on information created in the previous generation. 17
E. Mansfield reports that the time interval between counnercial development and the first commercial application averaged about 5 years far important postwar innovations in the U. S.A. 18 Only a few of the companies reported that more than half of their R&D projects ever resulted in commercialization. About half the patents issued in 19 the U.S. are used: about half are not. Nelson, et al., observed that applied R&D done by firms is directed toward improving or 20 expanding its line of products. The McGraw-Hill survey reports that the purpose of about half of industrial R&D spending in the companies surveyed was to create new products, about 40% to improve 21 existing product lines, and about 10% to improve processes.
The above illustrations may be enough to demonstrate how complicated and elusive the processes of vertical technology transfer are. It is apparent fran the foregoing that the processes of vertical transfer and the jointure of science and production is still poorly understood.
17 The Illinois Institute of Technology Research Institute, Technology in Retrospect and Critical Events in Science (TRACE), NSF (C535), vol. 1 (December 15, 1968), pp. 13-17.
18 E. Mansfield (1975), ~. ~o, p. 150.
19 Booz, Allen, and Hamilton, "Is R&D Management Effective?" Chemical and Engineering News, vol. 35 (June 10, 1957), po 38.
20 Nelson, et al., ~. ~., p. 49. 21 See Eric Gustafson, "Research and Development, New Products, and Productivity Change," American Economic Review, vol , 52 (May, 1962). 37
(2) Horizontal Process
The horizontal transfer of technology is of two kinds: spin-off effects and the transfer from one organization/location to another. Here we are primarily concerned with the special case of teclmology transfer between counrxtes, The problems of technology transfer between countries are quite different when the transfer is vertical as well as horizontalo
The spin-off effects which occur through the adaptation of a technology from one application to another is elusive when a device developed for one purpose (evg; military) spawns a related device that turns out eminently useful for another purpose (es g, civilian).
It is well known that the primary source of technological advance is historically military. Examples are abundant: computers, nuclear energy, jet engines, penicilin, canned foods, among others. It is easy to obtain statistics on the proportion of R&D expenditures allocated for defense purposes by the industrialized countries, especially the two superpowers (the U. So and the Soviet Union).
Expert opinion appears to be divided on the subject of the potential or actual spin-off to civilian technology. Robert McNamara warned against exaggerating the role of massive military R&D in closing technological gaps.22 However, Bobrow suggests another aspect of the spin-off effects of defense technology: military R&D can also provide learning for civil sector R&D: the most rapid growth in R&D in the
22 Robert McNamara, The Essence of Security, (New York: Harper &Row, 1968). 38
private sector occurred during the period of greatest defense R&D
increase.23 Another side of spin-off effects is from civilian
technology to military. Johan Galtung gives primary empbasis to
these spin-off effects in his analysis of international development. 24
Production technology for civilian purpose can easily be converted
into production technology for means of destruction: the person who knows how to make a tractor can also easily learn how to make a
tank: the person who only participates in extracting oil will know
neither. The point is that teclmological advance is never independent
of politics: its origin is from politics and its impact is far
reaching beyond the usual cost-benefit analysis.
International technology transfer can occur in two basic
forms: 1) movement of physical items such as drawings, tooling,
patents, machinery, products, etc. and 2) personal contact. Put
simply, technological knowledge is always embodied in something or
somebody, the form being important for determining the transfer process
and its costs.25 How these forms of international technology transfer
are channeled is a different matter. Many diversified means and
channels have been used in the international market for technology:
1) foreign investment; 2) license agreements; 3) trade of new products
or producer I s goods; 4) other personal mobility and information flows
(e.g., itmlligration, student exchange, exchange of scientific journals
23 David B. Bobrow, ''Military Research and Development: Implica tions for the Civil Sector," The Annals vol. 406 (March, 1973), pp. 117 128. 24 see Johan Galtung, "A Structural Theory of Imperialism" journal of Peace Research 2 (1971), pp. 81-118; and The European Community, (London: George Allen & Unwin, 1973). 25 See G. R. Hall & R. E. Johnson, .2£. £!!., pp. 306-308. 39 and literature, etc.). Among these channels this study focuses on
(1) and (2).
The transfer of technology is by no means costless : it uses up resources. It is necessary to construct some operational measure of the resource costs of technology transfer. The calculation of the cost is extremely difficult since one cannot easily isolate one aspect of technical activities from others. Taking into account such difficulties, I have selected the following items as the cost of international technology transfer: 1) royalty payments; 2) O".ltlays for engineering consultants; 3) costs of transferring engineering information; 4) costs of supervising the detailed engineering; and 5) costs of other technical services provided by sellers of technology.
Therefore, technology which is transferred through the purchase of equipment, tools or materials is excluded from the costs. This method was suggested by E. Mansfield, but he excluded the first item on the ground that royalties are not a payment for resources used to transfer the technology but a payment for the right to use it.26 However, it is difficult and not necessary to distinguish them as long as they cost the technology buyer. The costs of international technology transfer also were investigated in my field survey (see Appendix 4: Survey
Method and Questionnaire).
Figure 2 summarizes the possible patterns of the international technology transfer which combine the vertical and horizontal processes.
Holding the direction of flow constant fran nation A to nation B, a variety of patterns and transactions are possible. And the primary
26 E. Mansfield (1975), £e. ~. Figure 2. Model of Horizontal Technology Transfer
Stage Nation A Nation B Current Current 1 State-of-art State-of-art
2 Disco:very
3 j Invention (
4 IProduction 1< 5 ITech. Drift I J Tech. Drift New New 6 I State-of-art r State-of-art
Examples:
A2 + B3: Nation B imports scientific discovery from Nation A in order to stimulate research for invention.
'B3 + B4: Nation B cODDD.ercializes the new product which is invented as a result of applied research.
B4 + A4: Nation A imports know-how to produce the commodity through license agreement with Nation B. 41 patterns of horizontal transfer are the bases for the secondary patterns of the horizontal as well as the vertical transfer. For example a scientific discovery in nation A is picked up by a scientist or engineer of a private firm in nation B (A2 -+:' B3) leading to an
innovative invention. However this invention is not applied by that
firm but another firm in nation B that commercializes it (B3 -+ B4).
(3) The Late-Comer Thesis and the Technological Gap
The foregoing model of international technology transfer raises a number of questions: how is it practiced currently by the multinational corporations which are the major owners of technology?
To what extent is it possible? What are its limits and constraints?
What kinds (types) of technology are currently transferred by what channels or means? To what extent are different patterns or channels
substitutes or complementary'l If they are complementary, the question is what are the best combinations and what the appropriate phasing?
No attempt is made here to answer all these questions. Conventional theories have in general ignored these complicated processes.
Clearly, these problems are not susceptible to simple answers, nor is
it likely that any set of answers, however qualified they may be, will apply to all societies at all times.
During the last two decades, the leaders of the new govern ments as well as the developmental theorists were convinced that technical innovation in Western countries offered dramatic shortcuts
to power, prestige, and prosperity. One school regards the pre requisite of technology transfer to be to strengthen scientific and technological capability: to endow a few good scientific research 42 institutes and to train the appropriate number of scientists to do the research. For this purpose, they believe, international technical assistance programs should be extended. The only way to solve the problems of technological backwardness in developing countries is a teclmical one. A second school promotes the theme "choice of teclmiques": it stresses that the availability of production teclmologies from industrialized countries is more or less an unqualified blessing because they are incompatible with factor endowments and capital intensity. Care must be employed ip. the choice. Technology appropriate to local conditions is the only sure route to development.
There is a third approach which postulates that the adaptive capability of advanced technology can be achieved only when certain social attitudes and institutions approximating those of the modern industrial nations 27 have been accepted. According to this approach there is no lack of knowledge as to how to develop, only a lack of will or entrepreneurship to apply it.
All of these approaches derive from the late-comer thesis:28 the successful examples of 19th or early 20th century technological
27 See J. J. Murphy, "Retrospect and Prospect," in D. L. Spence and Alexander Woroniak (eds.), The Transfer of Technology to Developing Countries, (New York: Praeger, 1967). 28 Some important references are: E. Ames and Nathan Rosenberg, "Changing Technological Leadership and Industrial Growth," Economic Journal (March, 1963); C. P. Kindleberger, "Obsolescence and Technical Change," Oxf. Univ. Inst. Stat. Bull., (Aug., 1961), pp. 281-297; and M. Frankel, "Obsolescence and Technical Change," American Economic Review, (Sept., 1955), pp. 296-319. ~ ...
43 development and transfer in Western Europe, the U.S., Russia, and Japan.
Industrialization always seemed the more promising, the greater the backlog of teclmo logical innovations which the backward country could take over from the more advanced country. Borrowed technology, so much and so rightly stressed by Veblen, was one of the primary factors assuring a high speed of development in the backward country entering the stage of industria lization.. 29 In Kind1eberger's words, "there may be a penalty in the early start, if institutions adopt themselves to a given technology, and if static patterns of capital replacement develop as habits. ,,3D
But this theory has been made rather obsolete by recent technological change. Our observation of the past two-decade experience does not support this theory. There are essential differences between those earlier episodes and the current situation which make the historical examples of technology transfer poor guides for development strategies. In the last few years the new approaches, namely the theories of "technological gap" and "technological dependence," have begun to change the emphasis: they attempt to understand how the existing impoverished technological capabilities in the developing countries and the overwhelming international concentration of teclmologica1 capabilities in the industrialized countries has affected the position of the developing countries in the world economy.
29 Alexander Gerschenkron, Economic Backwardness in Historical Perspectives, (Cambridge, Mass.: Harvard University Press, 1962), p. 8.
30 c. P. Kind1eberger, ope ~., p. 282. 44
"The gap theory" attempts to explain the basic differences of technological situations. The technological gap, in terms both quantitative and qualitative between the United Kingdom and the then developing countries was not very significant. Both Germany and the
United States, then technological late-comers, were ahead of the
United Kingdom in terms of adult literacy and were not significantly deficient in scientific cadres.31 Further, the cognitive base of technological progress in the United Kingdom rested overwhelmingly on artisan ingenuity and learning-by-doing experience and its transmittal depended primarily on individual apprenticeship rather than blueprints, teclmical literature or other formal means of cogni tive transfer.32 While nineteenth century teclmology was based largely not on scientific discovery, but on engineering practice and invention, in the late twentieth century teclmology has become more closely associated with the progress of science. Therefore, today's successful technology transfer is more dependent on society's capacity to discover and innovate rather than simply imitate. Today, technology is embodied not in aggregate capital, not in particular factors but in the whole economic process that extends from factor supplies on the one hand to the marketing outlets on the other.33 In short, today' s teclmology, the gap theory posits, is fundamentally different from nineteenth century teclmology. It is not only qualitatively more
31 See David Felix, "Technological Dualism in Late Industria1izers: on Theory, History, and Policy," Journal of Economic History, XXXIV-l (March, 1974). 32 V. V. Bhatt, "On Technology Policy and Its Institutional Frame," World Development, 3-9 (Sept., 1975), pp. 653-4. 33 J. J. Murphy, 2£. m., p. 7. 45 sophisticated and complicated, but also constitutes a quantitatively wider gap.
There are numerous factors other than the technological gap which can explain why today's developing countries face more difficult problems than nations faced a century ago. The characteristics of modern technology and their impact on the international structure must be included in the analysis of these factors. In subsequent sections and chapters we shall examine some of these factors, which define and restrain international technology transfer.
The idea and process of teclmo1ogy transfer are further confused by debates over what is the essence of technology transfer and who owns technology. This is an area that the late-comer thesis often forgets, assuming that technology is free goods and public property.
The following is a summary of the essence of modern technology transfer:
1) To a great extent the transfer is a "people-oriented" phenomenon. Drawings, specifications, processes, procedures and patents are only sane of the most obviously needed ingredients. This fact is coupled with the empirical observation that most technological knowledge is transferred through person-to-person contacts.34
2) It is a multifaceted, amazingly diversified and constantly changing process with great variations from one industry to another, from one company to another, and it changes at the different stages
34 See W. Price and L. Bass, "Scientific Research and Innovational Process," Science, (May 16, 1969; and Jose de COOaa, Technology Transfer and the Developing Countries, (New York: Fund for Multi national Management Education, 1974), pp. 2,.3. 46
during the life of association. Because of this system-and firm-specific character of technology, rarely is the identical technology available from different sources: relatively small differences in process technology can result in ~5aningfu1 differences in product quality or mill costs.
(3) It has little similarity with the dissemination of knowledge or pure science, and neither the U.S. govermnent nor the U.S. universities have much practical technology to transmit, nor do they have the techniques, experience or organization structure with which to do so effectively. Most practical technologies are owned by the private sector as a matter of national policy in the industrialized countries.36
In short, contrary to the perception of theorists, technology is neither free goods nor public property, nor perfectly embodied in something. It is expensive (indeed) private goods embodied in persons who provide the competitive edge to the owner of technology. Socialist and communist countries are no exception in this respecto37
35 John E. Dull, ''Transfer of Technology to Latin America - A U.S. Corporate View," in Robert E. Driscoll and Harvey W. Wallender III (eds.), Technology Transfer and Development (New York: Fund for Multinational Education, 1974), pp. 274-5; and see de Cubas, ~. cit. p. 4. 36 de Cubas, .2£. cit., p. 4. It Ls easy to demonstrate the importance of multinational corporations by looking at the statistics concerning R&D expenditures and other indicators of their technological capabilities and other innovational activities. See, for example, Nelson et al., ~. cit.; Mansfield (1974), ~. cit.; Pavitt (1971), .£E.. cit. 37 There are reports, for instance, that technical personal in one East European country were loath to give experience secrets away to another country and, therefore, sabotaged the program by sending information on processes that were already widely known. See Frederic L. Pryor, "Research and Development Expenditures in Eastern Europe," in Stanislaw Wasowski (ed.), East-West Trade and the Technology Gap, (New York: Praeger, 1970), p. 81 Chapter IV
Technological Dependence
(1) Internationalization of Science and Technology
Recently a number of experts in the field of technology transfer to developing countries postulated a new dimension. Essentially they use partlcu1ar aspects of the structuralist argument about under- development in Latin America to show how the dynamics of the developing econ~ create a situation where local scientific and technological institutions are alienated from "production." At the basis of most of these arguments is the concept of "technological dependence." Ironically, it was rather in Western European countries, the nineteenth century technological leaders, where the concept of "technological dependence" 1 originated and was strongly voiced.
The starting point of the theory is the well-known "demonstra- tion effects" that emanate from advanced countries largely due to the recent revolutionary advance in modern communications and transportation systems. There is a deepe-r sociological reason for this phenomena which is related to the intellectual and psychological orientation of the educated and power elites of the developing countries towa-rd the
1 Jean-Jacques Se-rvan-Schreiber, The American Challenge, (New York: Atheneum, 1968); Robert Gilpin, France in the Age of the Scientific State, (Princeton: Princeton Univ. Press, 1968) and James McMillan and Be-rnard Harris, The American Take-over of B-ritain, (New York: Bart Publishing, 1968). servan-schretber" s American Challenge bas been most frequently cited but the argument by the two British journalists concerning American take-over seems to "be unfamiliar to most readers. 48 norms and standards of the advanced countries, not only in the matter of living styles but also with regard to scientific and technological pursuits. In the analysis of the problems of international technology transfer, the "demonstration effect" has a two-fold consequence to the developing countries: the internationalization of scientific and technological orientation on the supply side and the specification
of consumer patterns on the demand side.
Typically, the argument of the theory runs as follow:
The research workers in the developing countries take their lead
from the international orientations of research because standards and
interests are prescribed by what goes on in the most prestigeous
centers in rich countries. Therefore, scientific communities are
outposts of advanced country science, with very limited links with
the economic and social relations which surround them. This inter
national orientation of scientific and technological connnunities, in
turn, leads to a new "brain-drain" in addition to the well-known
"external" brain-drain which refers to the conventional one where
scientists and engineers flow poor to rich countries. According to
H. W. Singer and Paul Streeten, the new "internal" brain-drain occurs
when the activities of the small number of scientific institutions
and research people in developing countries are also largely devoted
to working on problems and using methods determined by the rich
countries. The result is that the small number of scientific and
technological institutes are alienated from production activities or
"marginalized." Consequently science in the developing countries is 49
largely a consumption item, whereas in the industrialized countries
J.t..1.S a i nvestment 1.tem.. 2
Obviously this "marginalization of science" theory is concerned with the problems of the relationship between science and technology which, viewed fran our model of technology transfer, corresponds to the vertical transfer processes fran current state-of- art to discovery (basic research), to invention (applied research), to production (innovation). However, as numerous studies in the
literature report the vertical transfer process is murky with tremendous difficulties and obstacles even in the advanced countries, capitalist or socialist: this is partly because the scientific system is
fundamentally international and science policy is national; and again this is because the central ingredient of science and technology is the research performer.
For example, given the emphasis in the Soviet Union on
scientific achievement and the mastery of modern technology as essential to state security, the loyalty and political inclinations
of scientists are matters for special conce'l'n. The'l'e have been nume'l'OUS
2 For the typical argument of the international character of scientific technological communities, see H. W. Singer, "Dualism Revisited: A New Approach to the Problems of the Dual Society in Developing Countries," The Journal of Development Studies, 7-1 (Oct., 1970), pp. 60-75; Paul Streeten, The Frontiers of DevelOpment Studies, (New York: John Wiley & Sons, 1972), pp. 381-402; J. E. Corr~di, "Cultural Dependence and the Sociology of Knowledge: The Latin American Case," International Journal of Contemporary Sociology, (Jan., 1971), p. 48; see also C. Cooper, "Science Technology and Production in the Underdeveloped Countries," The Journal of Development Studies 9-1 (Oct., 1972), pp. 1-18. The term "marginalization of science" is C. Coope'l"s. 50 attempts to ensure that Soviet scientists do not become a class apart from the rest of the population, even at the cost of delaying scientific education.3 In the People's Republic of China, Teng and the other moderates were scornful of the radicals' insistence that all research be related to immediate agricultural or industrial needs.
"The Academy of Science," Teng said, "is an academy of science; it is not the academy of cabbage. ,,4
The apolitical tendencies of scientists and engineers in
Western so~ieties and their transnational loyalty to universal scientific principle have disturbed the governments of nation-states who want to harness the products of the laboratory to political purposes.5
In industrialized countries, technology's demand for human talent has thus turned a large part of the university world away from its traditional role as a sanctuary for unfettered search after truth and the transmission of past wisdom to new generations. Instead the university has become a resource, whose existence is justified in part by its exploitation for practical purposes and whose curriculum 6 is more and more specialized to meet technological demands.
3 See Albert Parry, The New Class Divided, (London: Macmillan, 1968); and Eugene Zaleski, et a1., Science Policy. in the USSR (Paris: OECD, 1968).
4 Time, (Oct. ,25, 1976), p. 32. 5 W. R. Kintner and Harvey Sicherman, .2£,. ill., p. 22. 6 Ibid, p. 23. 51
In short, the theory of "marginalization of science" picks
up the critical problems area of science policy which the late-comer
thesis missed, e.g., the social processes in the vertical transfer
of technology; the fact that science is not always an investment item
even in the industrialized countries as the theory proposed. The
late-comer thesis assumed that a developing country can import the
state-of-art from the industrialized countries without costs and
further can easily convert the borrowed knowledge to production
(according to our model, this assumption can be formulated in the
following pattern: Al -+ 131 -+ 132 -+ 133 -+ B4)• But the theory
of ''marginalization of science" postulates another pattern, opposed
to the former (AI -+ 131 -+ 132 -+ 133 -+ A2 -+ A3). In other words imported scientific knowledge (AI -+ 131) from a technological
leader can be improved and developed into discovery or invention in
the late-comer countries, but this development is likely to return to
the leader country without practical application. For example, the
case of the United Kingdom is at point. Technologically, no country has done a better job these last twenty-five years than Great Britain.
Antibiotics, radar, and the jet engine to name only three are all
British origin. The computer, too, owes a great deal to British
technology, as does the atomic reactor. Yet in none of these have
the British reaped where they sowed and cultivated.?
The Korean govermnent recognized vaguely these problems
in the late 1960s. The Korea Institute of Science and Technology
(KIST), established by the govermnent with the assistance of U. S. AID 7 Peter Drucker, .2E,. ill., p. 51. 52 grants and a loan in 1967, basically aimed at the link between science and technology. The founding spirit was based on the underlying assumption of the late-comer thesis. President Park himself, the founder of the Institute, strongly emphasized applied research relating to production for economic growth. He still gives a great deal of attention to this Institute, frequently getting reports about the policies and performances of the research. But he also emphasizes the autonomous administration of the research activities, keeping govermnenta1 bureaucratic intervention out of the Institute.
More specifically the implicit and widely accepted role of the Institute is to serve as the center for foreign technology transfer: to import basic knowledge, discovery, invention, or product from the industrialized countries through the channels of reverse brain-drain and other personal and information exchange in order to stimulate the development and innovation of new product/processes in the local market. Following government policy, a number of graduate scientists (53 Ph.Ds and 49 master degree holders in science and engineering fields as of 1974), returned from advanced countries, and have devoted their research efforts to the practical technological and engineering tasks of putting their ideas on production and innovation for industries. Statistics of R&D contracts show that industries sponsored 53 percent of total research in 1974 (compared with 32 percent in 1973). Seven big firms out of 40 interviewed on my field survey have had research contracts with the Institute, amounting to $0.55 million during the period 1970-75. The exhibition room is filled with impressive and sophisticated devices and inventions which have been performed by the researchers. Patent statistics indicate that during 53 the period 1967-1974, out of 140 patent applications including 13 8 petitions for foreign patents, 60 were officially registered.
However, the ratio of commercialization of the inventions, though there are some cases of important innovations, seems to be minimal compared with the impressive record of inventions and product development. For example, there were widespread rumors that one of the important patents was sold to a foreign company for a great amount of money, because local entrepreneurs declined to make the innovation. The management of the Institute and the government officials b~gan to ask why these inventions are not applied in the local market. Many of the researchers interviewed ascribed this to the lack of entrepreneurship of local firms. The prevailing theory is that Schumpetarian entrepreneurship is needed, which is mis- conceived as a "risk-taking" function. But Schumpeter never conceived entrepreneurship in this way.: he said iIi. fact that the "entrepreneur is never the risk bearer. ,,9 A technology transfer expert at the
Institute paradoxically commented, "Japanese companies did our jobs. ,,10
Judging everything on the basis of evidence from one-side is dangerous.
A research department chief of a big firm said, "They (KIST researchers) know everything but make nothing." He, a former professor and researcher iIi. a prestigious western country university, further commented: "A generalist, a 'salesman' of technical service, knows little of the specialized know.,.haw of the industries. They did. a good job with their
8 The Korea Institute of Science and Technology, KIST-1974: Annual Review, (Seoul; KIST, 1975), pp. 9-14.
9 J. A. Schumpeter, The Theory of Economic Development, (Cambridge, Mass.: Harvard University Press, 1968), p. 137.
10 Personal identification is avoided, because the interviewees wanted to remain unidentified. 54
specialized know-how in the laboratories of the advanced countries.
Here (in Korea), however, their specialized knowledge has neither
complementary components nor coordinating forces. We have a research
contract with the Institute, not because we expect something good to result but because we need them in another way. KIST has one critical value: that is its role as the center for information."
(2) Consumption Pattern and Technology Transfer
The situation, discussed in the last section, is further aggrevated by the demand side of local science and technology in the
developing countries. Generally speaking, it is argued, the elite
consumers demand the same kinds of goods as consumers in the
industrialized countries. The diversification of potential demand that
occurs as a result of the demonstration effects has a two-fold con-
sequence. First, it specifies the types of industries that can be
set up, and sets the limits to the choice of products that is acceptable within the given structure of domestic demand. Secondly, it establishes
the absolute size of markets for particular commodities, and thereby
determines the scale at which new industries can operate initially.
This scale will evidently be much smaller than in the advanced 11 countries. Here we are concerned with the first theme.
In considering the impact of consumer patterns on technology
transfer processes, a preliminary point is worth making, although it
is not our main topic. "Choice of technology" is a controversial theme
in every economic text book. "Technological change" takes two
11 Meir Merhav, Technological Dependence, Monopoly, and Growth, (London: Pergamon Press, 1969), pp. 28-29. 55 different forms: product development and changes of method of production. 12 Product development further involves changes in quality of existing products and the development of new products. This is not a precise distinction: most technological change involving some development in type of product or quality also involves changes in process technology.13
An old established theorem about "choice of techniques" centers on the "inappropriateness" of technologies from the advanced countries which are generally assumed to be capital-intensive whereas developing countries may require labor-intensive technology. The transfer of the wrong technology is accused of being a proximate cause of unemployment and maldistribution of income in the developing countries.
There are numerous views and schools over policy measures and prescriptions: one school advocates labor-intensive small-scale technology (often old-technology) as more efficient and profitable whereas the other holds the opposite view. A middle-ground school argues that western technology is efficient but not good for developing
12 The term "technological change" is distinguished from "technical progress" which is associated with a shift in an existing production function. "Technical progress" does not necessarily have anything to do with science and technology. It, a measure of the unexplained differences or residual factor of production, is part of a learning process which is further the product of experience. See Norris & Vaisey, .2.£• .ill., p, 24.
13 K. J. Lancaster's distinction between "consumption technology" and "production technology" is identical with "product" development and "process" technology: the former concerned with product characteristics and consumption patterns, and the latter with factor use characteristics. See "Change and Innovation in the Technology of Consumption," Am. Econ. Rev. 56-2 (May, 1966), pp. 14-23. 56 countries: therefore, the developing countries had better select 14 technology between the two extremes. A more human approach rejects these middle-ground argument s and proposes a more human-faced techno1ogy.1S The Marxist approach, relying on an analysis founded on the nineteenth century industrial system, tries to combine the human approach with modern technological efficiency: its solution is to rely on working class control over modern technology. Little can be added to these rich theories. But I want to ask why the theories say nothing about the characteristics of modern technology which is presumably quite different from the last century I s technology, and why they do not try to define technology in other ways: for example to define it in terms of resources consumption (e.g., energy consumption which is considered of prime importance in an era of energy shortage).
If they perceive the technological impact on society to be great, why do they not consider the technological impact on the IIchoice of
ll techno1ogyll given to society in the context of lIone wor1d ?
The above discussion has been in terms of different methods of producing the same product. However, when the concept of "product;" or IIconsumption technologyII is introduced, the theory of the choice of technology is further complicated. The relationships between two different technologies are rather more complex. Frances Stewart posits that products (consumption technology) limit the available choice and
14 See E. F. Schumacher, Small is Beautiful, (New York: Harper & Row, 1973).
15 See David Dickson, Alternative Technology and the Politics of Technological Change, (Glasgow: William Collins Sons, 1974). 57 supports the views of the technological determinists: generally, technological change in the manufacture of a particular product does not give a range of alternative techniques, it gives a single technique or if there is a range it is more narrow than neo-classical models 16 normally assume. Walter Chudson, supporting the "technological rigidity" thesis, points out that the scope for efficient substitution of labor for capital in manufacturing processes depends on the particular product. In continuous process industries (chemicals, pharmaceuticals, metal refining, oil refining) and in the production of many consumers' goods and intermediate goods on an assembly line, the scope for such substitution is quite limited, except in certain ancillary operations, such as materials handling and packaging.
The wide range of choice may be in old industries like road building, irrigation, construction, and simple metal products. 17 A more practical view argues that "substantially the same technology" may not be adequate in a highly competitive area, whose relatively small differences in process technology can result in meaningful differences in product quality or mill cost.18 The point is that the choice of industry, the broad classification of the choice of products, determines to a great extent the choice of production methods (process technology) in the modern sector of industries.
16 Frances Stewart, "Choice of Technique in Developing Countries," The Journal of Development Studies, 9-1 (Oct., 1972), pp. 99-122. The critics of Stewart's article appear in G. K. Helleiner, "The Role of Multinational Corporations in the Less Developed Countries' Trade in Technology," World Development, 3-4 (April, 1975), p. 175: also see C. Cooper (1972), .2£.. ~., pp. 12-13. 17 Walter Chudson, "Africa and the Multinational Enterprise," in H. R. Halo et a1., Nationalism and the Multinational Enterprise, (N. Y.: A. W. Sijthoff Leiden, 1973), p, 152. 18 John E. Dull, ~. ~., p. 274. 58
The theory of "consumption technology," though crude as yet, takes a further step towards the realities of technological
change, because new product or product differentiation is the pre-
dominant form of innovation as well as of technology transfer in modern industrial sectors. Nelson, et a1., therefore, said that
"technological change [new products] has so altered the nature of
society and the quality of life that GNP comparisons over such long
period of time are meaningless. ,,19 This is also true in the case of
technology transfer. For example, an extensive survey of license agreements in Korea shows that consumption technology is a more
important factor than process technology among the Korean businessmen I s motives in seeking technology transfer: the combination of new products
and quality control for products account for 67.6%, while productivity
increase and the replacement of old equipment, and the expansion of
productn.on. f aca,·1ities are manor.mot ivea, 20 My fie1dsurvey data
indirectly support the hypothesis of choice of technique: the technology
intensive industries (note that technology intensity is different fran
innovational activities), measured by the number of engineers as
percentage of total employment, are positively correlated with capital 21 intensity measured by the assets/employment ratio.
19 Nelson, et a1., ~. cit., p. 21.
20 KIST, Kisu1doip Si1taejosa E Gwanhan Yonku (A Survey of Technology Transfer, (Seoul: KIST, 1976), p. 137.
21 See Appendix 1. A linear coefficient of .7883 is statistically significant at the level of .003. 59
Table 1. Motives of Technology Transfer
Answer %
1. For new product 39.8
2. For the improvement of quality 27.8 of products
3. For productivity increase 12.6
4. For the replacement of old 9.1 equipment
5. For the expansion of production 8.3 facilities
6. Others 2.5
Source: KIST, A Survey of Technology Transfer, (Seoul: KIST, 1976), p.137.
The process technologies required to manufacture these
cODDIlodities are owned by foreign private enterprises, namely the multinational corporations in the industrialized countries. The new
industries, initially producing new products in the local market, are
set up through direct foreign investment or joint ventures by the
owners of technology or through license agreements or other contractual methods. Consequently, foreign technology has tended to be a sub-
stitute for technologies that might have been developed by local
technological innovation activities. As we have seen even in those
rare cases where local laboratories have successfully developed the
types of technology which local enterprises might want, there is a
strong tendency to use a foreign technology instead--usua11y on the
grounds that it is more likely to work. 60
In the pursuit of profit, industrial firms are compelled by the constant threat of rivals to search out the most viable competitive edge they can attain. Schumpeter argued:
But in capitalist reality as distinguished from its text book picture, it is not that kind of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization (the largest scale unit
of control for instance) •• 0 It is hardly necessary to point out that competition of the kind we now have in mind acts not only when in being but also when it is merely an ever-present threat. It disciplines before it attacks. The businessman feels himself to be in a competitive 22 situation even if he is alone in his field o • o
In the case of the technological late-comer, this competitive edge
comes from foreign technology transfer. The famous brand name and its quality products already set up standards which the local companies
can produce. The evidence is that most innovation and development of
the local laboratories (e.g. ~ the case of KIST) are oriented to
improve the product or modify designs and quality of products rather
than develop process technology (e.go , machinery): the Korean companies
were led to introduce new products rather than to replace old machinery
or to install new equipment to produce old commodities: famous brand
names of foreign companies play an important part in technology transfer
for Korean canpanies as we will see later.
From the local entrepreneurs point of view foreign technology
is efficient and the decision to prefer to use foreign technology is
rational. All-around economic cost-benefit analysis cannot refute this
efficiency and rationality. If foreign technology is economically
efficient and qualitatively superior, it must be beneficial to economic
22 J. A. SchUlJlpeter (1950), .2£. ill., pp. 84-85. 61 development of the developing countries. Then, why worry about dependence on foreign technology at all?
Despite this quite optimistic view the Korean government recently launched a vigorous movement toward the Koreanization of machines and equipment. A plan to encourage the use of more domestic plants and equipment is mandatory if each project involves foreign capital of more than $1 million. Apart from the less developed stage of domestic technology, "blind" dependence on foreign capital is said to be the reason behind the allegedly sluggish progress in substituting 23 imports of capital goods. More importantly, the policy derives from the balance of payment problem and from the perception of the 24 importance of machine industry for national defense. Judged from close observation, the policy comes from practice rather than theory, and it was not designed to promote local technological development.
The theory-oriented argument of some intellectuals posits that the
"comparative advantage" policy is a better way. The impression is that there is a conflict between the practical policy makers' nationalism and the academicians I economic rationalism.
Certainly, the data shown in Table 2 are timely. The local entrepreneurs I views (actually interviewees came from middle management of big business in Korea), are quite interesting. Foreign technology is expensive: the expensiveness is expressed in t!Iree different terms; the problem of foreign exchange and overpricing (38.7%), sales and export restrictions (15.4%), and expensive maintenance services and
23 Korea News Review (April 3, 1976), p. 12. 24 Chosun-I1bo, (March 9, 1976), p, 2. 62
Table 2. Advantages of Foreign Technology
Question: What do you think are the main advantages and disadvantages (weakness) of using foreign technical services or equipment, compared with using local technical services or equipment? Please describe.
Answers:
Advantages % Disadvantages %
1. There is no local 34.3 1. Loss of foreign 38.7 know-how or equip. exch; , and expensive
2. Efficiency 34.3 2. Retarding local 23.1 techno devlp.
3. Reliability (quality) 21.8 3. Sales and export 15.4 restrictions
4. Use of brand name 6.2 4. Connnunication 7.7 problem
5. Others 3.1 5. Expensive maintenance 7.7 6. Intervention in 3.8 decision making
7. Linkage to loans 3.8 Total 100.0 100.0
Source: MY Field Survey Data 63 parts (7.7%). Local enterprises worry about the long term costs of technological dependence. Foreign technology is considered as a factor retarding local technological development (23.1%), and leading the foreign firms to intervene in the important decision~king process of local firms (3.8%). There are also problems of communication.
Foreign firms are reluctant to transfer complete information and know- how. In brief, apart from the economic loss there are other critically important factors which the usual economic analysis overlooks. The developing countries as a whole miss the spin-off effects which are more far reaching than in the advanced countries. C. Cooper summarizes the long-term social benefits from reducing technology dependence:
1) improvements of foreign exchange costs and strengthening of the bargaining position; 2) possibility to create technology appropriate to local conditions; and 3) "learning-by-doing" effects. For these reasons, he argues, technological dependence has a "self-perpetuating" tendency.25
(3) Local Innovative Activities and Royalty Payments
The foreoging theory conceives "technological dependence" in terms of "people": technology transfer is basically a "people- oriented" phenomenon. In other words, the stress is placed on who controls technology transfer processes.26 Viewed from our model of
25 C. Cooper, ££. ~., p. 7.
26 Cf. Alejandro Nadal Egea, '~ltinational Corporations in the Operation and Ideology of International Transfer of Technology," Studies in Comparative International Development, X-I (Spring, 1975), p. 24. Egea defines "technological dependence" as the "108s of control over key decisions regarding the generation, adaptation, application, importation and diffusion of the intangible .g.9~,,!1;echnical knowledge'." 64 technology transfer, the two channels, foreign investment and license agreement in which technology is typically controlled by the multi national corporations, fall within this concept. Of these two channels foreign investment is viewed as more direct and strong in its control mechanism of technology transfer than the license agreement.
The two other channels--trade of producers' goods and information/ personal exchange--are excluded from the concept. This approach seems reasonable because defining every flow of information and artifacts which compose technology is neither possible, nor realistic.
The above definition is still ambiguous. The first task is how we can operationalize the concept of "technology dependence."
Obviously there are numerous ways to measure this concept, but every method is arbitrary and subject to the purpose of the study. The main question is: under what circumstances do local innovative activities begin? In other words we are concerned with how the local innovative activities respond to foreign technology and more realistically how they are linked to the strengthening of the adaptive
capability of the local enterprise. I do not believe that the ideal type of "indigenous innovation" is realistic, however desirable it may be, in today's world. A great deal of the discussions on
"indigenous innovation" seems to employ closed-society assum.ptions
of the nineteenth-century. Instead I would emphasize the important
complementary character between the two activities of local innovation and foreign technology. For instance a country that tried to rely exclusively on the importation of technical knowledge would be, according to one expert, a decade or more behind its competitors in 65 the world market in every industry, and license agreements for new technological processes are almost always a supplement to rather than a substitution for a firms' internal research efforts.27
With this perception technological dependence is defined as the following formula:
ET IT + ET
Where: TD is technological dependence ET is the external source of technological change IT is the internal source (local innovative activities) of technological change
This index produces a score of between 0 and 100. A low score below 50 describes an industry which is independent of the external source of technological change, initiating its own innovative activities. A high score above 50 describes the opposite situation of an industry which is relatively dependent upon external sources of technological change. The measure of the internal source is discussed in the section on the vertical process, and that of the external one in the section on the horizontal process of technology transfer in
Chapter III: the internal source is measured by R&D expenditures as percentage of sales (RD) and the number of scientists and engineers as percentage of total employment (RS): the external source by royalty payments (ROY) and other technical transfer costs in the turn-key projects as percentage of sales (LOTE). In the case of foreign investment firms, royalty payments are calculated at 3 percent
27 Christopher Freeman, Science. Economic, and Government Policy, (Paris: OECD, 1963), p. 34. 66 of sales on the grounds that the Korean government prohibits royalty payments over 3 percent of sales, and it was almost impossible to
separate the technological transfer costs of royalty payments from the other kinds of payments in the foreign investment firms.
It is worth while to take a brief look at the Japanese pattern of innovative activities, since it is commonly argued that
Japan is one of the few market economies which has managed to overcome the problems of having been a technological late-comer. Although
Japan is the highest consumer of foreign technology measured by the royalty payments in the world, in our definition Japan has never been a technologically dependent country.28 Table 3 demonstrates a
complementary relationship between the import of foreign technology and R&D activities. The R&D expenditures by industries as percentage of total R&D expenditures increase from 59.6% in 1966 to 68.9% in
1970, and the technological dependence index of Japanese industries reduces from 19.1 of 1966 to 15.9 of 1970. Broadly speaking,
Japanese (implicit) policies may be characterized as fo11ows: 29
28 Available data shows that in 1970 the United Kingdom paid $239.3 millions for foreign technology, France $349.4 millions, West Germany $307.1 millions, and Japan $433.0 millions. See The Agency for Science and Technology (Japan), Handbook of Science and Technology, (Tokyo: 1973). 29 For the Japanese strategies and policies of technology transfer, see Y. Tsurumi, "Technology Transfer and Foreign Trade," (Unpublished doctoral dissertation, Harvard Business School, 1968); Keichi Oshima, "Research and Development and Economic Growth," in Williams (ed.), 2E.. cit., pp. 310-323; Terutomo Ozawa, "Transfer of Technology from Japan to Developing Countries," UNITAR Report No.7, 1971; Daniel Spencer, "An External Military Presence, Technological Transfer, and Structural Change," Kyk1os, XVIII-3 (1965), pp. 451-474; and John E. Tilton, International Diffusion of Technology: The Case of Semi conductors, (Washington D.C.; The Brookings lnst., 1971). 67
Table 3. R&D Activities and Royalty Payments of Japanese Industries
Unit: $ million Total R&D R&D Exp. Royalty Year Exp. (A) by Ind. payments BfA x TD* (B) (C) 100
1966 1,360.0 192.0 811.0 59.6 19.i
1970 3,320.0 488.0 2,287.0 68.9 15.9
C *TO (technological dependence) = B + C X 100
Source: The Agency for Science and Technology (Japan), Handbook of Science and Technology, (Tokyo: 1973)
(1) R&D activities are mainly oriented to absorbing and integrating the core of the foreign technology transferred. For example, it is a relatively we11 known strategy that the Japanese companies have turned the imported machines or products into an applied-research science by tearing them down and then building home-made products and machines of a similar sort but with a nmnber of added improve ments.
(2) While the govermnent promoted technological innova tions with guidelines and protective measures, it also controlled the terms on which technology was transferred.
(3) Direct control by foreign investment--as opposed to license agreements which did not involve direct contro1--was strongly discouraged.
Having touched upon the definition of technological dependence and its justification, we now turn to the main questions: what is the scale of R&D expenditures and royalty payments by the sample firms (the 40 largest) and what are the relationships between these two different activities? And what factors are related to these two activities? 68
Although the Korean government annually investigates R&D expenditures, the statistics are quite dubious. Consequently it is almost impossible to calculate what proportion of total industrial
R&D expenditures those firms in my sample industries account for.
With respect to the royalty payments the sample industries roughly account for more than 60% of total royalty payments during the period of 1970-75, although the comparison is questionable due to the differences in the calculation methods.
Total R&D expenditures of the 40 largest firms accounted to about $11. 9 millions in 1975. Appendix 1 shows that R&D indexes vary among the industries: the machine industry marks the highest value (0.86% of sales volume) and oil refining accounts for the lowest (0.01%). Generally speaking those industries which involve foreign investment (joint ventures) have low R&D activities: among them are oil refining (0.01%) in which 4 companies are joint-venture firms and fertilizer (0.17%) with 2 joint venture firms. This is quite reasonable from the firms' point of view. They have no need to care about innovative activities because technological innovation and know-how are supposed to be supplied by parent firms. Further highly sophisticated technological complexes measured by ENG indexes, which originally led the government to induce foreign investment, partly prevent the local companies from initiating any R&D activities.
One of these joint venture companies presented the bulk of R&D expenditures figures which were actually used for market development and in other ways rather than for technical experiments (there was no
R&D department or section unlike the local companies). Another joint venture firm's R&D expenditures decreased over the years leading to 69
the conclusion that over time the plant operation become a routine
job.
In contrast to the joint venture industries, the local-owned
industries vigorously invested in innovative activities: machinery
(0.86), iron and steel (0.58), and synthetic fibre industries (0.50) have very high indexes of innovative activities. Compared with those
industries in the U.S.A. these R&D expenditures are not small: for example, in 1960 in the U. S.A., R&D indexes are 4.3% for machinery, 30 0.8% for primary metals, and 0.6% for textiles and apparel.
The majority of the R&D projects constitute very modest examples of design ~provement, product development, quality control, and process ~provement. This trend is shown in Table 4: 30.8% of total R&D expenditures is for quality control, 27.8% for new products,
Table 4. Goal of R&D Activities of Korean Manufacturing Industries (1975)
Unit: % Classification Goal import New Quality Process Total subst. product control ~prl'mt large Ind. 13.2 30.8 28.6 26.4 100.0
Sm1 and Med. 9.5 21.4 35.7 28.6 100.0
Total Mfg. 12.0 27.8 30.8 27.1 100.0
Source: The Federation of Korean Industries (FKI), Sanup-kisu1 Gaebal-donghyang Josa (A Survey of Industrial Technology Development Trend) (Seoul: FKI, 1976), p. 17.
30 See National Science Foundation, Research and Deve10eent in Industry 1961, (Washington, D.C.: Government Printing Office, NSF 64-9, 1964), p. 9 and p. 40. 70 and only 27.1% is for process improvement. For example, a company exercised so-called "reverse engineering" by tearing down a new product recently innovated in Japan, so that the company could copy or possibly develop a new, slightly modified product. This is simply a gigantic
"product-differentiation" game inherent in oligopo1istic competition.
The nature of such activities does not differ very much in Korea and
Japan, and even in the U. S.A., as many researchers in this field confirmed. Many researchers on research and development seem to expect "a big jump" or "technological revolutions" from the industrial
R&D activities. Thomas Kuhn I s famous theme of "normal science and paradigm" is quite applicable to technological development: " •••no part of the aim of normal science is to call forth new sorts of phenomena ••• Nor do scientists normally aim to invent new theories. ,,31
Another firm was working on new formulas and model deve1op- ment to compete with Japanese companies in the world market. A chief of the research department of another big firm said, "Japanese companies no longer sell their know-how because we are now rivals in the foreign markets. Our laboratory is never open to anyone from outside."
A giant diversified firm was constructing a multimillion dollar research laboratory employing several Ph.Ds and number of master degree holders. A survey of the Federation of Korea Industries' reports that a large firm in the manufacturing sector employs an 32 average of 0.4 Ph.Ds. I met a number of Ph.Ds and former professors engaging in research work in the laboratories of the private firms.
31 Thomas S. KuhJ;l, The Structure of Scientific Revolutions, (Chicago: The University of Chicago Press, 1970, 2nd ed.) pp. 24-26. 32 FKI, .2E,• .£!!., p. 23. 71
It is a remarkable social change. Only several years ago when a prestigeous university professor moved to a directorate position of a big firm, the academic community was surprised at his down-fall since a businessman is less prestigeous than a university professor.
These patterns, however, are only emerging phenomena and are not typical patterns of R&D activities of Korean firms. R&D employment is usually a misclassified item. Compared with the FKI survey, the number of R&D personnel employed according to my field survey data is much less. This is mainly because my calculation of
R&D employment included only the degree holders beyond the B. S. : high school graduates or less-educated persons were excluded. I found this a reasonable calculation since I learned that high school graduates or less-educated persons were engaged mainly in performing routine chores in the laboratories, not in creative R&D activities.
Which factors explain R&D activities of the Korean big businesses? My data show that neither technological complexity
(measured by the ENG index) nor skill-intensity (low level technological inputs measured by the SKI. index), nor capital-intensity is related to
R&D activities. Then what other factors are there to explain these activities? We now turn to the analysis of the external environment of technological change which would presumably induce or restrict the internal innovative activities.
The Korean government distinguishes two kinds of technology transfer contracts (license agreements): one is termed a "first class" contract in which the terms and royalty payment last over 1 year and the payments are made in foreign currency, the other is a 72
"second class" contract in which the terms and royalty payment last less than 1 year and the payment is made in local currency. The former, regulated by the Foreign Capital Inducement Law, is subject to the approval of the Economic Planning Board (EPB) , and the latter is regulated by the Foreign Exchange Management Law and is administered by the Ministry of Finance. Foreign investments and foreign loans which are presumably the main sources of technology transfer are also regulated by the Foreign Capital Inducement Law and EPB.
Foreign investments and loans as well as license agreements are approved on a project basis. The main policies may be summarized as follow: Joint-investments have been much preferred to those financed either by foreign loans or wholly-owned by foreigners. The law provides foreign investors with preferential treatment through: a) guarantees for foreigner's properties; b) exemption from the various taxes for the first 5 years; and c) preferential measures in dealing 33 with labor disputes. This policy is mainly concerned with the proper allocation of the foreign investment and technology among the industries. However, fewer restrictions are applied on exports: foreigners are allowed to invest more than 50% in joint investment projects when the finished products are to be exported or when the proposed foreign investments are regarded as vital for economic development in terms of the quality of technology and the size of the investment projects. Of my sample firms an electronic component industry is wholly-owned by a foreigner, and all of its products are
33 Cf. Chin-I Table 5. Foreign Investment in the Sample Industries Industry No. of foreign Rank in Ownership Export invst. the Ind. share perform. Cotton textile 1 2 over 50% over 80% Fertilizer 2 2,3 50% 4% Oil Refining 4 1,2,3,4 50% 7.8% Electric &Electro. 1 4 100% 100.0% Transp. Equip. 1 3 50% 1.3% Total 9 Source: My Field Survey Data exported. And a cotton textile industry in which the share of foreign partner exceeds 50% exports more than 80% of its total products. Two transportation equipment manufacturing companies with 50% ownenship by foreigners were originally approved by the government, but recently one was taken over wholly by a local entrepreneur. Two fertilizer and 4 oil refining firms in which the ownership share is 50-50 were approved clearly due to the technological complexies which are reflected in the index of ENG (13.2 for fertilizer and 13.3 for oil refining). Of these 6 firms, one oil refining and two fertilizer firms are controlled by government ownership (50%). There are reports that these large foreign investment companies have already remitted more than their original investment and the leading local newspapers have asked that foreign ownership be taken over or the terms of contract 34 be revised. Recently the Korean govermnent is moving toward the take-over of the largest oil-refining firm from foreign ownership.35 34 See Dong-Ah I1bo, Feb. 18 and Feb. 21, 1977 and Joong-Ang ill2, March 26, 1977. 35 In January 1977 the Korean daily newspapers reported that the Deputy Prime Minister Naln, Duck-woo revealed the plan to take over wholly the largest joint venture oil refining firm in 1978. 74 Most of the foreign investments other than the sample industries of my field survey (therefore smaller than the sample industries) are allowed on the condition that they export a certain percent of their products, although recently they are allowed some small share of the domestic market. There are disputes over the preference for foreign investment. Usual cost-benefit analysts prefer foreign investment to other sources of foreign capital (e.g., loan) on the ground that it presents less of a problem of balance of payment and on the a priori judgment that foreign investment brings superior technology. On the other hand nationalists protest against foreign investment. The actual government policy is mixed up. Contrary to the theory of balance of payments, the short term experience during the past decade shows that foreign investment was not favorable to the improvement of balance of payments. Benjamin Cohen' s comparative study of foreign investment firms and local firms in Taiwan, Singapore, and Korea concluded that neither the direct nor the indirect economic benefits of this type of foreign investment are very great, if they 36 exist at all. He further suggests that the superior technology argument of foreign investment is not confirmed: he states that "some readers may be surprised at how little value added the Korean and foreign firms yield. ,,37 The Korean government's policy on "license agreements" is primarily concerned with the balance of payments rather than with 36 Benjamin 1. Cohen, Multinational Firms and Asian Exports, (New Haven: Yale University Press, 1975), p, 119. 37 -'Ibid p. 79 • 75 local teclmological development. While a license agreement is encouraged when it can improve competitive power in the international market and when it is more efficient than local technology, it is discouraged when it accompanies royalty payments over 3 percent of sales volume and when it contains restrictive clauses (with exceptions in some special cases). In short the policy is not one of teclmology but of foreign exchange management. As a corollary, the Ministry of Science and Technology, the explicit institution of science and technology policy, is quite alienated from technology transfer issues. As we examined in Chapter III, this kind of phenomena is little different from other countries (e.g., Japan). Official statistics about royalty payments are reported only for "first class" license agreements. Therefore information about the main sources of technology transfer costs and processes by means of foreign investments and loans and by "the second class" license agreements are virtually missing. According to the official statistics total payments of royalties during the period 1962-75 amount to $66.3 millions, and it exponentially increased over the years. For example it jumped almost 8 times from $2.4 millions in 38 1970 to $18.5 millions in 1975. The ten sample industries roughly account for more than 90% of the total royalty payments, and the 40 big firms, although data are incomparable because of differences of sources and calculation, are estimated to account for more than 70% of total royalty payments during the same period. 38 The official statistics are released sporadically by the Economic Planning Board. 76 Royalty payment indexes (ROY) as percentage of total sales by 40 big firms in ten industries, shown in the table in the Appendix 1, are positively correlated with technological complexity (ENG indexes) and negatively with skill-intensity (SKI. indexes). The former's coefficient .8489 and the latter's .7143 are statistically significant at the levels of .001 and .01, respectively. Also ROY indexes are highly correlated with capital-intensiveness (CAP) with a coefficient of .9226, significant at .001. At a glance innovative activities (R&D indexes) and royalty payments (ROY indexes) have no relationship. But when they are disaggregated, excluding two foreign investment intensive industries (oil refining and fertilizer), we find they are positively correlated, reflecting the complementary relationship between the two variables. (The coefficient of .7976 is significant at .010).39 Royal~y payments do not tell us everything about the source of technology transfer and its costs by our definition. Another· source is the so-called "turn-key" project (sometimes called "plant importation") which has been quite overlooked by the analysts of technology transfer. Even the repondents to my field study question- naires were surprised at the high costs of technology transfer in turn-key projects which were exclusively financed by foreign loans. Fortunately, the calculation of the costs of technology transfer was 39 By examining the scattergrams plotted by computer, I found that the relationship between the two variables was worth being disaggregated because two sectors (oil refining and fertilizer industries) were clearly lain at extreme from the normal scattering around the regression line. Also, disaggregation was attempted because the relationship between the two variables was of crucial importance to this study. 77 not as difficult as expected because most agreements on turn-key projects specified the items of technology transfer and their costs. As specified in section (2) of Chapter III (see page 39), the fo11ow- ing items are included in the costs of international technology transfer: 1) royalty payments; 2) outlays for engineering consultants; 3) costs of transferring information; 4) costs of supervising the detailed engineering; and 5) costs of other technical services provided by sellers of technology. The results, shown in Table 6, indicate that the costs of technology transfer are a sUbstantial portion of the total costs of establishing a new plant. Table 6. Technology Transfer Costs of Turn-key Projects in Korea (1970-75) Unit: % Cases Industry Average 1 2 3 4 Food Proc. 1.5 1.5 Synthetic Fibre 20.0 15.0 17.5 Textile (cotton) 3.0 10.0 6.5 Chemicals 8.0 8.0 Fertilizer 14.0 24.0 15.9 39.0 29.• 7 Petroleum 10.0 2.0 6.0 Steel & Iron 15.0 5.0 10.0 Machinery 17.0 25.0 20.0 20.6 E1ectr. Equip. 30.0 8.0 5.0 20.0 15.7 Tran~p• Equip. 15.0 5.00 10.0 10.0 Note: Total project costs equals the costs of establishing plant, including transferring the relevant technology, obtaining equipment, and building the plant. Source: My Field Survey Data ( II.~'. 78 David Teece's study of 26 projects in which U.S. multinational corporations transferred technology abroad reports that on the average technology transfer costs equaled about 36% of the total costs for the electrical and machinery projects and about 10% of the total costs for the chemical and petroleum refining projects. Most of these transfers were horizontal (not vertical as well), and practically all were system-specific and in the design phase. E. Mansfield hypothesizes that this ratio would be higher if the technology is relatively new, if the transferee had built no previous plants that used this technology, if relatively few firms in the world had applied the technology, and if the organization to which the technology is 40 being transferred had relatively little experience. Investigating a few samples of foreign loan projects, I found that most agreements on foreign loans have some specified terms and conditions which reflect government policies: for example, a specified percent of the commodities produced by the imported technology and equipment under foreign loans should be exported; a specified percent of the raw materials and equipment should be Koreanized in the given period; and so on. This is one of the mechanisms of government control over private enterprise in Korea. Most of the middle management personnel interviewed informally in the field survey said that their companies are prima facie private-owned but in reality half-nationalized. These technology transfer costs are deflated by the sales volume (the percentage of total sales), which are expressed as LOTE in the Appendix 1. These indexes are again positively correlated with 40 Edmond Mansfield (1975), ~. ~., pp. 374-375. 79 technological complexity (the index of ENG) and capital-intensity (C'AP) • It is interesting to note that the three indicators (the indexes of ENG, ROY, LOTE) are positively correlated with capital-intensity (C'AP), but all these variables except royalty payments have little to do with innovational activities (R&D and RS) which are presumably the most important and dynamic factors of technological change. Only royalty payments, when disaggregated, have some positive relationship with innovational activities. Further systematic study of this relationship between R&D activities and royalty payments would suggest important policy implications for the technology importing countries. I wish to point out, however, that for one thing foreign investment disturbs local innovational activities: foreign investment actually keeps the local entrepreneurs out of innovative activities and controls more strongly the technology transfer processes than license agreements. From this fact we can easily speculate which one is the more effective way for local entrepreneurs to learn foreign technology and to make innovations. So far we have discussed only the components of the tech nological dependence formula which tell us there is a systematic relationship between the internal and the external sources of technological change. Appendix 2 shows that technological dependence which is calculated in accordance with our formula is high in the sector of foreign investment industries: 94.0% in oil refining and 89.2% in fertilizer industties. Two industries are highly independent of the foreign source of teclmo1ogica1 development: 38 06% for food processing and 24.1% for cotton textile industries and synthetic fibre (47.5%). Four industries, steel and iron (53.8%), industrial 80 chemicals (61.2%), machinery (65.8%), electricity and electronic equipment (67.0%), have a high proportion of the internal technological inputs, though they still depend on foreign technology. Again what are the relationships between technological dependence (TD) and the independent variables (i.e., technological complexity (ENG) and capital intensiveness (CAP»? The correlation analysis tell us that capital intensity has little to do with technological dependence, but technological complexity is positively related to technological dependence.41 41 . The coefficient of .9152 between techno1og1cal dependence and the ENG index is statistically significant at the .001 level. Chapter V Technology Transfer and Monopoly It is often asserted that technological dependence results in technology monopoly. In the discussions on the problems of technology transfer, "technology monopoly" is conceived in two different ways: the first is concerned with technology as a source of monopolistic advantage and the second with the effects of technological change on the market structure in the developing countries. The former is discussed with respect to the characteristics of the international market for technology, and the latter deals with resources concentra- tion because of modern technology's requirements. However these two themes are inseparably related to each other. This chapter attempts to examine these themes with some empirical support. (1) The Theory of Product-Life Cycle The idea that technological innovation confers monopolistic advantage on private firms is an old theorem. It seems reasonable to begin our discussions by reviewing the theory of "product-life cycle," 1 which some economists term "a general theory of technology transfer." 1 For the important body of literature on the theory of product cycle, see Raymond Vernon, "International Investment and International Trade in the Product Cycle," Quarterly Journal of Economics, LXXX (May, 1966), pp. 191-207; Seev Hirsch, Location of Industry and International Competitiveness, (Oxford: C1areton Press, 1967); Louis T. Wells, Jr., "Test of a Product Cycle Model of International Trade," Quarterly Journal of Economics, LXXXIII (Feb, , 1969); Louis T. Wells, Jr. (ed.), The Product Life Cycle and International Trade, (Boston: Harvard University Press, 1972); and William Gruber, Dileep Metba, and Raymond Vernon, "The R&D Factor in International Trade and International Investment of United States Industries," Journal of Political Economy (Feb., 1967), pp. 20-37. 82 The theory, which was originally concerned about the direction and pattern of international trade between the industrialized countries, has been extended not only to explain foreign investment, but to compete with the Marxist theory of "surplus capita1.,,2 It also , l' ~ "', has strong implications for the international transfer of technology. According to the model, corporations in the advanced countries (typically the U.S.A.) begin with the development of new products or a new line of products which are usually characterized by tightly held technology. From this competitive edge of technology and the combination of other skills (management and capital) comes their power to exact an economic rent from customers, stimulating and responding to demand. These conditions are met in the most advanced industrialized countries, which therefore have a comparative advantage in new products. And the company innovating the technology bas a "quasi-monopoly" of the new products. During the period of product development, some foreign orders come from countries with similar demand structures. These orders create the first opportunity for firms to extend the exploitation of barriers to entry in the face of increasing competition and their inability to maintain dYnamic growth at home. Exports become an increasingly important part of the firmIS production and marketing strategies. 2 See Raymond Vernon, Sovereignty at Bay, (New York: Basic Books, 1971); Theodore H. Moran, "Foreign Expansion as an Institutional Necessity for U. S. Corporate Capitalism, II World Politics, XXV-3 (April, 1973), pp. 367-386 and Multinational Corporations and the Politics of Dependence: Copper in Chile, (Princeton, N.J.: Princeton University Press, 1974); and Mira Wilkins, The Emergence of Multinational Enterprise, (Cambridge, Mass.: Harvard University Press, 1970). 83 In the second phase, as aggregate demand in that market expands, the technology becomes more standardized, the rate of profit declines, and the uncertainties of marketing are lessened. Though scientific and technological inputs are still requisite, the "quasi- monopoly" is undermined as other fims begin to copy the product or to develop near-substitutes because technological inputs are used mainly for routine activities. At this stage enterprises in other industrialized countries will increasingly have comparative advantage and will enjoy the 1ate-comer's benefits with the clearer knowledge of demands and cost characteristics serving to lower barriers to entry into the market. Local competitors begin to challenge the position of the foreign exporters (the originator of a new product or a new product process): they do not have the transportation costs of the foreign exporters; they can combine local factors of production more effectively than foreign exporters; and they can seek governmental protection. In this situation the original innovators must make the decision of whether to give up the overseas market and settle back to a shrinking share of the market in the home country, or take the big step of investing within the foreign country to defend a market already built up through exports. However, they do not, the theory, argues, move into local production in the foreign countries until their exports were threatened by tariffs.3 Foreign investment allows the fims to average R&D costs and to maximize returns on scale 3 see Mira Wilkins, ,2£• .ill., Chapters IV, V, and X; also Raymond Vernon (1971), .2E.. ill., Chapter 3. 84 economies and experienced management skills. Later producers must rely on some factor costs advantage (e.g. low wages) to secure a share of foreign sales, while early producers enjoy easy access to foreign markets. In the final stage, the production technology becomes mature and fully standardized, the monopolistic position has been eroded, price canpetition remains, and current scientific and technological inputs are no longer required. At this point the developing countries rely on the comparative advantage of cheap unskilled and semi-skilled labor. Furthermore, production history may determine whether overseas commibnents by leading firms take the form of licensing agreements, joint ventures, or solely owned corpora tions.4 Beyond these points the theory says little about the patterns of trade and technology transfer between the industrialized coutnries and the developing countries. Unfortunately, as Charles Cooper and G. K. Helieiner criticize, this theory breaks down rather badly as far as observed technology transfers to less developed countries are concerned since: (a) quasi-monopo1y frequently endures far beyond the point of 'maturity', as when it is based upon firm-specific experience and know-how, brand names and trade-marks, etc.; (b) international factor flows within the firm may enable and produce transfers of location to less developed countries long before a product has 'matured'; local factor endowxnents are not the sole determinant of the possibility of production there; 4 G. c. Hufbauer, "The Impact of National Characteristics & Technology on the Commodity Composition of Trade in Manufactured Goods," in Vernon (ed.), Technology Factor in International Trade, (New York: NBER, 1970), pp. 184-5. 85 (c) oligopo1istic market structures and the creation of protective tariffs and quotas in the less developed countries may force multinational firms to locate production there for defensive reasons well before the product matures; (d) the theory is based upon final products, whereas there is increasing resort to the production of components and intermediate activities in the less developed countries within vertically integrated manufacturing industries, some of which are also quite 'fmmature'.5 Apart from the main contributions to international trade theory, the theory leads us to a better understanding than before of the nature of the international transfer of technology. The transfer of technology does not take place because some enterprise in the developing countries draws from the shelf of world technology. Rather it is the outcome of a process in which technology-owning enterprises in the advanced countries exploit their quasi-monopo1isitic advantages in the developing markets. Aside from the views from the supply side, it is important to look at the demand side of technology in the developing countries. Table 7 shows that Korean enterprisers' views support the hypothesis of product cycle theory: financial capital is not a real problem of Korean business, compared with technological requirements. Whereas 5 The first three of the points which follow are C. Cooper's, Q£. cit., p. 11 and the last one is G. K. Helleiner's "The Role of Multinational Corporations in the Less Developed Countries' Trade in Technology," World Development 3-4 (April, 1975), p. 167. Vernon himself admits that the theory was beginning in some respect to be inadequate as a way of looking at U.S.-controlled multinational enterprise. As to the last point, Vernon also touched on it briefly. See Vernon (1971), ~. cit., pp. 98-112. 86 Table 7. Motives of Foreign Capital Inducement: Korean Businessmen's Views Q: What are the main factors which lead your firm to make a decision to induce foreign capital (including foreign investment and loan, and license agreement)? Answers Weighted(1) Primary Secondary Minor Value (%) 1. To introduce equipment for a new process 48 (22.9) 10 8 2 2. To introduce equipment for new products 63 (30.1) 13 10 4 3. To replace old machines 23 (11.0) 2 5 7 4. To get financial capital 18 ( 8.6) 3 2 5 5. To get access to technological know- how 44 (21.0) 10 4 6 6. To get access to int'l market 5 ( 2.3) 1 3 7. To get advantages offered by govermnent 5 ( 2.3) 2 1 8. Others (please specify) 3 ( 1.4) 1 Total 209 (100.0 39(2) 32 28 Notes: (1) Weighted value = (primary x 3) + (secondary x 2) + (minor x 1) (2) A total of 31 firms answered to this question. The number of responses for "primary" is inflated because many respondents answered twice for "primary." Source: My Field Survey Data 87 the combination of item 2 (new products) and item 5 (technological know-how) accounts for a weighted value of 107 (51.1%), that of item 1 (new process) and item 3 (replacement of old equipment)--the two items most demanding of capita1--account for only a weighted value of 71 (33.9%). It is interesting to note that financial capital, contrary to the conmon assumption in the studies of this subject, has a minimal value of only 18 (8.6%). C. K. Park's survey of joint-firms reports that the primary motives of the domestic partners for joint-investment with foreigners are to import advanced production technology and management skills which accounted for about 40% of the total responses: supplementing the capital shortage of the domestic partner does not appear as a major motive, accounting for only 8.9% of the responses.6 The product cycle model suggested what kind of technology is likely to be transferred to the developing countries and that the kind of technology would to great extent determine the patterns of technology transfer. For example, simple technologies requiring a minimum of local adaptation and which are relatively mature in their development (the age of the product) are more likely to be made available through license agreements than newer and more complex technologies which multinational corporations prefer to retain for their wholly-owned subsidiaries. Larger firms and firms selling in conditions of differentiated oligopoly also tend to a preference for 7 direct investment rather than license agreement. The kind of 6 See C. K. Park, ££. ~., p. 121. 7 For discussion of these issues and results, see UNCTAD, Guidelines for Stud of the Transfer of Technolo to Developing Countries, (New York: UN, 1972); Vernon 1971),22. cit.; C. Cooper, "Choice of Techniques and Technological Change as Problems in Political Economy," International Social Science Journal, XXV-3 (1973), pp. 293-304; and E. Mansfield (1974), ~. ~. 88 technology hypothesized in terms of the product-life cycle theory assumes that standardized products imply standardized processes. Obviously this perception of the kind of technology can be understood in terms of the vertical processes of technology transfer, formulated in Chapter III. We should note that the concept of the kind of technology transferred differs from those of the conventional classi fication, i.e. capital-intensive vs. labor-intensive or new vs. old technology. In brief, we hypothesize that technology at the bottom end of the product cycle (the lower end of the vertical transfer) is likely to be transferred to the developing countries. It is extremely difficult, if not impossible, to measure how long is the life of a product or process: even the scientists and specialized engineers in a particular field may not judge it correctly. Nevertheless, the KIST survey reports that 33.9% of the total cases of technology transfer through license agreements between 1962 and 1974 were developed before 1955, 13.8% during the period of 1956-60, 20.1% during 1961-65, 20.1% during 1965-70, and only 8 12.6% after 1971. It is obvious that, read in the context of the questions given, "development" (the criterion to measure the age of the technology in the KIST survey) means the stage of "matured commercialization" (which may be the "technological drift" in our model) in the advanced countries. The hypothesis of the "bottom end of the product cycle" is strongly supported by another statistics. According to official 8 KIST, .2£,. cit., 259. 89 statistics, Japanese companies sold a large proportion (69.3%) out of total license agreements (472 cases) during the period of 1962-74, and American companies account for 22.7% during the same period. It is cODDnon1y argued in Korea that Japanese technologies are obsolete 9 and second-hand: their origin is from the U.S.A. As we have seen in Chapter IV, the main patterns of technology transfer to Korean industries were through foreign turn-key projects and investment. Foreign loan projects which were financed mainly by international financial agencies (e.g., the World Bank and the Asian Development Bank) and foreign banks, were actually performed by the multinational corporations. Especially the so-called Japanese "Big Ten" have played a major role in these foreign loan projects: according to my estimate the Japanese "Big Ten" are responsible for about 50% of these projects in terms of amount and cases.10 Japanese investments (joint ventures) in Korea are mostly small-scale compared with those of the U. S.A. Park's survey indicates that 75.5% of the 94 joint firms (which responded to the questionnaire) have foreign partners whose investments are less than US$500,000 and Japanese joint-ventures accounted for 80.8% of these sample firms, while U.S. firms occupied only 11.7%. It is interesting to note that 9 Ibid and FKl, ,2£. £!!. 10 The Japanese "Big Ten" enterprises are: Mitsubishi, Mitsui, Marubeni-Ida, C. Itoh, Nissho-Iwai, Toyo Menka, Sumitomo, Michima, Kanematsu-Gosho, Ataka. The "Big Ten" account for 62% of Japanese imports and 47% of its exports, and were responsible for as much as 80% of Japanese investment contracts in foreign countries. See T. Ozawa, "Transfer of Technology from Japan to Developing Countries," (New York: UNITAR Report 7, 1971). 90 in the majority of the joint-investment projects, foreign loans are involved: the major source of the foreign loans is the foreign partner companies; 61.5% of the joint-firms said that foreign loans affected joint-investment conditions or vice versa. l l Recently J. Roemer noted that much of Japan's high technology investment in the developing countries, especially in the socialist countries and the Middle East, is not direct investment but is financed by govern- ment loans in return for production sharing. He further pointed out that Japanese capital export is not "knowledge-intensive," but it certainly embodies highly sophisticated labor.12 A Japanese economist Kojima. asserted that while America invests abroad in its comparatively most advantageous sectors, keeping at home its uncompetitive industry, Japan has behaved rationally by exporting its labor-intensive and comparatively disadvantageous industry, concentrating on the bottom end of the product cycle and trade-inducing sectors. 13 In brief the US exports the top of the product-cycle to the advanced countries, and Japan the bottom end of the product cycle to the developing countries. This contributes to a new form of international division of labor. In this way the life-time of a certain technology may be multiplied by moving it down the development ladder step-by-step. The rent of technology may last for much longer than the theory of product cycle proposed, and the rent may be really 11 C. K. Park, ~. cit., ppo 120-125. 12 John E. Roemer, "Japanese Direct Investment in Manufacture: Some Comparisons with the US Pattern," Quarterly Journal of Economics and Business, 6-2 (Summer 1976), pp. 91-111. 13 Kiyoshi Kojima, "A Macroeconomic Approach to Foreign Invest ment," Hitotsubashi Journal of Economics, 14 (June, 1973), pp. 1-21. 91 expensive as we will see in a later section. A similar pattern of technology transfer from Western Europe to Eastern has been analyzed. 14 (2) The Nature of the Market for Technology In the discussions of technology transfer, the industrialized nations and the multinational corporations are often accused of narrow selfishness, of charging exorbitant fees or royalties, and of enforcing a multitude of restrictive provisions. Obviously these peculiar phenomena come from the very nature of the international market for technology. The failure of the conventional theories to recognize the nature of this market structure is the major source of confusion about the process of technology transfer, and the confusion further results in serious conflicts between the transaction parties. The Baconian dictum. is a useful advice: truth emerges more readily from error than fran confusion.15 This confusion stems primarily from the treatment of technology as if it were the same thing as other commodities or production factors. Lately several economists have elaborated on this topic, but its analysis is still in an early stage. For example, P. Streeten lists the five characteristics of the market for technical knowledge: 1) indivisibility; 2) inappropriability; 3) embodiment in other factors; 4) uncertainty; and 5) impossibility to know the value until the purchase is made.16 14 See Sverre Lodgaard, "Industrial Cooperation, Consumption Patterns, and the Division of Labor," Journal of Peace Research (1974), pp. 387-399; and Stanislaw Wasowski (ed.) , East-West Trade and the Technology Gap (New York: Praeger, 1970). 15 Cited in Thomas Kuh~, 2E,. ill,., p. 18. 16 Paul Streeten, The Frontiers of Development Studies, (New York: John Wiley & Sons, 1972), pp. 395-398. 92 Streeten points out that the use of knowledge is subject to indivisibilities and that average costs diverge widely from marginal costs. C. Vaitsos succinctly summarizes the peculiarity of the technology market. Technology is good, the use of which involves the owner in no marginal costs; it is non-exhaustible since it is not used up through use, 17 However its value to a purchaser--as represented by the cost of developing it for himself--may be great indeed. Secondly, the inappropriatability of technology comes from legal barriers (i.e., patent and brand name protection). There has recently been a lively discussion of the benefits and costs to the developing countries of adherence to the international patent conventions. 18 Vaitsos' study on patents emphasizes the role of patents as a support for technological monopolies and argues that patent systems actually restrict the transfer of technology to developing countries.19 Penrose points out that so far as inventions are concerned a price is put on them not because they are scarce but in order to make them scarce to those who want to use them.20 Patents 17 Constantine Vaitsos, "Bargaining and the Distribution of Returns in the Purchase of Technology by Developing Countries," Bulletin of the Inst. of Development Studies, (Oct., 1970). 18 See United Nations, The Role of Patents in the Transfer of Technology to Developing Countries, (New York: UN, 1964); C. Vaitsos, "Patents Revisited: Their Function in Developing Countries," Journal of Development Studies, 9-1 (Oct., 1972), pp. 71-97. 19 C. Vaitsos (1972), £e. £!!. 20 E. Penros, The Economics of the Internal Patent System, (Baltimore: John Hopkins Press, 1951). 93 as a highly protected value is a mechanism which its possesor may use not only for productive purposes, but for protective ones. BeIge Hveem conments that patents are politics, not just something for the technological community, and not only for the market. 21 Third, technology and its transfer per se, as we have frequently emphasized, are fundamentally people-oriented pheneomena. Patents, blue-prints, formula, etc., are only uncompleted parts of technology. Know-why and know-how are embodied in human brain and memory. The theory of product cycle overlooks the delicate, long and arduous processes of after-innovation, i.e., the refining, improving or modifying processes of technological progress that are reflected in the differentiated products, i.e., product class (e.g., TV), product form (e.g., Color TV), and brand names (e.g., RCA). In the processes of after-innovation, the general-information would be transferred to the system-specific, which in turn would be transferred to firm-specific information. In this way, the multinational cor 22 porations can maintain their monopoly advantages in technology. For this reason it has been stated that the product cycle theory becomes in fact a monopoly cycle. 23 Fourth, the technology market is characterized by the so-called Arrow's dilemma. Arrow noted that for some purchases 21 Helge Bveem, "The Global Dominance System: Notes on a Theory of Global Political Economy," Journal of Peace Research (1974), p. 328. 22 See Nariman K. Dhalla and Sonia Yuspeh, "Forget the Product Life Cycle Concept," Harvard Business Review, (Jan/Feb., 1976), pp. 102-112. 23 C. Vaitsos, "Income Generation and Income Distribution in the Foreign Direct Investment Model," (Cambridge: Harvard Bus, School, Ph.D. Dissertation, 1970). 94 such as medical care, the private market place is less likely to give an efficient result because "the value of information is frequently not known in any meaningful sense to the buyer: if he knows enough to measure the value of information, he would know the information 24 itself." In this situation, it is reasonable to assume that the terms on which technology is transferred to the developing countries are worked out by bargain. However, Harry Johnson, concentrating on the foreign firm's monopolization of knowledge, argues that the developing countries will pay less for the knowledge than will rich countries because poorer and less-developed countries are likely to have more elastic demand curves for knowledge-intensive products than richer and more advanced countries; he concludes that the transp1anta- tion of superior technical and managerial knowledge is most probably benefici a 1 to.the country receav. if·ng ozeagn dazec . t·anvestmen . t • 25 He views the purchaser's demand curve for foreign technology as stable and well defined. But Arrow's dilemma argument rejects Johnson's assertion. Some empirical evidence shows that the majority of the Korean partners (53.5% out of 58 firms) of joint-ventures paid a fixed amount in technical assistance fees on terms negotiated between 24 . See Kenneth J. Arraril, "Uncertainty and the Welfare Economies of Medical Care," American Economic Review, 53, (December, 1963), p. 946, and "Economic Welfare and the Allocation of Resources to Invention," in R. R. Nelson (ed.) , The Rate and Direction of Inventive Activity, (Princeton: Princeton University Press, 1962), pp. 614-619. 25 Harry G. Johnson, "The Efficiency and Welfare Implication of the International Corporation, II in Kind1eberger (ed.), International Corporation, (Cambridge, Mass.: The M.I.T. Press, 1970), pp. 35-39. 95 two parties rather than on the basis a fixed schedu1e.26 Again the KIST survey of license agreements indicated that the majority of local entrepreneurs (60.9%) usually choose technology on the basis 27 of the well-known brand-names of foreign firms. They never choose technology on the basis of well-defined information as Johnson asserted. Three big firms in my field survey sample had license agreements with a well-known American corporation to manufacture the same product. The major problems arising over technology transfer are the negotiations about the terms on which the agreements are made between two parties: according to the KIST survey the problems of the bargaining process account for 38.8%. 28 Due to the characteristics of the technological market discussed above and due to the weakness of the scientific and technological capabilities in developing countries, the bargaining position of the purchaser or licensee of technological knowledge is such that the terms of the agreement are likely to be highly restrictive, and consequently the supplying enterprises are able to control production and to get high rates of return. The well-known practices of the array of restrictive clauses that are usually included in license agreements are quite common and are abundantly documented especially in the literature of Latin America. 29 Among them are: 26 C. K. Par k, ~. £!!., .p. 124 • 27 KIST, ~. cit., p. 138. 28 Ibid, p. 145. 29 See Alejandro Nadel Egea, ~. cit.; C. Vaitsos, "Transfer of Resources and Preservation of Monopoly Rents," Harvard University Economic Development Report, No. 168 (June, 1972); and Robert E. Driscoll and Harvey W. Willender III (eds.), .2E,. ill. 96 1) export restriction clauses to all countries or certain regions; 2) obligation to purchase raw materials, intermediate products and/or capital goods and equipment from licensor; 3) control by licensor of volume of production and sales, location of production, transactions with other firms; 4) clauses requiring licensee to transmit any improvement related to licensed process to licensor (sometimes free of charge); and 5) obligation of licensee not to reveal or use technical secrets after contract has expired; etc. FKI's survey of all Korean industry demonstrates that the obligation to purchase r~Y' materials and parts ranks first (25.1% of the total restrictive clauses), and restriction on the development of technology competing with the transferred technology and the restriction on manufacturing other similar products differentiated from the transferred technology account for 20.2% and 19.1% respectively: export restriction clauses also occupy a high proportion (18.1%), while the clause which ensures the licensor's equity participation is minimal (908%).30 The KIST survey of license agreements reveals some different trends: the obligation not to reveal or use technical secrets occupies the highest proportion (22.3% out of 349 cases), and the export restriction the secpnd (16.6%): the purchase-tie clauses and the restriction on the development of competing technology account for 11.7% and 17.2% respective1y.31 On the other hand, Park's study on joint-venture firms shows another aspect of the restrictive practices: 59.7% of 72 responding 30 See FKI Survey Report, ~. cit., p. 34. 31 See KIST Survey Report, ~. ill., p. 146. 97 firms have no restrictive clauses on export market and the remaining joint companies (40.0%) have export restriction clause. Although a large number of the joint-firms are free to export in the international market, in practice the majority of joint-firms, as Park himself pointed out, export to partner companies. More than 50% of the joint-firms rely on partner countries (including partner companies) for more than 50% of their total imports of raw materials: this raw material supply was secured by the contracts (48.9% out of 45 firms). In the case of new technology development, these new technologies do not exclusively belong to the joint-firms: instead, in 30% of the cases, these technologies are supposed to belong to the foreign .. 32 partner companies wit hout any charges andl or restr1ct10n. So far I have not mentioned "overpricing" of technology and the problems of balance of payments arising from royalty payments on which the bulk of the literature has recently concentrated. I have described only the nature of the technology market with the emphasis on bargaining power and the results of this stiructure, i.e., the restrictive practices. I have no idea about how to measure the "overpricing" of knowledge, although C. Vaitsos used a formula to . 33 measure overpr1cing. I am not in a position to support the argument 32 C. K. Park, .2£.. cit., p. 125. 33 C. Vaitsos defines overpricing as: f . O.b . price paid) (f.O.b. price quoted in) ( o = by the recipient - different world market X 100 f.o.b. quoted in different world market C. Vaitso, "Strategic Choices in the Commercialization of Technology," (mimeo, 1970), cited in Hveem (1974), ~. cit., p. 339. 98 that the same technology will function in the same role in any place and any time to any people. The value and role of same technology like other information (e.g., education) may be different over time and place. Therefore only inferences are possible. To my judgement overpricing is not so important as restrictive practices, and, consequently, the control of the production of technology in the recipient country. Again the effects of restrictive practices on other economic factors are not measurable. (3) Industrial Concentration So far we have discussed technology as a source of monopoly (or quasi-monopoly) and its effects on the structure of the international market for technology. In this section I will investigate another aspect of the impact of technology transfer on the industrial structure of the developing country. In some important theories of development, monopoly bas been assigned a key role: some (e.g., the Marxist school) have seen it as a major cause of stagnation, while others have regarded monopoly as the engine of economic growth. Most analyses of the former school are based on the classical theory of financial capital concentration which ignores the direct relationship between technological change and industrial concentration: if the theory has some concept of technological change, the concept is mainly derived from nineteenth century technology. For this reason Paul A. Samuelson could say that improving technology, in actual historical fact, moves the economy in other directions, negating or concealing the Ricardo-Marx law of 99 the declining rate of profit.34 The latter school has invariably dealt with the problems that technological change and industrial concentration (monopoly) pose in the matured industrialized countries. Although the application of the theory itself to the problems of the developing countries is limited, its implications for technology transfer and its impact on the structure of the developing economy would be great. Foremost among those associated with the position that monopoly power and large size spur inventive activity is J. A. Schumpeter.35 He envisioned an economy as an organization with cells constantly dying and being replaced by superior ones. His lucid definition of "development" is understood as "only such changes in economic life as are not forced upon it from without but arise by its own initiative, from within.,,36 If there are no such changes there is no economic development. By this notion economic development is not a phenomenon to be explained economically. By this process of "creative destruction," the organism grows and flourishes. In an economic system, regeneration and development are achieved through replacement of existing products, processes, and modes of industrial organization by improved ones. Schumpeter saw the quest for extraordinary profits through innovation as the motivational force propelling the process, with the monopoly position achieved 34 Paul A. Samuelson, Economics, (New York: McGraw-Hill, 6th ed., 1964), pp. 733-4. 35 Joseph A. Schumpeter, Capitalism, Socialism. and Democracy, (New York: Harper Colophon Books, 1950, 3rd ed.); and The Theory of Economic Development, (Cambridge, Mass.: lJarvard University Press, 1968). 36 J. A. Schumpeter (1968), ~. ~., p. 63. 100 through innovation as only temporary. It is susceptible to erosion by imitation and usurption by new innovations. Innovation, however, requires a relatively sizable commitment to resources and a commensurate return to make it worthwhile. Immediate imitation of a firm's new product or process by others would eliminate realizable rewards and thereby its incentive to innovate. Thus, only a firm that can attain at least temporary monopoly power, delaying rival imitation, will find innovation attractive. Galbraith emphasizes the importance of firm size per se.37 He contends that the era of cheap innovation is over. Current innovative activities require vast sums of money for technical personnel, engineers, scientists, and their equipment. The needed resources are available only to large firms possessing a substantial degree of monopoly power. Moreover, large firms can hedge against the technical uncertainties associated with innovation by undertaking several projects simultaneously. Schumpeter and his followers have argued that large and monopoly power are prerequisites for economic growth through technological change. The loss to society from the absence of perfect price competition is more than compensated by the gains in the long run, derived from innovation. Regarding policy, Schumpeter argued thz~t antitrust laws should be implemented more selectively so as not to impede technological change. He states: 37 See J. K. Galbraith (1952), ~. cit. 101 The firm of the type that is compatible with perfect competition is in many cases inferior in internal, especially technological efficiency••• If it is, then it wastes opportunities••• In this respect perfect competition is not only impossible but inferior••• It is hence a mistake to base the theory of government regulation of industry on the principle that big business should be made to work as the respective industry would work in perfect competition.38 The bulk of the literature has been devoted to test the Schumpetarian hypotheses involving the relationship between R&D 39 activity and firm size. Some studies have indicated that a relative small firm is more efficient in many development projects (invention activities) than a large one: larger firms are emneshed in bureaucracy and red tape;40 not; only is invention and development more costly to large firms, but some firms have also suppressed 41 42 them; large industrial labs tend to produce mainly minor inventions. Other investigations have shown some empirical evidence that both large and small firms play assential, complementary, and inter- dependent roles in the process of innovation. Larger firms tend to contribute most to innovation in areas requiring large scale R&D, 38 J. A. Schtnnpeter (1950), ~. ill., p. 106. 39 For comprehensive reviews of the literature on this subject, see M. 1. Kamien and N. L. Schwartz, "Market Structure and Innovation," The Journal of Economic Literature, XIII-l (March, 1975), pp. 1-37. 40 A. C. Cooper, "R&D is More Efficient in Small Companies," Harvard Bus. Rev. (May/June, 1964), pp. 75-83. 41 J. M. Blair, "Economic Concentration: Structure 2 Behavior and Public Policy, (New York: Harcourt, Brace, Jovanovick, 1972). 42 See D. Hamberg, ;;.;R&D~.:.:~=.::~~;.:;....;.::.~~;:.;;.;=.::::.=...;:;.::.....::.:=.::.;=:.=Essays on the Economics of Research and DevelOpment, (New York: Random House, 1966). 102 and smaller firms tend to concentrate on specialized but sophisticated 43 components and equipment. Although the theories and empirical data vary, both rejecting and supporting the hypothesis of the relation- ship between the firm size and technological progress, they seem to agree that the large firms are major innovators rather than inventors. Recent studies indicate that a large proportion of the innovations are based on inventions made outside the innovating firms. 44 The innovative drive of U. S. business is not to be confused with any outstanding capacity to invent. The function of large firms in many instances has been simply that of accepting the risks and costs associated with developing inventions and introducing products based on them into the market. But this does not tell us anything about where the bulk of R&D is done or about relative R&D efforts: in absolute terms large firms are directly a major source of innovation and indirectly of invention. The next hypothesis is related to the impact of technological advance upon economies of scale. In the Nicolas Ka1dor' s theory of accumulation (and David Levine's recently extended version of it), technology change is coherently integrated in the economic growth process and the changes of economic institutions.45 Levine divides capitalist development into three stages: 1) the stage of "primitive accumulation"--the period of accumulation without technical change for 43 K. Pavitt and S. Wald, The Conditions for Success in Technolo gical Innovation, (Paris: OECD, 1971). 44 See E. Mansfield (1974), ~. cit., pp. 150-155; Nelson, et al., ~. cit., po 70; W. Price eSc: L. Bass, "Scientific Research and the Innovative Process," Science, 164, 3881, pp. 802-6. 45 See N. Kaldor, Essays on Economic Growth and Stability, (Glencoe, Ill.: Free Press, 1960), Part 3; and David Levine, "The Theory of the Growth of the Capitalist Econ~," Economic Development and Cultural Change, 24-1 (Oct., 1975), pp. 47-74. 103 which as a result of the conditions of technology, the Marxian model of accumulation might in effect be appropriate; 2) the stage of the "absolute concentration of capita1"--the progress of technology tends to increase the capital/labor ratio and larger amounts of capital increasingly concentrate in fewer major industry; and 3) the stage of ''monopoly'' capita1--techno1ogica1 change is directed toward new product innovation rather than process innovation for price competition. This model suggests, though it is crude in certain respects, some dynamic process of structural change which other theories ignored. It can also provide a starting point for the treatment of important questions such as the role of uneven growth between industries, sectors, and national economies as well as the connection between capital accumulation and the international movement of capital and the implications of government intervention. Blair very comprehensively reviewed the literature dealing with the impact of technological advance upon economies of scale. He concluded that from the late 18th century, technological change exerted a powerful impetus toward concentration because advances in steam power, in materials and methods in fabrication, and in transpor- tation (rail road) permitted and encouraged scale expansion. Since then, newer technologies (electricity, materials and methods of fabrication, trucks) have tended to have the opposite effect, reducing plant size and capital requirements for optimal efficiency.46 46 See Balir, ~. cit.; and D. Hamberg, "Size of Enterprise and Technical Change," Antitrust Law Econ., (July/Aug., 1967), pp. 43-51. 104 R&D and technical progneaa can be barriers to entry particularly in certain industries with high "technological complexies," such as aircraft, drugs, electronics. Because of the products' complexity, their manufacture employs many existing patents, through cross licensing know-ho-w agreements, and patents pools.47 The stronger a firm's own technical position, the more readily it can obtain such technical agreements on favorable terms. This minimum R&D capacity to maintain a defensive market position plus requisite marketing and technical services facilities constitutes a minimmn size for entry. D. C. Mueller and J. E. Tilton show some evidence that during the first stage of product cycle neither relative nor absolute size are requisite to invention, development, or technical imitation. In the next stage substantial costs of building and maintaining a large R&D capability constitute an entry barrier favoring the large industrial lab. In the final stage barriers to entry are not based on R&D requirements but on production and marketing scale. Price competition replaces technological competition.48 Phillips argues that initial successes in a technologically changing industry create opportunities for further successes while failure may breed further failure, because of substantial learning 47 See A. Phillips, Technology and Market Structure: The Study of Aircraft Industry, (Lexington, Mass.: Lexington Book, 1971); W. S. Commanor, "Research and Competitive Product Differentiation in the Pharmaceutical Industry in the U. S. ," Economica (Nov., 1964), pp. 372-384; and C. Freeman, "Research and Development in Electronic Capital Goods," Nat. Inst. Econo Rev. (Nov., 1965), pp. 40-91. 48 D. C. Mueller and J. E. Tilton, "Research and Development Costs as a Barrier to Entry," Canadian Journal of Economics 2-4 (Nov., 1969), pp. 570-579. 105 costs. As a result the scale of the successful firms tends to be large and industry concentration to be high.49 In brief, while in the 19th century capital was conceived as the major source of industrial concentration, in the 20th century, especially in the 1970s, technology increasingly takes over the decisive role to cause monopoly and concentration. I introduced the theories and empirical studies about the relationship between technology and industrial concentration, not because I think that they are applicable to the analysis of industrial structure and technology policy for the developing countries: rather I think that when these theories are applied uncritically to the developing countries they are dangerous or sometimes destructive since the social conditions of technology in the developing countries are manifestly different from those of industrialized societies. But one thing is relevant to our study. If modern technology favors monopoly or industrial concentration (bigness), this phenomenon will be arrived at in a much earlier stage of development in the developing countries through technology transfer. Put another way, if the developing countries want to industrialize via technology transfer from the advanced countries, the choice is already given by modern technology. This problem was vividly demonstrated in the Western European countries in the 1960s and 1970s. In the late 1960s Europeans concluded that superior know-how steming from scientific 49 A. Phillips, "Patents, Potential Competition and Technical Progress," American Economic Review, 56-2 (May, 1966), pp. 301-310. 106 and technical achievements in the U. S. had allowed American companies to obtain large shares of European markets and that the superiority of technology was attributed to two factors: the U. S. government I s financing of R&D in the private enterprise mainly in the defense sector, and their very large size. Though some scholars were skeptical that bigness went hand in hand with efficiency, official circles usually took the relationship for granted. On the basis of that assumption, the idea of developing a "national champion"--an enterprise responsive to its national government's needs and entitled to its national govermnent's support--began to take root. In addition to creating some new state-owned enterprises, the governments in Europe began to encourage their existing firms to merge into large units. 50 Vernon commented ironically that the nature of modern technology has become so complex and so specialized that few economies can hope to generate all the elements for a successful end-product from sources within their borders: it often demands networks larger than Europe can provide: a net for the assembly of relevant information on design and production: and a network of market outlets: any EEC-wide policy for the high-technology industires may have to confront the fact that the European-based enterprises cannot effective 51 1y implement an autarchic policy for the EEC. It seems that capitalism in the 19th century has been described as having been concerned with the question of the ownership of industrial property, 50 See Raymond Vernon (ed.), Big Business and the State, (Cambridge, Mass.: Harvard Univ. Press, 1974). 51 ~, pp. 20-24. 107 while the principal questions of 20th century capitalism are viewed as being concerned with the efficiency and well-being of the economy, 52 rather than with property ownership. J. E. Tilton, in his compara- tive study of semiconductor technology diffusion in the industrialized countries (The U.S., West Germany, Britain, France, and japan), concluded that large established firms are needed to catch up unless a country is wi lling to become dependent on foreign subsidiaries.53 Now we return to our original question about how technological giantism affects the industrial structure of a developing nationIS economy. From the above discussion we can easily derive a hypothesis: the more technology is transferred from the advanced countries (the higher Tn indexes), the higher the degree of industrial concentration (CON indexes). In the literature a variety of indexes of concentration have been used in the analysis of industrial structure.54 We adopted 52 I. A. Litvak and C. j. Maule, "Foreign Subsidiaries as an Instrument of Host Government Policy," in H. R. Bahlo, et a1., (edsv) , Nationalism and the Multinational Enterprise, (N.Y.: Ocean Publishing, 1973), p. 195. 53 John E. Tilton, International Diffusion of Technology: The Case of Semiconductors, (Washington, D.C.: The Brookings Inst., 1971), p. 167. 54 The types of concentration indexes can broadly be classified into two: 1) relative concentration and 2) absolute concentration. The former considers the percentage of the total number of firms in an industry that control a certain percentage of the total assets or sales while the latter measure the proportion of total assets or sales controlled by a small number of very large firms in an industry. The Lorenze curve and the Gini coefficient are concerned with the former measures and indexes developed by, for example, Adelman and Ba1air, with the latter measures. see M. A. Adelman, "CODIDent on the 'H' Concentration as a Numbers Equivalent," Review of Economics and Statistics, (Feb., 1969): j. M. Balair, "Statistical Measure of Concentration in BUSiness," Bulletin of the Oxford University Inst. of Statistics, (Nov., 1956). 108 the most connnonly used measure which is the percentage of output (sales volume) accounted for by the four largest firms in an industry.55 According to the above definition the measure of concentration ratio can be expressed by the following formula: CON = sales by 4 large firms X 100 Total output of an industry Before we analyze the main feature of industrial concentra- ti~n, it would be useful to take a look at how important the growth performance of the sampled national champions (40 largest firms in manufacturing sector) is to the Korean economy. According to official statistics the total value added by the manufacturing sector ($504 billions) contributed 29.05% to the GNP ($1806 billions) in 1975, 56 compared with 21.6% ($1.6 billions) of GNP ($7.5 billions) in 1970. In terms of gross output (not value-added) 10 sample industries ($10.0 billions) accounted for more than half of the total output of the whole manufacturing sector ($18.3 billions). The total sales volume of the 40 large firms ($4.4 billions) occupies 24.3% of the total output of all manufacturing industries and 44.2% of that of the 10 selected industries ($10.0 billions). 55 Firm size is alternatively measured by sales volume, assets, or number of employees. These variables are positively but not perfectly correlated. I prefer "sales" because it is neutral regard ing factor proportions and R&D budgets and other technical activities which may be based on projected sales. Cf. F. M. Scherer, "Size of Firm, Oligopoly, and Research: A Comnent," Canadian Journal of Economics and Political Science, 31-2 (May, 1965), pp. 256-266. 56 See Economic Planning Board (Korea), Economic Manual (Seoul: unpublished handbook, June, 1975), p: 8. The Bank of Korea, Tentative Estimates of GNP-1975, (Seoul: unpublished mtmeo, Dec., 1975), p. 1. 109 In March and April 1976 the Korean government released a list of 204 companies involved in manufacturing 147 commodity items, which will be regulated by the anti-cartel and monopolistic price control clause of the newly enacted Law on Price Stabilization and Fair Trading.57 The gross sales volume of the listed 147 items accounts for 31.9% of the total output of all manufacturing industries. These large firms again share 50% of the monopoly market in terms of sales volume. Note that the percentage of the monopoly market share of the 40 large firms is much higher if the items of petrochemicals and fertilizer are included: these items are not covered by the lists because they are controlled by existing pertinent special laws. The measures of monopoly used in the selection process included: any firm whose production, shipment or supply account for more than 30% of the local market and any three companies whose production, shipment or supply account for more than 60% of the domestic market. The yardstick by which we measure the industrial concentra- tion ratio is much broader than that selected by the Korean government. Our concern is more with potential industrial competition than with technical measures of monopoly by commodity class, as Schumpeter maintained that the businessman feels himself to be in a competitive situation even if he is alone in his field. 58 The correlation analysis, seen in Appendix 1, shows that technological complexity, measured by the number of engineers as 57 The figures were obtained from the leading Korean daily newspapers in March and April, 1976. 58 J. A. Schumpeter (1950), £E. ~., p. 85. 110 the percentage of total employment (ENG index), is positively correlated with industrial concentration (CON index) with a coefficient of .7096 (which is statistically significant at the level of .011). The next significant correlation with industrial concentration is found in the technical service fees in foreign loan projects (turn-key projects) represented by the LOTE index with the coefficient of .6823 being significant at the .015 level. As for our main hypothesis, the correlation analysis shows a positive answer: the relationship between the degree of technological dependence and that of concentra- tion has a coefficient of .8419 which is statistically significant at the level of .001. It is interesting to note that, contrary to the assumptions of economic theory, the capital requirement (CAP index) is quite weak in the relationship with the concentration ratio. This finding was supported by another study in Korea. Woo H. Nam, in his study of industrial concentration using data taken from the Mining and Manufacturing Census of 1966-69 for all 234 census 4-digit industries, concluded that the increase in the concentration ratio over time (1966-69) may have been mostly due to increase in firm size taking advantages of scale (measured by average size of the firm), followed by product differentiation of the products (measured by the advertise- mentlsales ratio), together with development of export and import substitute industries which are in general highly protected, perhaps technically more advanced, and thereby in a superior position with respect to prospective entrants.59 As to the weak correlation 59 Woo H. Nam, "Industrial Concentration; Korean Manufacturing Industries," (Seoul: The Korea Development Inst. Working Paper 7209, 1972) • 111 between the concentration ratio and the capital requirement, he concluded: "It is, however, surprising to find that the coefficient of the variable describing capital requirement has a negative sign contrary to some possible theorizing0 •• Perhaps the poor showing may be due to faultiness in the data. ,,60 I would like to suggest that the poor showing may not be because of a data problem. My data show that, with the exception of petroleum and fertilizer industries, generally speaking the older the industry, the more capital intensive: steel and iron (CAP:56.9) is more capital intensive than machinery (13.3) and transportation equipment (17.7); cotton textile (16 08) more capital intensive than synthetic fibre (13.5); grain mill (32.3) than food processing (18.9); and the electricity and electronics industry has the lowest capital-intensive index (701).61 Further systematic investigation may reveal more interesting resultso When I was in Korea on the field survey, a Korean economist working on the anti-trust law said to me, ''Monopoly is reality and competition is the norm in the Korean economy: the economy of 60 Ibid, p. 34. 61 R. Vernon speculated that a standardized textile item may be more or less capital-intensive than a plant for unstandardized petro chemicals. See Vernon (1966), .QE.. cit., p. 206. He found a similar result in U.S. industries; the index purporting to measure teclmology intensity proved to be positively correlated with the measure representing industry concentration. Consistent with earlier studies the capital-intensity measures show no significant relation with the measure of industry concentration: evidently capital-intensive processes afford no sure road to oligopoly power, at least when measured by the structure of U.S. industry. See William H. Gruber and R. Vernon, "The Teclmology Factor in a World Trade Matrix," R. Vernon (ed.) (1970), .2£. cit., p. 250. 112 monopoly is not in the boundary of economics but belongs to politics." Further, he asserted that there may be no correlation between technical factors and industry concentration. I was much interested in hearing from Korean economists and political scientists, but almost all kept silent about this important topic. Only the daily newspapers and magazines strongly voiced the argument that monopoly has actually been bred by the government itself to take advantage of the economies of scale in the process of implementing the Korean economic development plan, and that this is consequently at the expense of consumer protection.62 62 See Dong-A Ilbo, March 27, 1976, p. 2: Shin-Dong-A (!May, 1976), pp. 244-247. CHAPI'ER VI Technology and the International Division of Labor It would be abundantly clear that national policies for science and technology are very heavily influenced by the international framework within which they are undertaken. 1 This framework offers not only opportunities for economic growth for the developing countries, but also it imposes increasingly severe constraints on what national scientific and technological strategies can be expected to remain viable. This framework is defined by an international division of labor in the context of technological change. Theoretically, specialization is the organizational principle of technological change as many sociologists and anthropologists suggest: its underlying value is the efficiency of science and technology. Therefore, any discussion of specialization without taking into account the technological factor is likely to be superficial. Historically, uneven distribution or development of technology has contributed to the division of the world into developed and underdeveloped countries in conventional terms: the former engaged in industrial and the latter in primary production, with consequent differences in income growth. The contemporary world is now at a transitional stage, in which the traditional division of labor is being radically transformed due to recent revolutionary technological change. However, this transformation has moved over the last few decades so rapidly that any conventional analysis is susceptible to early obsolescence. 1 Keith Pavitt (1973), ££. ~., p. 194. 114 In this chapter I wish to investigate what implications this new pattern of international specialization has for the distribution of power and wealth between technologically developed and underdeveloped countries. (1) International Trade Pattern The internationa1 division of labor is primarily reflected in international trade patterns. International specialization has taken a succession of varying forms. The traditional pattern of international specialization has long been associated with the role of capital: the advanced countries with presumably abundant capital specialize in manufacturing and the underdeveloped countries without capital serve as the provider of raw material or primary products. The Heckscher Ohlin factor contention theory has been the predominant paradigm to explain these patterns of international trade. However, technological change has brought about radical changes in international economic value and has made the well-known paradigm obsolete. In the last decade or two, the theorists of international trade, puzzled by Leontief's well-known paradox, have struggled to understand and define the technology factor as an element to explain the paradox. The product-life cycle theory which was introduced in Chapter V, and its family of related theories--the technology gap and the human skills mode1s--are foremost among those which have pioneered the puzzle-solving task. The technology gap model stressed the advantages to the innovating country which came from the possession of the newest products as opposed to advantages 115 2 accruing from lower costs. An empirical study showed that location of production and per capita exports were a function not of factor costs but of technological progress measured by research expenditures, patents, and innovation.3 Keesing examined the skill levels in U.S. export industries and further suggested that R&D has more power to explain the American competitive abi1ity.4 However, these two models are hardly distinguishable from the product-life cycle model since their theoretical predictions and empirical findings are consistent with those of the latter model. The theories have so many elements in connnon that any exact distinction between them is arbitrary. In Chapter V we have already examined the theory of the product-life cycle in the context of technology transfer. Here we need to re-examine the theory in the context of international trade, the phases of which, according to the theory, lag behind the phases of domestic production. In the first phase of the cycle, American producers are likely to have a virtual monopoly on the 1W:l.llufacture of new products and U. S. exports begin. In the second phase, when 2 Irving B. Kravis, "Availability and other Influences on the Commodity Composition of Trade." Journal of Political Economy, vol. 64 (April, 1956), pp. 143-155. 3 See Christopher Freeman, "The Plastic Industry: A Comparative Study of Research and Innovation," National Institute of Economic Review vol. 16 (Nov., 1963), pp. 22-62, and Gary Hufbauer, Synthetic Materials and the Theory of International Trade, (Cambridge: Harvard University Press, 1966). 4 Donald B. Keesing, "Labor Skills and International Trade," Review of Economics and Statistics, vol. 47 (Aug., 1965), pp. 287-294; and "The Impact of R&D on United States Trade," Journal of Political Economy, (Feb., 1967), pp. 38-48. 116 production has begun in a foreign market, American exports to that market cease to grow. However, U. S. exports continue to go to markets where production has not begun. In the third phase, U.S. exports to non-producing countries (e.g., Third World) begin to be displaced by exports from other nations (e. g., middle countries). The role of these "middle countries" in this phase has been studied separately by Tsurumi and Hirsch who looked at the trade patterns of Japan, Israel, Holland, and Demnark. 5 These countries typically export products in earlier stages of the cycle to the less-developed countries and products in later stages to more advanced countries. In the former case the advantage lies in economies of scale and technology, and in the latter case they take advantage of their cheap labor. Tsurumi concludes that high R&D content products are being exported first to the developing nations, notably Asian nations, and then to the industrialized nations in the West as the Japanese manufacturing industries improve their technological competence. There exists today a strong indication that R&D intensive companies of Japan are consciously taking advantage of the duality of the Japanese export markets. Often Asian markets serve as the testing ground for Japanese manufacturing for the world market. The R&D efforts of Japanese manufacturing industries have been largely on foreign technologies acquired through licensing agreements.6 5 Yoshihiro Tsurumi, "R&D Factors and Exports of Manufactured Goods of Japan," in Louis T. Wells, Jr. (ed.), The Product Life Cycle and International Trade, (Boston; Harvard Business School, 1972), pp. 161-192; and Seev Hirsch, The Export Performance of Six Industries, (New York: Praeger, 1971). 6 Yoshihiro Tsurumi (1972), ~. ~., p. 178. 117 A further phase has been hypothesized in which the 1ess- developed countries become exporters of mature products. In an early article, Raymond Vernon speculated about future industrial exports from the developing countries. He was led to think of products with a fairly clear-cut set of economic characteristics (the standardized products): 1) their production function is such as to require significant inputs of labor (low-skill). 2) they are products with a high price elasticity of demand. 3) products whose production processes do not rely heavily upon external economies; and 4) products which could be precisely described by standardized specifications. Standard- ized textile products, electronic components, crude steel, simple fertilizers, newsprint, some chemical products are illustrated as the candidates. According to his speculation, even in these industries, unstandardized or research-oriented products/components production remain closer to the markets of the advanced countries. 7 Little systematic work has been done to date to examine the exports of manufactured goods from the developing countries. Ha1:B. Lary found that the non-resources based manufactured exports were intensive in their use of unskilled labor.8 Another study of manufactured exports from the developing countries shows that Mexico, Colombia, and Nicaragua tended to export products which were late in the product life cycle, where the exports usually involved some 7 . R. Vernon (1966), 2£. ~., pp. 202-207. 8 Hal :B. Lary, Imports of Manufactures from Less Developed Countries, (New York: Columbia University Press, 1968). 118 participation by a foreign firm because marketing techniques and 9 information played an important ro1e. To sum up: the theory of the product-life cycle suggests a new dimension in the international division of labor: it goes along the line of innovative processes: it does not go along the traditional classification of primary and secondary production or connnodity lines. It implies the eventual division of the world into three spheres. The first would include those nations characterized by a high level of technological development: these countries would be the source of discovery and innovation. The second would be a middle zone, including Europe and Japan, that would concentrate on the industrial application and imitation of discoveries, inventions, and innovations made by the technologically more advanced nations. Thirdly, the Third World would remain essentially a producer of primary materials and of classical industrial production activities requiring only low-level skills, leaving the rewards for technological know-how 10 and management to the technologically more developed countries. (2) Technological Activities and Export Performance We already have several indexes representing the different levels of technological activities: innovative activities measured by R&D expenditures, technological operations mainly engaged in routine 9 Jose R. de 1a Torre, '~rketing Factors in Manufactured Exports from Developing Countries," in Louis T. Wells, Jr. (ed.),.2£. ill., pp. 227-259. 10 Cf. Albert O. Hirschman, "How to Divest in Latin America and Why," in A. Kapoor and Phillip D. Grub (eds.), The Multinational Enterprise in Transition, (Princeton, N. J.: Darwin Press, 1972), p. 448; P. Streeten, .2l?. ill., p, 391; and J-J. Servan-Schreiber, .2l?. ill., p. 110. 119 tasks'in the technological complex area measured by the number of engineers and the lower level of technical activities carried out by skilled and semiskilled workers. R&D indexes are widely used by theorists of the product life cycle: other indexes (i.e., technological operation and the low skill-intensity) are used by D. Keesing as key 11 features of the occupational skill pattern. In addition to these, the indexes of external sources of technological change were introduced in Chapter III: royalty payments, and teclmical service fees as the technology transfer costs in turn-key projects, and the technological dependence index, a synthetic formula of the internal and external sources of technological change, which are presumably an important factor influencing trade patterns of the developing countries. The next task is to define export performance. Any definition of export performance is arbitrary and its usefulness is the only valid criterion for its adoption. The point of view taken is not that of the individual businessman, but that from a national perspective, i.e., that seeks to expand national exports by inducing individual firms to increase their exports. The two objectives do not necessarily conflict, but neither do they necessarily coincide. We are looking for an index which relates the actual exports of four large firms to their export potential. In short run, export potential is equal to the firm I s productive capacity. However, since productive capacity is not easily determined, even by the firm, we might replace productive capacity by total sales of four large firms: hence the measure can be 11 See William Gruber, D. Mehta, and R. Vernon, ~. ill. and D. B. Keesing (1967), ~. ~., pp. 38-48. 120 expressed by the formu1a: 12 E X 100 S Where: EXP is export performance E is actual exports S is total sales The Korean case may be one of the good examples to show how technological change and its transfer shape the trade (export) patterns of developing countries. Korea, as one of the most densely populated countries in the world, has neither significant natural resources nor great potential in the primary sector (until recently she has been a net importer of grain) to contribute to national economic growth. The political goal of economic development has no choice but to look "outward." As a corollary, the political agenda of the "outward-looking" policy has pressed hard to promote the exports of the manufacturing sector, assisting and providing private enterprise with various incentives.13 Due to these hard-pressing policies, the 12 This formula was used in Seev Hirsch (1971), ,2£. illo, pp. 17-34. 13 For analyses of international trade in Korea, see Wontack Hong, Factor Supply and Factor Intensity of Trade in Korea, (Seoul: Korea Development Institute, 1966; Youngil Lim, Industrialization, Trade, and Employment in South Korea, (Honolulu: EWTDI Papers No.2, 1972) and Hyong Chun Kim, "Korea's Export Success, 1960-1969, "Finance and DevelOpment, 8-1 (March, 1971), pp. 5-23. The incentives provided to exporters by the Korean government are: 1) exemptions from tariffs and indirect taxes on imported materials used in export production; 2) the provision of wastage allowances on (tariff-exempt) imported raw materials to be used for export production; 3) direct tax preferences (50% exemption) on profits arising from export activities (not applied since 1973); 4) preferential interest rates on loans related to export activities; and 5) the establishment of government-financed export net-works (Korea Trade Promotion Corpora tion). See Hong, ,2£. ill., po 6. Professor Lim estimates the combined subsidy effects of all these measures has been approximately 25 cents per dollar's worth of export revenues. See Lim, .2E.. ill., p. 13. 121 share of manufactured products in tota1 commodity exports, which never exceeded the 20% level during 1953-61, remarkably increased to about 80% in 1966 and to about 90.2% in 1974 and 86.3% of total exports in 1975 (see Table 8). Table 8 shows that the export volume of manufactured commodities has quintupled during the period 1970-75. In 1975 the combined gross export volume of all the firms in the 10 sample industries are estimated to account for approximately 60% of total manufactured exports and in turn the 40 sample firms' exports ($1.1 billion) are responsible for one-fourth of total manufactured exports and for 43.3% of the exports of the 10 selected industries. Table 8. GNP and Export Performance by Manufacturing Sector in Korea Unit: $ Million Share of Manufacturing Export mfg. export Year GNP sector Total by mfg. in total (Value added) exports sector export (%) 1970 7,558 1,637.4 1,003.8 839.4 83.6 1971 8,747 1,902.7 1,352.0 1,162.8 86.0 1972 9,824 2,303.5 1,807.0 1,584.3 87.7 1973 12,374 3,241.2 3,256.9 2,872.8 88.2 1974 17,164 4,844.4 4,712.9 4,252.7 90.2 1975 18,668 5,424.5 5,081.0 4,386.0 86.3 Source: Economic Planning Board (Korea), Economic Manual (Seoul: EPB, June, 1975), p. 24. The figures of 1975 are taken from The Bank of Korea, Tentative Estimates of GNP, (Seoul: unpublished mimeo, 1976). 122 Correlation analysis (see Appendix 1) reveals that Korean exports are concentrated in the low-level skill-intensity category. While the technologically complex industries represented by ENG indexes are negatively related to export performance, low-level skill- intensity (SKI. indexes) is positively and significantly correlated 14 with export performance. As R. Vernon predicted, R&D activities have no significant relationship with export performance. 15 Although the individual indexes of R&D, royalty payments, and the technical service fees in turn-key projects have no significant relationship with export performance, the- synthetic index of these variables which is called technological dependence is negatively correlated with export performance (coefficient of -.7961, significant at .003 level). This correlationship reinforces the complementary character of the local innovative activities and foreign technology; it would suggest that even though one industry might rely on foreign technology, if the local R&D activities are proportionally strengthened, the industry is relatively successful in exports. The cases of synthetic fibre, machinery, and steel and iron industries are at point. All these industries are grouped as among those relying on foreign technology, but the internal R&D inputs are also high, resulting in lower technolo- gical dependence than other industries (e.g., electricals and electronic and transportation equipment industries). 14 The coefficient of -.8209 between ENG and EXP is statistically significant at the level of .002 and that of .7074 between SKI, and EXP at the level of .011. 15 W. Gruber and R. Vernon speculated that the tendency (the association of R&D with export performance) weakens and may even be reversed as one moves fram developed to less-developed countries. See William H. Gruber and Raymond Vernon, "The Technology Factor in a World T:tade Matrix," in R. Vernon (ed.) , The Teclmology Factor in International Trade, ,2E.. ill., p. 237. 123 Seev Hirsch's comparative study of six industries (food, chemicals, textiles, machinery, electricals, and electronics) in Denmark, Holland, and Israel concluded that Denmark's least skill- intensive industry (food) has higher export performance than skill- intensive industry (electrical products) and a lower export performance than highly. skill-intensive electronics. In Holland, the most skill- intensive industry (electronics) has the lowest export performance. In Israel high skill intensity is clearly associated with low export performance (food and textiles).16 Hirsch's measure of skill-intensity as the share of scientists, engineers, and other skilled workers is open to criticism. Skill classes are tmperfect substitutes; scientists and engineers are not substitutes for skilled workers. Actually skill-levels are hierarchical and not substitutable. However, I found that my engineers indexes are highly correlated with Hirsch's skill- intensity rankings of six industries in terms of their ranks, as shown in Table 9. Table 9. Skill-intensity Unit: Percentage Industry Denmark Holland Israel Korea Food Process 6 (6) 13 9 ~6) 6.5 ~4) Textiles 7 (5) 11 P)6) 10 5) 3.5 5) Chemicals 22 (2) 22 21 9.1 Machinery 13 21 17 8.0 P)3) Electricals 17 15 ~~l 16 Electronics 24 ~i~ 41 i~ 30 m 9.0 (2) Note: Figure in () are ranks Sources: The figures of Denmark, Holland, and Israel are from S. Hirsch, .2£. cit., p. 54 and those of Korea from my field survey data. 16 So Hirsch, .2P,. cito, pp. 55-57. Note that Hirsch's skill- intensity is measured by the share of scientists, engineers, and other professionally and technically qualified skilled workers in the labor force. 124 As to the relationship between capital-intensity and export performance of the Korean big businesses, which may be of interest to theorists of international trade, my correlation analysis suggests that the capital/labor ratio has no significant association with export performance. As a capital-poor and labor-abundant country, according to conventional theory, Korea' is expected to export labor- intensive commodities. But the product-life cycle theory proposes the contradicting hypothesis that "at intermediate incane levels countries would have a higher ratio of physical to human capital than at high incomes, and that therefore they would find their comparative advantage in goods requiring relatively large amount of physical capital, or vice versa.,,17 Professor Youngil Lim's study of factor contents of trade of Korea in 1968 observed that "South Korea exports unskilled labor- intensive goods and imports skill-intensive goods." He also recalled that the Heckscher-Ohlin theory was reversed when all goods and services were considered, while the theory was supported rather strongly when the manufactures only were considered. 18 However, Wontack Hong's recent extensive study of Korean trade concluded that "with the accumulation of capital, Korea started to produce and export an increasing amount of capital intensive goods; since 1971 through 1973 Korea started to export capital through its trade in exports vs, competi tive imports--which seems to be a reproduction of the Leontief paradox. ,,]9 17 Anne O. Krueger, "Comment on Seev Hirsch's Technological Factors in the Composition and Direction of Israel's Industrial Exports," in R. Vernon (ed.), Technology Factor in International Trade, .2£. cit., po 411. 18 Youngi1 Lim, £1?. .£!!., p, 39. 19 Wontack Hong, £1?. cit., pp. 117-121. 125 Both economists rightly stressed cthat the conventional two-factor analysis may be inadequate in explaining trade in the real world, and since the skill supply will playa decisive role in Korea's exports expansion in 20 the future, more rigorous investigation in this area is warranted. This trend is reinforced by the most recent export performances of 1976: the export volume of the most capital-intensive industries (ship-building, construction, cement, iron and steel, and oil-refining) by only 6 large companies accounts for 20% ($1.2 billion) of total exports ($6.1 billion) 21 of Korea in 1976. From this finding we may conclude that the era of cheap labor-intensive exports from Korea is past. (3) Implications of the International Division of Labor for Power and Wealth Distribution International trade theory tells us that a country will be better off with trade than without it. Differences in factor endowments will cause each country to specialize in the production of those commodities which require relatively much of the factors of which it has an abundance and which are cheap. The principle is that specialization raises efficiency. There is agreement among economists of all persuasions, whether they are protectionists or free traders; trade will result in gains. The controversy is about the conditions under which these gains can be realized, and about who will gain more and who less. The conflict of opinions reflects a fundamental difference of orie~tation, on two 20 See Youngil Lim, .2£.. cit., p , 39, and W. Hong, Ope cit., p , 17. 21 See the export performances of the 100 largest trade companies of Korea which appeared in Korean newspapers, February 3, 1977. 126 levels: 1) views differ according to whether the problem is approached from the viewpoint of static trade theory which speaks of welfare gains, or from that of the theory of growth which speaks of gains from growth, 22 for the two rest on contradictory sets of assumptions and 2) the advocates of free trade often represent a harmonious point of view in which the benefits of trade are considered from a "cosmopolitan" perspective, while their adversaries take the individual nation as the unit of reference.23 The neoclassical approach tends to exaggerate the benefits of trade in an open economy when it does not explicitly consider the effects of uncertain export prices and the difficulties of shifting resources to meet changing market conditions. Neoclassical theory hardly takes into account the technology factor which has been considered as one of the most dYnamic elements in international trade; it is almost impossible to make any sense of the development process of international specialization without considering it in terms of a complex interplay between technological progress and the availability of natural resources. Ricardo was led to false prognostications 24 because he ignored teclmological progress. Throughout history countries have continued to follow protectionist policies. The only two major countries to have advocated free trade are Great Britain (prior to WWII) and the United States (after WWII) which have had the 22 Hollis B. Chenery, "Comparative Advantage and Development Policy," American Economic Review 51, (March, 1961), p. 19 and M. Merhav, 2£. cit., pp. 167-168. 23 See Peter B. Kenen, International Economics (Englewood Cliffs; Prentice-Hall, 1964), p. 5. 24 Ronald Findlay, ''What Have We Learned from Economic Growth Theory?--Implications of Growth Theory for Trade and Development," The American Economic Review, LXV-2 (May, 1975), p. 314. - 127 most to gain from free trade. Neoclassical policy consists essentially in removing impediments to the functioning of markets so as to make the real world as much like the abstract model as possib1e.25 Therefore, no matter how complex, the model must quickly come into conflict with the reality of national and international political relationships. Within a unified national market with strong political coordination, specialization is a powerful engine of progress. But when the units of reference are separate national entities which are pursuing their own interests with the actual or potential use of political power, inter- national specialization is likely to be the characteristic and exclusive province of the advanced countries and to militate against the autonomous development of the developing countries. In reaction to the naive optimism of "comparative advantage theory" there has arisen a counter-perspective over the last two decades appearing under the label of "structuralist theory." The structuralists' views have been pessimistic as to the possibilities and benefits of international trade for the developing countries. The world's industrial countries are seen as no longer "exporting" their own growth rates to primary producing countries, owing to such factors as low income elasticities of demand, the rise of synthetics and the importance of home primary product output in the advanced countries. Prospects for exports of manufactures from the developing countries to the industrial countries are also poor, both because of the formidable obstacles to the attainment of a minimum level of efficiency in the former countries 25 Hollis B. Chenery, "The Structuralist Approach to Development Policy," The American Economic Review, LXV-2 (May, 1975), p. 314. 128 and because of unfavorable commercial policies in the latter. Other writers, notably Prebisch and Myrda1, claimed that free trade would be an impediment to the economic advance of the poor countries. Raul Prebisch bases his argument on an alleged secular deterioration in the terms of trade; G. Myrda1 on the claim that trade would tend to perpetuate or even create backward sectors in the underdeveloped countries. 26 Prebisch argued that " ••• the great industrial centers not only keep for themselves the benefits of the use of new techniques in their own economy, but are in a favorable position to obtain a share of that deriving from the technical progress of the periphery."Z! The name of Hans W. Singer is frequently joined with that of Prebisch in the discussion of the iSsue. He also stressed and elaborated on the importance in a dynamic context of industrialization per se: ", •• the most important contribution of an industry is not its immediate product••• and not even its effects on other industries and innnediate social benefits••• but perhaps even further its effects on the general level of education, skill, way of life, inventiveness, habits, store 28 of technology, creation of new demand, etc." Clearly Singer's notion of industrialization points to the spin-off effects of technological change which were discussed in ChapterIII. 26 See Raul Prebisch, The Economic Development of Latin America and Its Principle Problems (New York: UN, 1950) and "Commercial Policy in the Underdeveloped Countries, II American Economic Review XLIV (May, 1959), pp. 257-73 and G. Myrda1, Economic Theory and Underdeveloped Region, (London: G. Duckworth, 1957). 27 See R. Prebisch (1950), ~. cit., p. 14. 28 Hans W. Singer, "The Distribution Gains between Investing and Borrowing Country," Amer. Economic Review, Papers and Proceedings vol. XL (May, 1950), pp. 476-77. 129 Johan Ga1tung' s analysis of the international hierarchical system relies heavily on the spin-off/spi11-over effects of technological change. He posited that the productive activities of the primary producing and the industrialized countries basically involve different degree of processing (the basic variable behind the spin-off effects). The spin-off effects of high technological activities should be far reaching and strongly related to development itself; they develop new means of production in other industries as subsidiary economic effects. However, the effects are not confined to merely the economic domain. The nation that has the task of providing the most refined, processed products in the international division of labor will obviously have to engage in research and development. Research needs an infra-structure, a wide cultural basis in universities, etc., and it has obvious spill over effects in the social, political, and military domain. Politically, the central nationI s position is reinforced; militarily, the means of destruction can easily be produced; the means of communication can easily be developed; knowledge and research as well as scientists and engineers much needed for higher levels of processing are promoted; change of the social structure to permit mobility is carried out; and 29 a basic psychology of self-reliance and auton~ is reinforced. Technological spin-off effects reinforce the vertical division of labor in international trade which further results in higher trade partner concentration and trade canmodity concentration. By careful review of his basic thesis we can find that his major variables are constructed in an hierarchical chain order: i.e., technological 29 See Johan Galtung (1971), sa- ill., p. 87. 130 development + vertical division of labor + trade partner and coumodity concentration + exploitation. Therefore his definition of "exploita- tion" is not only in terms of "unequal exchange" but also in terms of 30 "spin-off effects." Most analyses of exploitation invariably concentrate on the former concept (unequal exchange), leaving the latter untouched, although Ga1tung's emphasis is placed on the latter. For these reasons his theory of imperialism claims that dominance rests on structural rather than on direct violence. Karl Deutsch rightly coumented on Ga1tung's thesis: The trade partner who has the higher end of the bargain will show rapid economic growth and rapid technological innovation••• In this sense, whereas David Ricardo has described the exchange of British textiles for Portuguese wine as an example of the wisdom and excellence of the international division of labor and the greatness of the law of compara tive advantage, Ga1tung would say it just shows that the Portuguese... had few spin-off effects and were poor in external economies••• while the British were developing with strong spin-off effects that would eventually lead to British railroad, aircraft, and other industires••• In this sense and on this matter, Ga1tung, who had the advantage of hindsight, p~~uced more realistic theory than Ricardo did. Indeed, Galtung is a technological determinist in this sense: technological change and its spin-off effects do everything in every domain. Galtung' s and Singer's theorems perhaps explain the reason why technology and its offspring industrialization. are so universally desired by underdeveloped countries and why Western European countries fear so much technological dependence. Clearly the differentiation 30 ~, p. 98. 31 Karl W. Deutsch, "Theories of Imperialism and Neocolonialism," in Steven J. Rosen and James R. Kurth (eds.), Testing Theories of Economic Imperialism, (Lexington: D. C. Heath, 1974), p. 26. 131 of a national economy into the primary, secondary, and tertiary sectors represents an instrument of control over the vertical division of labor in the international stratification system. A more subtle form of vertical division of labor has been found in the context of the technology transfer process. To break the sequence of the vertical division of labor is to break the status quo of international stratification. This suggests that economic resources or economic development per se is not a consummatory value but an instrumental value. This truism is often forgotten by social scientists. A consummatory value is rather power, prestige, privilege, and ultimately survival. In modern society technology is considered the prime source of LnatrrumentiaL value which accords power and prestige as well as 32 resources. (4) International Division of Labor and Choice The structuralists' theory of international trade and of the consequent result in the international division of labor provides valuable concepts and their approaches are more realistic. The disadvantages and barriers which impede the development of the under- developed countries are formidable. Access to the marvellous achieve- ments of science and technology is in practice barred to all but a few: the very successful achievements of science and technology in the advanced countries did more harm than help to the developing countries. What to do with this reality? 32 J. K. Galbraith (1971), .2£. cit., pp. 61-73; also see G. Lenski, .2£. cit. 132 As to policy prescriptions the structuralists propose that the structure is self-perpetuating and permanent. Therefore, the best policy for the developing countries would be to cut down their contacts with the advanced world, to abandon vertical trading, re- placing it with horizontal trading which means trading among those developing countries at the same level of industrial technology. However, it seems that the structuralists ignore the technological reality of the world system. If the partners in exchange are at the same general level of development, there are theoretically no canpara- tive advantages, and little exchange is possible, especially in 33 manufactured product exchange. For example Taiwan and Korea, both semi-industrialized countries at almost the same general level of technological change and with similiar income levels, factor endowments, and consumption tastes, hardly record any significant trade (virtually minimal exchange) between them, even though the political leaders of both countries strongly emphasize mutual exchange and benefits. It is paradoxical to realize that while the structuralists emphasized the impact of technological change on the situation of the developing countries in the international political economy, they failed to consider the reality of modern technological change which defines and restricts the range of choice open to them. Lewis Mumford pointed out that no country can erect a wall around itself 33 However Linder contends that potential exports and imports of manufactured goods between advanced countries with similar income levels and consumption patterns are the same products. See S. B. Linder, An Essay on Trade and Transformation (New York: Wiley, 1961). 133 without thereby destroying the international foundations of 34 technology. This pessimistic argument appeaISagain in J. Ellul's work: After consumer goods came an invasion of productive techniques. Technical invasion is a question not only of colonialism, but also, for the less powerful countries, of simple technical subordination••• All political or economic explanations are superficial and ridiculous. There are two great technical powers, the United States and the Soviet Union. Every other country must subordinate itself to one or the other of the two ~!mp1y because of their technical superiority. Ironically these pessimistic views seemed to be reinforced and exemplified by the recent movements of socialist countries: the People's Republic of China and the Eastern European countries have been gradually destroying the quarter-century walls erected against the capitalist countries simply because of the urgent need of capitalist techno10gy.36 In this situation trade is obviously necessary for most states. No developing country can avoid the fact that development requires some degree of openness. The choice is only in the form of dependence. The question is not one of eliminating dependence but 34 Lewis Mumford, Technics and Civilization, (Harcourt, Brace and Company, 1934), p. 232, cited in Denis Goulet, The Cruel Choice, (New York: Atheneum, 1973), p. 138. 35 J. Ellul, ~. cit., p. 119. 36 William W. Whitson, "China's Quest for Technology," Problems of Communism, XXII (July/Aug., 1973), pp. 16-30; Patrick M. Boarman (ed.) , Trade with China, (New York; Praeger, 1974); S. Wasowski (ed.), .2£.. ill,.; and S. Lodgaard, sa- ill. 134 rather of changing its nature. Osva1do Sunke1, a leading theorist of "dependence" attempted to clarify this notion: 'the alternative to dependency was not independence, and certainly not autarky, but a reduction of dependence, the achievement of a more symmetrical re1ationship0 ,,37 The fundamental question we should raise here is how this situation--i.e., an asymmetric relationship or dependence-- can be improved into a more symmetric and more tolerable form of dependence. Technological development alone is the viable candidate. No doubt technological development is unavoidable if a nation is to achieve some degree of the desirable target of interdependence (the more tolerable form of dependence), and every country of the contemporary world--capitalist or socialist--implictly or explicitly seems to wish to achieve this target. Therefore technological progress is a choice dictated to the developing countries by inter- national settings, whether or not they wish the choice. This choice is not a "convenience" but a "necessity." We should then ask how the developing countries can develop the necessary technology in this formidably restrictive international setting. How important is international trade to the technological progress of the developing countries? Of course these questions are bold ones and no single literature can answer the questions. Of late a considerable body of literature on trade policy has shifted away from "an inward-looking" strategy that relies 37 Osva1do Sunke1, "The Pattern of Latin American Dependence," Urquidi (ed.) , Latin America in the International Economy, (New York: John Wiley & Sons, 1973), pp. 33-34. 135 exclusively on the home market for manufactures, towards "an outward- looking" strategy of trying to export manufactures early in the process of industrial development. D. Keesing proposed several advantages of the outward-looking over the inward-looking strategy: 1) learning effects and improvement of human resources; 2) improvements of technology; 3) increasing returns connected with economies of scale and market size; and 4) limitation of govermnent intervention.38 Although his hypothetical analysis is based on classical economic theory, explicitly excluding the political problems of implementing this policy, his ideas have valuable implications for the relationship between technological development and international trade for the developing countries. As he mentioned, his ideas derived fran sane successful examples of exports of manufactures in Taiwan, Hong Kong, Korea, and other developing countries. The first two items which Keesing listed separately are virtually the same thing: human skill is another side of technology. Viewed from our proceeding analysis, the last two items--i.e., economies of scale and govermnent intervention--resu1t from the impact of modern technology. International trade, the only outlet of economies of scale given by technological giantism, actually reinforces govermnent intervention as opposed to Keesing's theory about its opposite effects. Assuming that competition is conducive to innovative efforts and the improvement of the quality of the products, K.eesing speculates 38 see Donald B. K.eesing, "Outward-looking Policies and Economic Development," The Economic Journal (June, 1967) pp. 303-320. 136 that "in a small and poor nation adequate competitive pressure can be achieved only by opening the economy to some competition from abroad. ,,39 My field survey data support this hypothesis: the lower the techno1o- gica1 dependence the higher the export performance of the industries. This relationship was examined in section (2) of this chapter. In the long-run, however, 1earning-by-doing cannot totally substitute for 1earning-by-spending on technical research proper. International competition pushes the firms of the developing countries into the 1earning-by-spending (R&D efforts). Keesing never discussed, however, the improvements that marketing knowledge as a key learning-effect of international trade produces. Torre's analysis of the manufactured exports of Columbia, Nicaragua, and Mexico showed that where marketing techniques played an important role, exports usually involved some participation by multinational corporations. For this reason Torre uncritically recommended that developing countries must be conscious of the important contribution that multinational corporations can provide through their capacity for export deve1opment.40 Instead I wish to suggest the oriental wisdom of Kuan-tzu: "If you give a man a fish, he will have a single meal. If you teach him how to fish, he will eat all his life." Note that this example of Kuan-tzu' s wisdom was cited by J-J. Servan-Schreiber in his "American Challenge." 39 !lli, p. 313. 40 See J. R. Torre, Jr., "Marketing Factors in Manufacturing Exports from Developing Countries," in Louis T. Wells (ed.),..2£. cit., pp. 227-259. 137 The Korean government has vigorously promoted the building of large trading companies, encouraging merger of small and medium trading firms, and thereby imitating the example of the Japanese "Big Ten." In 1975 the 10 largest Korean trading companies accounted for 22.2% and the 20 largest for 30.1% of total exports. Only one year later (1976), the 10 largest trading companies were responsible 41 for 38.4% and the 20 largest for 54.2% of total exports from Korea. A central feature today of industrialized countries is oligopoly or bigness. Any given industry is dominated by a small number of large uneasy giants. In such a setting the opportunity that developing countries have to determine the path which benefits them is large- 42 much larger than under competition or monopoly. Again international trade requires bigness in the developing countries. This bigness cannot come into being without political intervention or supports (which we shall examine in Chapter VII). At one time the Japanese Big Ten trading companies handled a large share of Korean exports. My data indicate that the 40 largest Korean firms exported their products almost entirely through their own subsidiaries or other loca1 trading companies: foreign trading companies are no longer significantly involved in exports from Korea. In 1975 the majority of export commodities were destined for develop- ing countries' markets (mainly South Asia and the Middle East) and 41 This estimate is based on the official statistics of the 100 largest trading companies' export performance yearly released by the government. 42 R. Vernon, "Discussion on the Paper by O. Sunkel," Uriquidi (ed.), ~. cit., p, 21. 138 Western Europe: about 52.8% of total exports by the 40 largest firms was directed to developing countries and Western Europe, 38.7% to the United States, and only 8.6% to the Japanese market. The majority of technology-intensive commodities were exported to the developing countries: fertilizer, machinery, transportation equipnent, food processing. And skill-intensive commodities--texti1es, synthetic fibre, electric and electronic components--went to the United States and Japan. When sales to Korea's two biggest customers (Japan and the U.S.) fell off sharply, the government's economic planners diversified with agility and style. Its most spectacular success was in estab1ish- ing economic ties with such oil-rich Middle Eastern nations as Iran, saudi Arabia and Kuwait. During the first half of 1975, exports to the Middle East shot from virtually nothing to $131 million. This, coupled with a 38% rise in exports to Europe, raised to a remarkable 45% the share of trade going to other countries than the U.S. and Japan.43 Keesing's third point is considered the most important factor although he did not stress it as much as he did the learning effects of human skill and technology. The idea that scale or size effects of all kinds create difficult obstacles in the way of small and poor countries seeking to industrialize is well integrated in the relatively well-known theory of "regional integration." In this connection, M. Merhav's theory of "technological dependence" expresses the situation of the developing countries: 43 See Keyes Beech, "S. Korea's Vigorous Growth," Honolulu Star-Bulletin, December 3, 1975, A~14. 139 If one grants the validity with respect to the disparity between the scales of output given by technology and the initial size of markets, the stagnation tendencies••• must be expected to appear in underdeveloped countries even more acutely, and certainly earlier, than in an advanced economy••• Foreign trade•• is considered the most important avenue of escape from stagna- t 1on" •••44 It seems that international trade is one of "choice" for the advanced countries, but it is one of "necessity" for the developing countries if industrialization is the goal. Keesing did not see international trade as a "necessity" but proposed it as one of choice: "economies of scale may effectively perpetuate a local monopoly or oligopoly situation, so that only foreign competition can ensure adequate pressures for cost-cutting and product-improve ment.,,45 In short this notion may explain why several export- oriented developing countries including Korea and Taiwan demonstrated their phenomenal economic growth in the 1970s, while others concentra- ting on import-substitute manufacturing industires showed stagnation tendencies. Probably the general truth is that one makes innovation when one must: hence the advantages of an "arms length" relationship between the local engineer and the sources of foreign know-how. This could force a change of mentality and a corresponding reallocation of the engineer's time between consulting foreign sources and 46 studying local reality. The foreign trade of manufactures seems 44 M. Merhav, .Q.E.. ill., pp. 8-12. 45 D. B. Keesing (1967), ££. ~., pp. 313-314. 46 Albert O. Hirschman, "Discussion on the Paper by Katz," in Urquidi (ed.), ~. £!!., p. 229. 140 to provide this opportunity of "must" innovation for the developing countries. Chapter VII Politics of Technological Change and Modernization (1) Politics of Modernization In the preceeding chapters I have centered the analysis on the impacts of technology on economic institutions of the developing countries. In this chapter I wish to address the analysis to how exogenous technological change affects the political institutions of a developing country. For most of history, as philosophers and social scientists of such views as Marx and Alfred Marshal have agreed, political institutions have originated in economic structure and system. In considering this complex problem, I will utilize the conceptual frameworks of political institutions from David Apter's model of the politics of modernization and from "dependency" theory, because both theories strongly address the role of politics in the industrialization of developing countries. The former emphasizes internal factors as the source of change of political systems, while the latter concentrates on external constraints (i.e., the international factor) and their impacts on the pattern of industrialization of the developing countries. In this study the two different approaches of political economy are viewed as complementary rather than alternatives to each other. Apter's developmental theory defines "development" as Hchoice": Choices expand as a result of men's capacity to increase their control over nature, to be less the victims of it and more the masters. Such a capacity is a function of the kind of information people have at their disposal••• If development 142 is a process of growth that reduces scarcity and enlarges choice, implied is the growth of differentiation and specialization. Industriali zation is a condition of a high innovation on the basis of rapid generation of new informa tion and its application' through a technological infrastructure••• Modernization is derivative•••l This is one of the typical examples of definition to which the 2 conventional theorists of development adhere. Simply put, for Apter, "development" is the result of "technological mastery," which Denis 3 Goulet views as one of the two "change processes." However, this is not the place to become involved in the problems of definition of 1 See David Apter, Choice and the Politics of Allocation, (New Haven: Yale University Press, 1971), p. 18; see also his earlier book, The Politics of Modernization, (Chicago: The Chicago University Press, 1965), p. 67. 2 For instance, Marion Levy claims that a society is "more or less modernized to the extent that its members use inanimate sources of power and/or use tools to multiply the effects of their efforts." See Marion Levy, Modernization and the Structure of Societies, (Princeton: Princeton University Press, 1966), p , 7. Samuel P. Huntington reviews the typical definitions of modernization: 'To virtually all theorists, these differences in the extent of man's control over his environment reflect differences in his fundamental attitudes toward and expectation from his environment." See "The Change to Change," Comparative Politics (April, 1971), pp. 285-287. 3 D. Goulet distinguishes two categories of change process. The first process includes production, mastery over nature, rational organization, and technological efficiency; the second stresses structures of power and ideology. "The former refers to technological mastery. The two categories remain closely inter-related. Technolo gically advanced nations also wield dominant political power and ideological influence in the world••• Consequently entry into technological modernity can only be obtained on terms set by those who already master both series of processes••• Historically, colonialism has been an expression of the industrialized world's role in the second set of processes." See The Cruel Choice: A New Concept in the Theory of Development, (New York: Antheum, 1973), p.l4. In this book he exclusively writes to refute the conventional concepts of development and to give emphasis to the normative aspect of development. 143 development. The important thing is to see how technology plays a pivotal role in the "change processes." Apter offers four types of political systems defined in terms of values (consummatory and instrumental) and authority distribution (hierarchical and pyramidal): 1) a mobilization system-- the combination of consummatory values and hierarchical authority; 2) a bureaucratic system--the combination of instrumental values and hierarchical authority; 3) a reconciliation system--the combina- tion of instrumental values and pyramidal authority; and 4) a theocratic system--the combination of consummatory values and pyramidal authority. Apter holds that while the two former systems will employ a high degree of coercion, the latter two will use information to 4 achieve their values. As Apter stated, the best test for a political system is its ability to foster economic development. For Apter, the best system of modernization is a mobilization system with strong central control, little information, and a large dose of consunnnatory values, because modernization requires above all great sacrifices which must be imposed even brutally. He states that Political instability may be the most favorable condition for further development••• A recon ciliation system would limit development because it does not allow concentration of resources for rapid growth. The most appropriate type of political system for development would be the mobilization system. Thus developmental pressures tend to produce a dysfunctional political system, and the system that would 4 See Apter (1971), .2£. cit., pp. 32-33. The term, consummatory values refers to ultimate ends or meaning, and instrumental to concrete ends. See Ibid, p , 21 and p , 23. 144 be most functionally useful is very difficult to put into practice. The most counnon resolu tion is through some variant of bureaucratic system. (Emphasis his).5 s. Huntington appraised Apter's works as probably the most successful in bringing to the fore dynamic concerns with the rate, 6 formr:, and sources of change. Apter's work seems to possess scientific utility and to be successful in establishing logical relationships between mobilization or reconciliation systems, on the one hand, and specified stages in the industrialization process, on the other. Thus, one is led to expect certain political formats, given certain economic situations and certain normative goals. In this sense, certain political patterns can be accounted for. The relation- ship between information and coercion is a case in point. At an early stage of the industrialization process, the need is for action rather than information; hence, the mobilization system with its high degree of coercion is most efficient. In the later stages, information is needed to cope with the increased complexity of an industrial society; therefore mobilization systems will be supplanted by recon 7 ci1iation systems. Thus Apter has gone far beyond the conventional functional paradigm and is quite autonomous from whatever use he has made of the 5 Ibid, p, 66. 6 s. Huntington, sa- cit., p, 308. 7 Lawrence C. Mayer, Comparative Political Inquiry, (Homewood, Ill.: The Dorsey Press, 1972), p. 257. 145 elements of that paradigm. There are criticisms of Apter's model from different point of views.8 The fundamental weakness of his theory probably lies in his isolation of the external factor and historical conditions, a common failure of the conventional functional paradigm. Given his stress on economic development and the political system, it is curious that he does not stress enough the influence of inter- national forces on mobilization and political orders in the modernizing societies. Furthermore, he never specifies the economic variables to which one should direct attention. He appears to exaggerate the benefits of foreign investment and dependence on foreign capital accruing to the host country. 9 He implicitly adheres to the late-comer thesis of technological change which we have examined in Chapter III. During the 1960s and early 1970s, analysts developing the "dependency" model worked to shift emphasis to the international 8 Glanfranco Pasquino's appraisal of Apter's model lists several weakness: 1) the ignorance of external factors; 2) the underestimation of the importance of the relationships between the agrarian and the industrial sectors; 3) the applicability of the concept of moderniza tion which is too broad to operationalize; and 4) the failure to distinguish between socioeconomic and political aspects of moderniza tion. See "The Politics of Modernization: An Appraisal of David Apter's Contributions," Comparative Political Studies (October, 1970), pp. 297-321. Lawrence C. Mayer's critique concerns the third item of the above list: Apter's propositions are not made testable; Apter's paradigm may generate explanatory appeal rather than explanatory power. See, L. C. Mayer, ~. cit., p. 158 and p. 257. 9 See David Apter (1971), ~. cit., pp. 45-46; see also his recent article, "Charters, Cartels, and Mu1tinationa1s--Some Colonial and Imperial Questions," in David E. Apter (ed.), The Multinational Corporation and Social Change, (New York: Praeger, 1976), pp. 1-36. 146 system relationships. "Dependence" means, essentially, that the alternatives open to the dependent nations are defined and limited by its integration into and functions within the world market. 10 Dependent countries are unable to exert substantial influence over the basic decisions affecting their national economies: the issues of what to produce, how to produce, and for whom are all shaped directly or indirectly by international structures and processes. In this respect, dependency theory runs along lines strikingly similar to the literature on "linkage politics. ,,11 Although authors of depeudency usually leave the term "development" undefined, references to industrialization and techno1o- gica1 development are found throughout their works, emphasizing that the limitation of internal markets and the external vulnerability of the developing countries imply constraints on their prospects for long-term economic growth. For example, dependency theorists recognize that industrialization is not by nature dependent; it becomes part of the infrastructure of dependency only when the industrial structure is integrated into and made complementary to the needs of foreign 12 economies, when its main sectors are controlled by foreign capital. 10 See Susanne Bodenheimer, ''Dependency and Imperialism: The Roots of Lain American Underdevelopment," in K. T. Fann and Donald C. Hodges (eds.), Readings in U. S. Imperialism, (Boston: An Extending Horizons Books, 1971), p. 158. n See James N. Rosenau (ed,') , Linkage Politics, Essays on the Convergence of National and International Systems, (New York: The Free Press, 1969). Both bodies of literature explore the proposition that internationally derived constraints operate on the developmental patterns of national systems. Unlike dependency theory, the linkage literature places much less emphasis on economic variables. 12 see Susanne Bodenheimer, sa- ~., p. 126. 147 The dominance of metropolitan technology gives the providers of technology decisive leverage over economic and socio-po1itica1 alternatives in the dependent society.13 Although they realize that this enclave condition is determined by external technological change, they did not give much attention to the analysis of the characteristics of modern technology and consequently their views of technology development are more or less optimistic. For example, Stephen Hymer stressed that dependency should not be attributed to technology: the new technology, because it increases interaction, implies greater interdependence but not hierarchical structure: it is not technology which creates inequality: rather, it is organization.14 Similarly, Girling writes: "we are not arguing that the points we have raised are inherent to technology per see Quite the contrary, the problem resides in the direction and use of technology Which occurs in capitalist development (but it is by no means limited to those societies).,,15 However, we should note that this naive optimism about the role of technology in transforming organization and social structure has been refuted by technological determinists, who point to the "technical invasion" and the socialist imperialism of the Soviet Union. 13 Robert Girling, ''Dependency, Technology and Development," in Bonilla and Gir1ing (eds.), Structures of Dependence, (Stanford, 1973), p. 55. 14 Stephen Hymer, "The Multinational Corporation and the Law of Uneven Development," in Jagdish N. Bhagawati (ed.), Economics and World Order, (London: The Macmillan Co., 1972), p. 126. 15 Robert Girling, .2£. cit., p. 55. 148 The dependency theorists argue that technological dependence and foreign capital control involves the outflow of internally- generated surplus, or capita1, through profit remissions, dividends, license fees, foreign domination of crucial sectors of the under- developed nations' economies, etc. In terms of policy proposals, these analysts have suggested a variety of national policies for achieving economic development, closing off outflows of surplus and attaining rapid growth, stressing internal structural reforms, industrial development and various strategies for regaining national control of important sectors of economies dominated by foreign interests. Whereas many conventional theorists associate ''modernization'' with a trend toward more open political systems, dependency theorists foresee practically the opposite set of consequences. However, most recognize but perhaps fail to place enough emphasis on the crucial importance of mobilizing national resources in general and of technological development strategies in particular. As Professor Stauffer pointed 16 out, more is required than criticism. Robert R. Kaufman, et a L, , in their empirical test of the theory of dependency, suggest: "Restated more cautious1y--perhaps as a complement, rather than an alternative to more 'conventional' theories of deve1opment--the concept of dependency may indeed be useful in the diagnosis and understanding of these problems. Several of our findings, especially those regarding 17 inequality and participation, point in that direction." 16 Robert B. Stauffer, "Development American Style: Hidden Agendas for the Third World," (Honolulu: unpublished mimeo, 1975), p. 19. 17 Robert R. Kaufman, Harry I. Chernosky, and Daniel S. Geller, "A Preliminary Test of the Theory of Dependency," Comparative Politics (April, 1975), p. 330. 149 By combining internal and external factors, a systematic classification of the different types of modernization is needed. A true theory of modernization cannot bypass the problem of the genesis of the modernizing stfmuli, and of the consequences a different origin has on the entire subsequent process. In this context, G. Pasquino has identified four types of modernization: endogenous, exogenous, enclave, and defensive modernization. 18 The first type of modernization, called autonomous or endogenous modernization, takes place when the process of transformation of the society begins through inventions and innovations produced by 19 the society itself. This has been the case of the western worldo It has one inconvenience and many advantages. The inconvenience is due to the costs of the initial innovations generally attained after a long process of cumulation of knowledge, and of trial-and-error procedures. The advantages are represented by the possibility of adapting the innovations to the society that produced them in the most suitable way and by the spill-over and spin-off effects of innovations in one field upon other fields as we have seen. Historically, although the social environment and institutions of individualism, democracy, and capitalism were favorable to technical development until the late 19th century, technology, it is argued, requires an opposite set of institutions and social environment: state intervention, collectivism, technocracy, etc. This is the basic thesis of technological deterministso20 Recognizing this argument 18 See G. Pasquino, zs»on _.,cit pp. 314-•315 19 Ibid, p. 314. 20 See Jacques Ellul, ~• .£!E.., chapters III and IV; J. D. Bernal, The Social Function of Science, (Cambridge, Mass.: The M.l.T. Press, 1939), p. 409. 150 and following Schumpetarian diagnoses, David Apter proposes that " ••• modern technology requires a new normative--structura1 synthesis••• All lead in the general direction of socialism (or state capita1i~), a rationalized system of mixed public and private ownership in highly 21 industrialized countries." This proposition was reinforced by Pah1 and Winkler's investigation of the actual behavior of British corporations which led them to predict that a corporatist system with private ownership and state control will be introduced in Britain by 1980. 22 The second type of modernization may be called induced or exogenous modernization. It is the typical outcome of the intrusion of colonial powers into countries having a less developed technology. There are two important consequences: the creation of a modern or quasi-modern urban sector that will aggravate the problem of national integration (both in the political and in the economic sense) and the creation of a prolonged state of economic dependency of the colony upon the colonial power. Finally, there is the tremendous problem of the recovery of national identity and of the conversion of people trained 23 by the colonial power to be citizens of the new state. 21 See David E. Apter (1971), ~. ~., pp. 201-202 Preston reviews extensively the literature of the future economic system, centering on the relationship between big business and society. See Lee E. Preston, "Corporation and Society: The Search for a Paradigm," The Journal of Economic Literature XIII-2 (June, 1975), pp. 434-453. 22 See R. E. Pah1 and J. T. Winkler, "The Coming Corporatism," Challenge (March/April, 1975), pp. 28-35. 23 G. Pasquino, .2£. ill., p. 314. 151 The third type--"enclave" modernization--is tied up with a particular state of economic dependency created without a previous colonial experience. It takes place when the industrial sector of a country is only the appendix of the industrial sector of a more industrialized and technologically more advanced country. In this case, the industrial sector in the modernizing country creates islands or pockets of modernity without being able to proceed to a thorough modernization of the country. Enclave modernization shares many of its features with induced (exogenous) modernization. It is typical of Latin American industrial sectors and is perpetuated both through the structural weakness of industrial sector (i.e., technological innovation) and through the vested interests of foreign companies. Imperialism in Latin America as well as underdevelopment are best seen through this conceptual lens, as the theories of dependency argue. A rarer type of modernization, but still analytically important, is called "defensive" modernization, starting as a technological "late-comer." It took place in the 19th and early 20th centuries when nonwestern elites had to resort to far-reaching political, economic, and social changes in order to resist or to avoid foreign domination. Defensive modernization is generally associated with or dictated by an intense national, cultural and racial pride. The fact that it is usually promoted by military elites most closely identify with national symbols, is by no means insignificant. The story of defensive modernization is not yet over. Actually, defensive modernization in a loose way is that process by which smaller _ 152 countries try to escape from the control of the great powers by transforming their socio-political system. At the international 2A level, these efforts are leading to an increased polycentrism. The typical examples of defensive modernization are .Japan, the Soviet Union, and the People's Republic of China. These three countries share some common characteristics of modernization: authoritarian leadership (hierarchical authority in Apter's terms), centralized political planning and coercive enforcement of changes, and strong commioment to industrialization and technological develop- ment, guided by strong national goals (consummatory values) like nationalism in the case of .Japan and socialism in the cases of the Soviet Union and the People's Republic of China, all of which coincide with Apter's mobilization system. The superiority of the mobilization system stems wholly from its massive exploitation of technology. In addition to this, the system has efficiency as its goal.25 It is often argued that since communist reg~es are oriented toward technical progress, the mark of superiority of communism is that it adopts all possible chances to promote technical progress. Stalin pointed to industrialization as the sole condition for the realization of communism.26 We should not disregard the possibility that the mobilization system can develop and practice a more sophisticated R&D policy (system) based on 24 -'Ibid p. 315• 25 Jacques Ellul, .2£• .ill., p. 288. 26 ~, p. 81; Richard T. LaPiere, 2£. £!!., p. 533. 153 socio-po1itica1 goals different from those presently promoted by Western economic and political systems. While western political systems are more effective in registering new ideas and demands, mobilization systems are superior with regard to achieving political goals once these have been established. Despite over-dimensioned and old-fashioned bureaucracies--which are obstacles to the realization of new policies as well as means to that effect, and which also provide bases for various kinds of political opposition--po1itica1 leaders in a mobilization system have at their disposal a far greater degree of power over social and economic processes than their 27 counterparts in western political systems. We should remember that a modern R&D system itself is a sort of collective system: the research worker is no longer a solitary genius. He works as a member of a team and is willing to give up his freedom of research as well as personal recognition in exchange for the assistance and equipment a great laboratory offers him. By the early twentieth century, most major industrial innovations had become even less amenable to the one-man approach. A single major innovation often required the assembly of ideas from many different branches of science. ;J:n free enterprise, production is not part of the liberal framework. It is, rather, subject to extensive planning, and it could not well be otherwise. The same is true of the tendency toward monopolies and trusts which is the plague and destruction of liberalism. Technology is, in reality, opposed to liberalism, a 27 These statements are based on Sverre Lodgaard I s analysis. See S. Lodgaard, ~. ~., p. 392. 154 social form which is unable to absorb and utilize modern technique. Ellul argues: Liberalism sufficed for the economy of a century and a half ago. Today it has no meaning. No economic theory is eternally valid: every period demands its own. The problem of the adaptation of society to economy (and it is in this sense rather than in the inverse, traditional sense that the problem must be posed) is a technical problem. That is to say, the problem has a solution only in a certain arrangement, through the mediation of the social apparatus and social mechanisms. This supposes an adaptive interven tion having as its object the wbo1e society and conscious of end and methods. Only a superior power, limited by nothing and possessing all instrumentalities, is in a position to proceed to this adaptation. This is what will bring about the mobilization of all means by the state.28 (2) Political Goals and Modernization An adequate understanding of the process of modernization and economic development presupposes an analysis of its goal structure. Therefore in this section, I shall attempt to identify and characterize the major goals of the Korean polity and the relationships that hold between these goals. The term "goal" refers to aims that are consciously being promoted by those in the polity that make major 29 decisions. President Park has repeatedly declared that Korean government programs have "three basic goals": the national security first, 28 Ibid, p. 239. 29 See Bo Anderson and James D. Cockcroft, "Control and Co- optation in Mexican Politics," in James D. Cockroft, et a L, , Dependence and Underdevelopment, (New York: Anchor Book, 1972), p. 221. 155 economic growth, and national solidarity.30 Clearly these three goals are listed in priority order: national security forms the consummatory value, and economic growth and national solidarity are instrumental values to achieve the first goal. This goal structure should be examined in the historical and political contexts of Korea. The history of the Korean peninsula has been the history of foreign invasion and influence. Around Korea are grouped in close proximity three of the largest nations in the world--China, the Soviet Union, and Japan. Because of its strategic location, struggle for Korea was the cause of the first Sino-Japanese War (1894-5) and the Russo-Japanese War (1904-5), as well as the 1950-3 war involving the U. S. and China. Still Korea is the "world's most threatening tinderbox" as an American journalist has said.31 Before the 19th century when the technological gap between the neighbor powers and Korea was not significant the Korean peninsula managed to protect itself from outside intrusions. But in the era of early 20th century imperialism, history moved against the Korean peninsula. When Perry's Black fleet challenged Japan in 1853, the Japanese reacted on their own terms: the condition of such survival was readily defined: to introduce modern science and technology in order to refashion traditional society on an industrial basis with 30 See Korean Overseas Information Services, Korea Policy Series (Seoul: Korean Overseas Information Services, 1976), pp. 8-9. 31 See Frederick H. Marks, "Korea: World's Most Threatening Tinderbox," Honolulu Star-Bulletin, Jan. 2, 1977, G-3. 156 the slogan "Western technology and Japanese spirit." The earlier arrival of western technology in Japan than in China and Korea enabled the aggressive Japanese militarists to conquer the Korean 32 peninsula and to intrude further into China in the early 20th century. Despite its history of invasion, domination, and enclave, Korea has maintained an independent, distinct and homogeneous culture and ethnocentric national identity. Though South Koreas abhore the regime in North Korea--and vice versa--the Koreans think of themselves as one people, temporarily and unjustly divided by cruel international circumstances. Korea's homogeneity and long struggle for sovereignty and independence are important background factors in the present situation. These bitter historical experiences have served only to convince the Korean people that the only way to secure national survival is through national power which is in turn invariably identified with economic growth and industrialization. Therefore economic development is a "means" to the immediate goal of national security. This sense of urgency is expressed in the declarations and writings on basic policies by Korean government and political leaders. For example President Park asserts: 32 See Williams W. Lockwood, "Japan's Response to the West: the Contrast with China," World Politics IX-I (October, 1956); and Thomas C. Smith, Political Change and Industrial Development in Japan: Government Enterprise 1868-1880 (Stanford University Press, 1955). 157 Freedom of thought and speech is not unlimited••• and in the end jeopardize the national existence and survival••• (The) Asian peoples want to attain economic equality first and build a more equable political machinery afterward••• The gem without luster called democracy was meaningless to people suffering from starvation and dispair••• Confrontation between democracy and communism is 'an economic competition' in which supremacy in development and construction aimed at prosperity and welfare matters more than frontal collision of arms.33 Also President Park frequently maintained after the fall of Indochina, "If Indochina were industrialized and consequently had stronger economic and national power, the United States would not have abandoned her.,,34 My intension here is to show how the political goal of economic development in many cases historically preceeds individual motivations. The former is in no sense the sum total of the latter: it is the collective goals which are likely to circumscribe the economic aspirations of individuals. Under this national goal and policy the entire nation's energy and resources have been concentrated on national defense, the increase 'of gross national pzoduct;, and the expansion of export. Today the slogan, "national security, production, export," not only inspires national policy but also commands popular attention on the walls of sprawling buildings in the cities and rural villages in Korea. 33 Chung Hee Park, Our Nation's Path, (Seoul: Hollym, 1970), p. 39, p. 96, and p. 36. 34 This statement is based on "The Messages from President Park" which appeared after every program on TV screens and daily newspapers in Korea in April and May, 1976. 158 I leave it to the reader to judge or interprete this economic-oriented policy, because the different emphasis and perspectives of most analyses of Korean politics and economy surpass the basic national goal structure and the bases of political philosophy. (3) Guided Capitalism: The Korean Style of Modernization Recently L. Jones in an extensive study of public enterprise in Korea, elaborated on why the Korean government, contrary to the official ideology and political leaders' commitment to free enterprise doctrine, heavily relies on public enterprise, as opposed to the Indian govermnent which views private enterprise as a necessary evil and public ownership as a social goal. He estimates that the Korean public enterprise share of NDP in 1972 was substantially larger than that of India in 1968-69 (9.2% versus 6.7%), but that the shares are virtually identical (13.6% virsus 13.5%) when agriculture, forestry, and fishing are excluded.35 Also he traced the basic motives of political intervention in production activities in every domain of Korean economy: historical inertia, political pragmatism, political leader's power-oriented personality, and market imperfections. In order to make an assessment of this prima. facie contra diction between rhetoric and reality, an examination must be made of the terms "guided capitalism" which the present govermnent adopted as an economic doctrine when it initiated the First Five-Year Plan in 1961. Under "guided capitalism," the free enterprise system is encouraged under govermnental guidance and intervention. The policies 35 L. P. Jones, ,2£. ill., 70. 159 provide that the government either directly participate in or indirectly use inducement policies in key sectors and in other major fields: that is, the government began to undertake massive economic development by the infusion of capital and by the institution of government control over the economy. 36 Se-Jin Kim pointed out: The program was clearly socialistic in terms of establishing and operating basic industrial plants. The SCNR vehemently eschewed the word 'socialism', and used a new euphemism, 'guided capitalism' ••• Nevertheless, the transparent attempt to uphold the capitalistic system in theory--in the face of contrary practice--seemed to have been politically motivated by the desire to retain the aura of anticommunism in whose name the revolution was perpetrated.37 The theory of "guided capitalism" seems to derive not only from political considerations but also from the compromise between the reality of the Korean economy and the theory of free enterprise. For this the following theoretical arguments are worth investigating in details: 36 Office of Public Information, Korea Moves Ahead, (Seoul: Office of Public Information, 1962), p. 66; and Jae-Won Lee, "Perspec tive for Economic Development and Planning in South Korea," in Andrew C. Nam (ed.), Studies in the Developmental Aspects of Korea, (Kalamazoo, Mich.: Western Michigan University, 1969), pp. 30-56. 37 Se-Jin Kim, The Politics of Military Revolution in Korea, (Chapel Hill: The University of North Carolina Press, 1971), pp. 119 120. The SCNR stands for the Supreme Council for National Reconstruc tion of the military regime in 1~61. 160 There was once a time when the laissez-faire policy was tbe only way to guarantee the maximum freedom of people's economic activities: but••• such a policy was apt to widen the gap between the have and have-nots and create massive unemployment. •• Free choice of consmnption or occupation and creativity of free businessmen are the decisive factors in the economic development of a state••• We should utilize the merits usually introduced by the price machinery of free competition, thus avoiding the ~ossible damages accompanying a monopoly system. 8 Clearly, the merit of free enterprise is conceived in terms of efficiency of entrepreneurship with the assumption of free competition. As we have seen, however, the assumption has been seriously challenged by modern technological change. Technological change cannot do without industrial concentration as well as centraliza- tion of political power, unless a national econany is tightly closed to international technology. An economy based on individual enter- prise is not conceivable, since most likely it cannot bear the extraordinary costs of technical progress. This necessary concentra- tion thus gives rise either to an economy of large corporations or to a state economy. Tbe alternative open to the small developing countries is already given: state controlled economy whatever form it may take. The Korean style of "guided capitalism" perhaps can be best seen through this concept. The impulse to concentrate is so strong that it takes place even contrary to the decisions of the government. Even in the U. S. and other industrialized countries, the state has often opposed concentration, but ultimately it has always been forced to capitulate 38 Chung Ree Park, .2E,. ill., p. 38, p. 214, and p, 216. 161 and to stand by impotently. In the developing countries, bigness and concentration are necessary conditions, as Hirschman pointed out, "of the instinctive defense which was taking shape by the emergence of the I countervailing power' of state-owned corporations and the acquisition of a growing ability to change the rules of the game (in 39 the international settings)." Also, the export of manufactured goods, especially in a country following "outward looking" policies, enforces giantism. All these technical results are, however, in conflict with certain interests. In order to achieve these technical results, policies must be adopted that may go against the good will of the public. It then becomes indispensable to enforce sanctions to achieve the collective goal of economic development. And only the govermnent can apply these sanctions. With this development, it has become very 40 difficult to trace a boundary between politics and economics. Entrepreneurship, the creativity of free businessmen, is conceived as one of the major merits of the free enterprise system. This issue can be clarified by recalling the Schumpetarian concept of entrepreneurship. 39 Albert O. Hirschman, "Coument on Sunke1's Paper," in Urquidi (ed.), ££. ~., p. 29 40 See J. Ellul, ~. ~., 157. .1.:lJ. .•. ,... ~ 162 The function of entrepreneurs is to reform or revo1utiona1ize the pattern of production by exploiting an invention or, more generally, an untried technological possibility for producing a new commodity or producing an old one in a new way, by opening up a new source of supply of materials or a new outlet for 41 products, by reorganizing an industry and so on. The entrepreneurial function is thus distinct from that of management and the capitalist. Paul A. Samuelson, following the Schmnpetarian notion of creative innovation, emphasized, "This task of creative innovation is not one for rugged individualism alone••• the government itself can innovate creatively. Somewhere between complete laissez faire and totalitarianism a developing country must work out its destiny. ,,42 In this sense the Korean government, especially the political leader and bureaucratic elites, has actually performed the original entrepreneurial function, by selecting, adopting, and coordinating new commodities and technologies available through technology transfer, by developing and expanding a new source of overseas markets, and by reforming and reorganizing whole industrial systems by economic 41 See JosephA. Schumpeter (1950),22. cit., p. 132; see also his book (1968) Ope cit., pp. 74-75. The concept of entrepreneurship refers to different things by different people, ranging from the Weberian "spirit of capitalism" to psychological approaches. Recently Theodore W. Schultz attempted to define entrepreneurship as "the efficiency of human beings to perceive, to interpret correctly, and to undertake action that will appropriately reallocate their resources." These a110cative abilities of human beings are influenced by education and experience. Therefore, entrepreneurship is conceived as rationality of human beings. See ''The Value of the Ability to Deal with Dis equilibria," Journal of Economic Literature XIII-3 (Sept., 1975), pp. 827-846. 42 Paul A. samuelson, sa- cit., pp. 772-774. 163 planning. For example, self-sufficiency of food-stuffs in Korea, one of the major goals of the Third Five-Year Plan, has been reported to have been achieved by 1975 and President Park proposed an offer of food aid to North Korea in early 1977 which of course has far- reaching political implications in the relationship between North and South Korea. My personal observation during my field survey period in 1976 was that this successful food self-sufficiency program would not have been possible without technological change, i.e., the invention of a new rice variety called "Tongil" combined with other agricultural techniques and its adaptation (diffusion) by agricultural extension services and the "new village movement (8aemau1 Undong). ,,43 The growth rates of agriculture and fishery have jumped from 3.3% in 1971 and 1.7% in 1972 to 5.5%, 5.6%, and 6.2% in 1973, 1974, and 1975 respectively. In 1975 the growth rate of agricultural products excluding the fishing sector marked 7.8%.44 The productivity of the new rice variety, called "Tongil" (it means unification in Korean), is 45% higher than that of the conventional variety.45 My personal observation in rural areas was 43 Until recently Korea heavily relied on grain imports, mainly rice and wheat. During the Second Five-Year Plan (1967-71), rice imports were 3.49 million tons, and in 1971 alone 1.1 million tons of rice had to be imported. See Jean Egan, Far Eastern Economic Review, Jan. 15, 1972, p, 50. The share of food imports to total imports increased from 12.6% in 1961 to 16.6% in 1971. See Rae H. Chung, "Industrial Progress in South Korea," Asian Survey, XIV-5 OMaY, 1974), p. 449. 44 See The Bank of Korea, Tentative Estimates of GNP - 1975, (Seoul: BOK, 1976), p. 2. 45 It is reported that the new variety which was developed by the Office of Rural Development (government agency for agricultural exten sion and research and development) is a hybrid of Japanese "Ugara," Taiwan's rice variety, and Philippines I "IR8." See The Ministry of Culture and Information, saemaul Undong (New Village Movement), (Seoul: Korean Press Corp., 1973), p. 168. 164 that the initial stage of introduction of Tongil (before 1972) was not quite successful mainly because of its taste and the lack of farmer planting techniques. However, the government persuaded the farmers to sacrifice their taste preferences and to take advantage of its economy and nutrition, and the technical problems were solved by extension services and the New Village Movement. I observed that almost every farmer adopted the new variety by 1975. Conceived as an experiment for "balanced economic development" which was emphasized in the Third Five-Year Plan (1972-76), the New Village Movement, which President Park called a "big leap forward movement" for the twin national goals of modernization and unification, was greatly expanded since 1972 to increase farm incomes and to improve the rural enviromnent. A vast number of urban-dwellers--students, civil servants, white-collar workers, and the like--were mobilized to assist the movement. It was basically a government-managed endeavor, but it promises to be a solution to the problems of rural underdevelopment provided the farmers can see its economic merits and are persuaded to take active part in its developmental projects.46 While the emphasis is on the improvement of farming skills and income generation another focus is along ideological lines with the slogans of "se1f- help, self-reliance, and cooperation," which may be sunnned up as "national solidarity. ,,47 Whatever the cost may be, I was impressed 46 See New COIIDllUnity Movement (Seoul: Korean Overseas Information Service, June, 1972). For a brief review of the movement, see Willard D. Keim "The South Korean Peasantry in 1970s," Asian surve~ XIV-9 (September, 1974), pp. 854-868. The typical projects lnclu ed the increase of production of various farm products, reclamation of arable land, cultivation of low hills, afforestation, the repair of rivers and ponds, etc. 47 See The Ministry of Culture of Information, .2E,. cit. 165 to see that the farmers' income and living environment have been remarkably improved, and more importantly, also their participatory attitude. The govermnent's initiative in introducing new products and new technology in the leading manufacturing sector is another example of the government's entrepreneurial function. Of my 40 large firm sample, nine firms were constructed and managed by the government (three in fertilizer, two in iron and steel, one in machinery, one chemicals, one in oil refining, and one in transportation equipment industry) • All these public enterprises were covered by L. Jones in his study of Korean public enterprise. He argued that public enterprises clearly constituted a leading sector in the sense of more rapid growth than the general economy and its significant influence on other sectors. Even among the "new" enterprises, the impetus seldom came from within the sector itself, but rather from the control structure and sectoral growth did not result from the dYnamics of particular activities themselves selected by the government.48 He further hypothesized that if all activities which were actually carried out by public enterprise were instead carried out under private ownership, income inequality and the concentration of economic power (of private sector) would have been greater and empl~ent would have been lower.49 The Korean government also has played a significant role in regulating consumption patterns. For example the Korean people still have no color TV programs even though Korea is an exporter of color TV sets: the government determined to postpone color TV 48 See Leroy P. Jones, .2£. cit., pp. 202-203. 49 ~, pp. 208-209. 166 broadcasting because it was considered a luxury as yet by the standard of the Korean national income. Govermnent intervention in economic activities is not confined to ownership control through public enterprise. Rather, ownership control by the state is inefficient and apt to corrupt due to the notorious bureaucratic system and more importantly to the lack of a flexible incentive system. The entrepreneurial function, by Schumpetarian definition, is different from managerial efficiency. While the state is in a good position to initiate the introduction and adaptation of new products and technology, it is weak in managerial efficiency. Even in socialist countries the ownership of the means of production is no longer important: social equality becomes a myth as a result of the emergence of an aristocracy of technicians (Apter r s embourgeoisement). Therefore the socialist state is likely to adopt the technical principles (managerial efficiency) of capitalism as we may see in the case of the Soviet Union. For this reason several firms of the nine public enterprises discussed above were converted into quasi-public status under private management when their technical operations are routinized. In my view this has little to do with ideology. In Ellul r s words, the state cannot modify technical rules: for this reason the transition of the economy to state control can create Only state capitalism, not socialism.50 The Korean approach to economic resources mobilization in the industrial sector can be found by a careful examination of the dynamics of interplay between the political and economic systems of the society. Kyung-Dong Kimr s recent investigation of Korean 50 J. Ellul, ~. cit., p. 245. 167 entrepreneurs' behavior found that political factors have always played a crucial part in either promoting or discouraging entrepreneurial ventures in the economic sector, and he claimed that the conventional studies of entrepreneurship are meaningless in the Korean case, because of historical circumstances in which technological know-how is already available. 51 In the period of reconstruction and rehabilitation (1946-61) the consumer industry was predominant and foreign aid became the most important source of capital accumulation for private enterprises. The best access to this source (foreign aid) was the use of political connections to gain favors in exchange for political contributionso In addition to this the entrepreneurs·accumu1ated capital through such "non-rational" processes as speculation, price fixing, tax evasion, and taking advantage of cumulative inflation. Those who made it in this process came very close to establishing themselves as monopolistic capitalists similar to the Japanese Zaibatsu ("Jaebol" in Korean) and 52 those entrepreneurs were called "political capitalists." In 1961 the military revolution which advocated eradication of corruption and injustice from Korean society introduced some political and economic reshuffling. They renewed the investigation into the nortorious "i1licity accumulated wealth.,,53 However, the 51 Kyung-Dong Kim, "Political Factors in the Formation of the Entrepreneurial Elite in South Korea," Asian Survey XVI-5 (May, 1976), ppo 465-466. 52 Ibid, p. 469. 53 This investigation was initiated by the former Chang's regime before the fall of his regime by the military revolution in 1961. 168 military regime's ambitious long-term economic development plan inevitably involved compromise: instigated by the urgency of reorienting the economy from its emphasis on consumer goods and light industry to that of heavy and chemical industry, political leaders and planners relied heavily on the ideas of and cooperation with the "Jaebol" sector. By the end of the 1960s, a trend towards diversifica- tion of industrial activities appeared, but the industrialization programs have accelerated monopolistic and oligopolistic concentration in the hands of a limited number of large-scale conglomerates. With limited capital funds available domestically, Korean planners opted for reliance on foreign sources in their economic growth programs. Now that the era of free grants-in-aid was virtually over the most feasible source of foreign capital was found in various types of 54 loans. And the entrepreneurs naturally went for this source of capital for their economic ventures, again effectively utilizing their political connections for special favors. A few examples of outstand- ing special favors involved include the allocation of foreign loans or designation of a particular company for a certain foreign-loan project; financial support from commercial banks for specially designated industrial development projects; special subsidiaries for export promotion; and other familiar practices such as tax evasion, and price 55 fixing. 54 Seung-Hee Kim, "Economic Development of South Korea," in Se-Jin Kim and Chang Hyun Cho, (eds.), Government and Politics of ~, (Silver Spring, Md.: The Research Institute on Korean Affairs, 1972), pp. 148-175; Cited in K. D. Kim, 2e. cit., p. 473. 55 ~, pp. 474-475. 169 Recently the government offered explanations for the trend toward concentration of wealth and industrial monopolization in the face of some obvious side effects. Concentrated support was intended to avoid unnecessary spreading out of limited funds and to take advantage of the most feasible and promising enterprises in terms of export financing, foreign capital inducement, domestic subsidies. For these reasons, government policy, it is reported, leans toward the regulation of monopoly/oligopoly rather than breaking them down. 56 It may be impossible to go backwards to a competitive market. It is against the nature of modern technology. To cope with these structural problems, the government has responded with a series of political and administrative measures. In 1969, for example, a special presidential task force investigated and disposed of 30 "ineffective enterprises" on the ground that they were not competitive in the international market. Warnings have been issued to the "unethical" enterprises engaged in tax evasion or anti-social monopolistic practices. The government has applied strong pressure on the large "Jaebo1" groups to open up stockownership to the public in order to change the parochial and familial pattern of management. 57 It has been continuously reported by the Korean daily newspapers since 1975 that a number of enterprises labeled "unethical" as well as high ranking civil servants involved in unethical connections have been vigorously prosecuted. The recently 56 See Dong-A I1bo, June 4, 1974; and Joong-Ang I1bo, April 30, 1977, p. 2. 57 K. D. Kim, .2E,. ill., p. 477. 170 enacted Law on Price Stabilization and Fair Trading is considered a major tool to control private enterprise in this way. The above description, at the risk of oversimplication, represents the Korean style of modernization which is aptly labeled a semi-mobilization system. Many economists and social scientists of Korean studies contend that the Korean model of modernization is really costly not only in economic terms but also more importantly in political terms. There has been growing criticism of "export at all costs" wisdom58 and "skyrocketing foreign debt-services. ,,59 Despite a forecast of "economic crisis" in South Korea, the econany in 1976, showed some signs that Korea might have weathered the "oil shock" and the subsequent recession. This ne-..r momentum evidently owed much of its thrust to a sharp increase of 68.1% in canmodity exports during 1976. With the boom of exports, prospects for South Korea Is foreign debt servicing improved somewhat. 60 The Korean government exhibited confidence that after mid-1980 it will not 58 As to the costs of exports, W. T. Hong reported that Korea lost a significant amount of both capital and labor via trade in competitive goods in 1969 and 1970 and gained a significant amount of labor at the expense of capital in the period 1971-73. See W. T. Hong, Ql!... cit., p. 126. See also Y. Lim, ope cit.; H;yung Chun Kim, Ql!... cit.; and P. W. Kuznets, "Korea's Give Year Plans," in Irma Adelman (ed.), Practical Approaches to DevelQPini Planning, (Baltimore; John Hopkins Press, 1969). 59 For example, see T. C. Rhee, "South Korea's Economic Develop ment and Its Socio-Po1itical Impact," Asian surv XIII-7 (3uly, 1973), pp, 677-690; John K. C. Oh, "South Korea 1976: TSe Continuing Un- certainties/I Asian Survey XVII-1 (Jan•." 1977) f pp. 71-80; and Chery'l Payer, "Pusned into the nebt Trap--Soutn Korea s Export 'Miracle'," Journal of Contempora ASia 5-2 (1975), pp, 153-164. Foreign debt servicing was estimateea bY tfi e Economic Planning Board at $439 million and $560 million in 1973 and 1974 respectively, and $971 million in 1976, roughly 5% of the 1975 GNP of $18.7 billion. See Dong-A I1bo, June 19, 1976, p. 4. 60 See John K. C. Oh, ,2£. ill. 171 need to depend on foreign capital: in 1975, 58.2% of the total investment funds came from domestic savings with the remainder mostly fxom foreign sources and in 1976 domestic savings will comprise a larger share--71.4%.61 W. Hong suggested that we should at least try to justi~ the existence of static losses, e.g., losses of significant amounts of both capital and labor via trade, in terms of dynamic gains.62 Viewed from my analysis, Korea is learning technology and human skills but with all these costs. The learning costs- learning-by-spending--cannot be measured by any conventional analytical method. Without these learning effects, the Korean economy might have collapsed, as predicted by many economists. It has also been strongly voiced by many social scientists that, viewed from the perspectives of general democratic norms typically associated with western standards of liberal democracy, the entire sequence of South Korea's domestic political development has been an unfortunate step backward. However, a social explanation should be evaluated in terms of the relations between social units or factors, not in terms of isolated units or factors. Korean develop ments should not be judged in terms of political factors isolated from other socio-economic factors, or domestic affairs separated from external environments. As Chae-Jin Lee pointed out, if one is prepared to accept that South Korea is at a critical turning point in the struggle for survival and prosperity, and that South Korea's loosely structured, partisan-oriented, and faction-ridden political 61 Sam-O Kim, .2E,. ill,., p. 63. 62 W. T. Hong, .2E,. cit., p. 126. 172 system was inadequate to deal with such a turning point, then the decisive, though costly, efforts for internal political restructuring might be appreciated. 63 Robert Sca1apino was sympathetic about this political situation: Modern Asia••• has been marked by a certain ambivalence or paradox with respect to political institution and values••• I think that restrictive political·practices in countries like Korea or Thailand, any retreat from a certain degree of openness does have an adverse influence upon groups like the student-intellectual connnunity. The problem is what the indigenous elite think about them. In justice to these and other societies, however, it should be said that one of the most difficult things in the world is to operate on the basis of political 9penness when a people are being committed simultaneously to a one-generation industrial revolution and a rapid nation-build ing program••• It is much easier to adopt totalitarian methods, mobilizing people en masse and marching them through the modernization process••• In my opinion, these experiments [of quasi-openness] constitute the best hope for meaningful political evolution.64 Indeed, the dilemma of modernization is :::ound in the re1ation- ship between political development and economic growth. G. Myrda1's rather bitter conclusion seems to explain this relationship: 63 Chae-Jin Kim, "South Korea: The Politics of Domestic Foreign Linkage," Asian Survey XIII-1 (Jan., 1973), p. 101. 64 Robert A. Sca1apino, "The New China Policy: Its Impact on Korea and Thailand," Hearings of House of Representative, Ninety Second Congress, Second Session May 4, 1972 (Washington, D.C.: U.S. Government Printing Office, 1972), pp. 125-129. 173 So is the possibility--though not the necessity- that an authoritarian reg~e will come under leadership that is prepared to carry out reforms that would not have been enacted under a 'democratic' reg~e. From the point of view of the value premises, it would then be pre ferable. The conclusions of my research .&2. against my grains though I have to accept them. (Emphasis his).b In Ellul's words technology is the boundary of democracy. 66 (4) The Perspectives It is, however, of considerable ~portance to note that there has been an apparent absence of force and coercion in the implementation of the economic programs. Although the saemau1 (new village) Movement is still a program invigorated from the top down, there is some indication that it might implant some sustained initiatives in the country-side: collective works are carried out on a voluntary basis with some incentives provided by the government's material supports. It should never be confused with farm collectivi- zation. Although the government policy relies heavily on the public enterprise instrument, it did not nationalize existing private enterprises. Public enterprise is in large part a pragmatic response to the practical necessity to achieve technological efficiency and to overcome market imperfections. An alternative would have resulted in socially undesirable consequences if left to the private sector. The process of resources mobilization to achieve technological efficiency and to meet international competition have resulted in 65 Gunnar Myrdal, The Challenge of World Poverty, (New York: Vintage Books, 1970), p. 436. 66 J. Ellul, ££. ~., p. 209. 174 the lopsided concentration of industrial resources in the bands of few "Jaebo1" groups. Therefore, government intervention seems justified if these key sectors are to be made workable as the agencies for economic development. In no sense can this sector be considered as pure private enterprise in terms of its origin and growth process and of its importance in national perspectives. We should not confuse the national economies of technological late-comer countries with those of technological leader countries. Though Korea is at the moment working with some degree of restrictive political measures, in large part caused by threats from the belligerent connnunist North and by urgent and massive domestic development programs, she is far more tolerant of individual choices than the rigid collectivism of communist regimes--freedom of the press, freedan of private expression, freedom to move one's residence at will, and freedom of choice of occupations which are virtually unknown in North Korea. They remain as ideals in the minds of large numbers of Korean people as an American journalist said.67 Judging from the present perspective, Korea might prove in the near future that economic self-sufficiency can be achieved without resorting to painful methods of total collectivism. If the Korean model of a "guided capitalism" bears economic fruit, it could serve as the noncoercive alternative to the cOIlDllunist approach.68 However, I want to make a reservation at this point. As Edwin 0 0 Reischauer 67 Don Oberdorber, "North, South Battle for Minds of People," Honolulu Star-Bulletin, June 29, 1975, B-1. 68 Se-Jin Kim, .2£. ill., p. 121. 175 pointed out, Korea is not much like most other developing countries. Korea shares many of the characteristics that account for the extraordinary successes of Japan and China in recent years. Korean people are hardworking, disciplined, and skilled organizers. They have a passion for education and have all but wiped out illiteracy. 70 In addition, traditional hierarchical culture mainly influenced by Confucianism which Korea, Japan, and China have commonly shared throughout history has been a factor conducive to the semi-mobilization system which also occurred commonly in the early stage of moderniza- tion in these countries. Also the South Korean people are solidly unified against the Communist North, still remembering its ruthlessness and cruelty when it overran most of the South during the Korean War. In my opinion, Communist doctrine, as the South Korean people perceived it during the Korean War, was fundamentally incompatible with the traditional Confucian values. I agree with Scalapino that if there could have been a purely free election or free choice on the part of the Korean people, Korea would certainly have been non-Conmunist: 71 Connnunism (in North Korea) was wholly a product of external sources. The fundamental problems of the future of the Korean economy and politics lie in technological development, especially in the relationship between technological progress and foreign investment. The production of modern technology exhibits three characteristics: 70 Edwin O. Reischauer, "No 'Peace' in Korea 23 years after War," Honolulu Star-Bulletin, August 1, 1976, B-1. 71 Scalapino, ££. ~., p. 139. 176 discovery, urgency, and spin-off. Discovery, the infinite increase of scientific knowledge, is the capita1 of R&D: urgency, the demand for innovation, is the motive of R&D: and spin-off, the unexpected effects of innovation, is the hidden dividend. The rate of discovery, the rate of innovation, and the value of spin-off are the three great measures of technological success. 72 Here, the value of foreign capital should be examined in this context. Viewed fran my analysis, foreign loans and license agreements reduce the motive of R&D efforts, leading to technological dependence, but they have some spin-off effects when they are left in the hands of local companies under pressure of R&D efforts. Foreign investment suppresses all three effects, by depriving local engineers of the opportunity access to R&D laboratories. For this reason, local partners are always in a subordinate position with little chance to achieve a technical break- through. Dependency and underdevelopment basically come fran this effect. The Korean government's view of foreign investment typically runs as follow: foreign investment facilitates domestic capital formation, technological development, improvement of balance of payments, transformation of the industrial structure, product quality improvement, and strengthening international competition by bringing capital, techno'logy; and management skills together: it also does not 73 involve debt-servicing. Benjamin Cohen's study of foreign investment 72 Kintner and Sicherman, ,2E. ill., p. 39. 73 Hankuk Hongbo Hyuphe, Urinara Chungyo-chungchaek u Kibonbanghyang Un Irongushida, (The Basic Policies of Our Nation), (Seoul: Hankuk Hongbo Hyuphe, 19731), p. 137. 177 argued that government officials expected that foreign firms would bring large amounts of cheap capital or superior technology and management but these officials may not have foreseen how small the benefits would be. 74 I argued elsewhere that technological know-how is theoretically and empirically the last thing that foreign firms would bring to the developing countries: they would bring some assembly line or routinized production technology which would already be well known. Benjamin Cohen further suggested that the principal reason for attracting foreign firms may be political, not economic: 1) the U.S. government is less likely to impose quantitative restrictions on imports from South Korea; 2) the U.S. government is more likely to protect South Korea from military invasion; and 3) U.S. firms are 75 a countervailing force to the Japanese influence in South Korea. As to the second item of the above, the former Prime Minister Jong-Pil Kim stated before the National Assembly, "A multinationa1 corporation may be stronger than a combat division of the American army for our national defense. ,,76 While the political impact is usually considered to be negative (at least in Latin America), governments in these three Asian countries consider it to be positive.77 74 Benjamin Cohen, .2£,. cit., p. 134. 75 -'Ibid p. 135• 76 Cited in Se-Won Kim, ''Dagukjuk Kiup Ui Saegaejuk Kyunghyang (World Trend of Multinational Corporations)," Saedae (January, 1973), p. 133. 77 B. Cohen, 2£. cit., p. 135. 178 In addition to political considerations, there were some positive economic effects. At least until 1970 foreign countries' economic involvement in Korea which takes the form of grants-in-aid and loans has certainly been motivated by non-economic considerations, the ultimate objective of political influence, Le., their own interest of national security, because of Korea r s strategic location. Unlike other developing countries, Korea lacks any economic factor, e.g., natural resources and markets to attract foreign economic interests except cheap labor. With strong preservation of the domestic market for Korean firms, foreign firms were pushed out into exporting 78 which resulted in net benefits such as increased emp1oyment. In this sense, the Korean government has adopted a sort of exp10itive policy, taking advantages of political factors which have been combined with aggressive policies as in export sector. K. Areskoug's empirical investigation of foreign investment in developing countries offered an interesting conclusion: highly centralized or semi-totalitarian regimes and restriction on political freedom would be conducive to more effective growth-planning efforts and facilitate the deliberate allocation of foreign capital to investment. 79 78 According to an official survey on the basis of 1974 perfor mance, foreign investment projects accounted for 15.2% of the total production in the manufacturing industry. Such projects were responsible for an annual average of 20.6% of the total conmodity exports during the 1970-74 period, and created jobs for an average 6.2% of the total population employed in the mining and manufacturing industry during 1971-74. See Sam-O Kim, Far Eastern Economic Review, July 30, 1976, p. 64. 79 Kaj Areskoug, "Private Foreign Investment and Capital Formation in Developing Countries," Economic DevelOpment and Cultural Change, 24-3 (April, 1976), p. 547. 179 However, we should emphasize that the effects from foreign investment during the last decade include not only the optimistic results the Korean government foresees, but also costs. Some negative symptoms have already begun to appear in some key sectors like petrochemical and fertilizer industries, when considered only in economic terms. Furthermore the economic and political implications of the rapidly growing Japanese penetration are not to be underestimated. It would be difficult for Korea to adopt economic policies in conformity with its national needs. Japanese economic penetration could essentially lead to political problems compounded by anti-Japanese sentiment which is still deeprooted in the minds of many Korean people. It seems that some form of non-zero sum game in the past will turn into a zero sum game in the future. This means that foreign countries or firms will be tempted to exert political influence for their economic interests. In short the Korean govermnent should be cautious in inducing direct foreign investment, because it suppresses domestic technological development and it has a tendency to overexploit the internal market, endangering the existence of natior13.l industries. Thus, the host country should periodically evaluate and control these international firms in the national interest. To sum up: the national policy for the development of science and technology is crucial for modernization. Sheer mechanical mobilization of national resources will not guarantee a rapid and balanced modernization that developing countries desire. In Korea, political and bureaucratic elites seem to be a~1are of the importance of science and technology as sources of economic growth, but their 180 perceptions and orientations are invariably based on some naive assumption of the late-comer thesis; the solution of technological problems is conceived as mechanical or technical which ignores the social function of science and technology. The whole notion of a national policy for science and technology, conventionally termed "science policy" seems to be closely related to the stage of develop ment. This suggests that the science policy for developing countries should be different from that of industrialized countries which is in large part irrelevant to the solution of the developmental needs of developing countries. An autonomous theory and policy are called for. By this notion I suggest that "science policy" for developing countries could be perceived as "political measures to develop and adapt science and technology for national goals and needs and to prevent or reduce the negative impacts of modern science and technology for society as a whole and economic development." My analysis implies that science policy in isolation from internal and external socio-economic environments is pure fantasy. Based on my analysis, the following policy implications are suggested: 1) Foreign investment was found not to be beneficial, even negative, for the development of science and technology in developing countries. 2) Turn-key projects, financed by foreign loans in Korea, should be selective and should be accompanied by strong local R&D efforts, desirably more than the total foreign technical service fees, thereby reducing technological dependence. Otherwise they have no difference from foreign investment in terms of technological deve1op- ment. 181 3) License agreements may be conducive to spin-off effects if they are followed up by strong local R&D efforts, desirably more than royalty payments. As to the royalty payment policy, I take the position of "Pay more" if it is considered as much beneficial as its costs. Restrictive clauses should be deleted as far as possible. 4) Exportation, though costly, may be justified as a factor conducive to technological development through the competitive pressure Which it may induce on the motive of R&D. 5) There is need for R&D efforts to be carried out in close conjunction with production. This implies that a few big research laboratories separated from industrial production will not bring about as many innovations as expected. 6) These strategies are likely to require economies of scale and concentration of national resources as long as a national economy is a technological follower and adopter rather than innovator and inventor, at least for defensive reasons. These policy implica tions are reinforced when a national economy of technological follower adopts an "outward-looking" policy. Therefore, the key industrial sectors, selected on technological capability requirements and economies of scale, should be regularly evaluated and controlled by government for the national interest. Possibly, legislation rather than administrative measures is needed to open stockownership and management of these big firms to the public. Chapter VIII Conclusion Technological change never occurs in a vacuum, It grows and flourishes in specific social settings. Also, once it comes into being, it plays a pivotal role in transforming society. Therefore, technology transfer and development Which are presumably of critical importance, Whether their impact be beneficial or vicious to the developmental problems of developing countries, should be examined in terms of international circ1.U1lstances in which technology is con centrated in the hands of a small number of multinational corporations of the industrialized countries. Conventional developmental theories, based on the assumption of the late-comer thesis, have failed to recognize how the existing impoverished technological capabilities in developing countries and the overwhelming international concentration of technological capabilities in the industrialized countries have affected the position of the developing countries in the world economy. The problems of technology transfer from industrialized countries to developing countries stem not only from the widened technological gap but also from the very nature of the world system Which has been shaped by modern technological change. The well-known "demon stration effects" determine the range of the choice of techniques because of world "consumption pattern." The community of scientists in developing countries is oriented to meet the standards of the world community. Consequently the internationalization of science 183 and technology is likely to divert their products to the outside world rather than to contribute to the national needs of developing countries. The production of modern technology is motivated by an urgency requiring considerable R&D efforts, and resulting in spin-off effects. Technological change as well as technology transfer is fundamentally a people-oriented phenomena. The various types of technology transfer to developing countries must be investigated in terms of these characteristics of modern technology, not in terms of mathematical and mechanical models. Viewed from this perspective, foreign invest ment which is usually controlled by multinational corporations keeps developing countries from access to modern technology, instead taking out capital from developing countries. Heavy reliance on foreign investment, ostensibly conceived as an agency for technology transfer, basically reinforces a dependent economy. We need not resort to any other explanation like "economic imperialism." Foreign loans and license agreements, although really costly, may bring some spin-off effects, if they are followed up by complementary R&D efforts. And if not, they result in the same consequences as those from foreign investment: economic stagnation and continuous capital outflows. Now that creating indigenous technology is accepted as an impossible task for developing countries, adaptive efforts, 1.e , , the combination of R&D efforts with technology transfer, are considered a viable approach for technological development of developing countries. The strategy involves gradually reducing technological dependence (ioe., more inputs of R&D than royalty payments). 184 If we assume that modern technology is a fact of life, developing countries have to learn to live with it. Modern technology requires a sizable coumitment of resources and consequently it usually favors concentration of resources which is usually conceived as monopoly! oligopoly in the market economy. This technological giantism calls for state intervention, at least for defensive reasons in developing countries. A liberal economy is, therefore, likely to be meaning- less in the face of this situation. State intervention is reinforced when a developing country pursues an "outward-looking" policy. Export is also considered as one possible outlet of economies of scale demanded by technological efficiency. An export-oriented strategy pushes a developing country to participate in the international division of labor, hierarchically structured by technological change, which costs a developing country formidably in the initial stage of modernization. Only the learning effects of teclmo1ogy may justify the costs. The alternative policy open to a developing country, for which many developmental theorists opted during the last decade, is a "closed door" strategy. However, this prescription seems to ignore the reality of the world system shaped by modern technology. If such a policy is successful, its road may be more painful and I doubt that it can long endure, because a majority of the population seems to be on the side of technology. Paradoxical is the impact of technology. While technological efficiency demands a shrinking of political barriers, the value of 1 sovereignty strengthens those barriers. The history of our time 1 W. R. Kintner and H. Sicherman, .2£. ill,., p. 139. 185 is likely to be recorded as the period of conflict between ethnocentric 2 nationalism and geocentric technology. In this situation, the response of ethnocentric nationalism to the challenge of geocentric technology is likely to take the form of collective measures. In this respect, the pandora box of technology seems to promise no progress for human civilization: it is technical regression, viewed from the mO'~al and humanistic standpoint. One possible solution of this dilemma of human civilization may be to "slow down" technological change in the industrial countries and to promote a more equable distribution of existing technology throughout the world. Besides this normative perspective, the recent movement of "slow growth" or "limits to growth" derived from the reality of limited world resources and an environmental perspective, suggests a unified world order. But in the foreseeable future it will not come into being. The problem seems to get worse in the future rather than better because of the nature of technology. We all must grapple with the teclmological issue, but it is a problem the politician rarely 3 has time to grapple with. 2 S. E. Rolfe and W. Damn, The Multinational Corporation in the World Economy, (New York: Praeger, 1970), p. 32. 3 John H. Badgley, Hearings of House of Representatives, Ninety-Second Congress, Second Session, May 4, 1972, (Washington, DoC.: U. S. Government Printing Office, 1972), p. 1260 APPENDICES ~. Appendix 1. Correlation Analysis of Technological and Economic Activities of Selected Industries (1975) CON EXP RD RS ENG SKL ROY LOTE TD CAP CON 1.0000 -.5538 .0906 .0321 .7096* -.4021 .5943 .6823* .8419* .5736 EXP 1.0000 .0417 -.3883 -.8209* -.7074* -.5070 -.4588 -.7961* -.4139 RD 1.0000 .7660* -.2980 .2747 -.3136 -.2943 .0766 -.4471 RS 1.0000 .0389 -.0284 -.1510 -.2556 .0909 -.2800 ENG 1.0000 -.6787* .8489* .8091* 09152* .7886* SKL 1.0000 -.7143* -.6005 -.4822 -.7111* ROY 1.0000 .9373* .6953* .9226* LOTE 1.0000 .7399* .8231* TD 1.0000 .5799 CAP 1.0000 Source: Field Survey Data Notes: 1) N = 10 (10 selected industries) 2) * Indicates coefficient statistically significant above the level of .025. 3) For abbreviations, see the next page. f-I 0) '-I Abbreviation 1) CON - industrial concentration: four large firms' sales as percentage of total output of an industry. 2) EXP - export performance: firm's exports as percentage of firm's sales. 3) RD - R&D expenditures as percentage of sales. 4) RS - scientists and engineers engaged in R&D activities as percentage of total employment. 5) ENG - the number of engineers as percentage of total employment. 6) SKI. - the number of technicians and skilled workers as percentage of total employment. 7) ROY - royalty payments as percentage of sales. 8) LorE - technical service fees in turn-key projects as percentage of sales. 9) TD - technological dependency: the foreign source of technological change as percentage of total technological inputs (the internal source plus the foreign source). 10) GAP - capital-intensity: capital/labor ratio ($1,000 per worker). ..... 00 00 Appendix 2 0 Indexes of Technological and Economic Activities of selected Industries (1975) Industry CON EXP R&D RS ENG SKL ROY LOTE TD CAP Food 15.9 21.9 002 0.6 6.5 53.0 0.1 0.02 38.6 1809 Syn Fibre 48.4 73.2 0.5 0.2 3.5 73.9 0.13 0.35 47.5 1305 Tex (Cot) 15.4 89.0 0005 001 2.8 80.5 0.01 0.01 2401 1608 Indo Chern 38.8 19.9 0.45 1.03 9.1 62.7 0.54 0.18 61.2 1406 Fert 98.5 1.9 0017 004 13.2 58.0 0.80 0.90 8902 57.5 Oil Ref. 83.1 7.8 0.01 0024 13.3 44.7 (3.0) (3.0) (9400) 13607 Steel and Iron 50.4 36.6 0058 1.05 8.9 66.4 0.60 0.1 5308 5609 Machine 75.4 28.7 0086 1.15 8.0 66.8 0.66 1.02 65.8 13.3 Elect. 31.2 24.1 0038 0.72 9.0 70.9 0.47 0.29 67.0 7.1 Trans. Equip0 56.3 23.0 0029 0.62 11.4 76.7 0.33 0.76 78.5 17.7 Source: Field Survey Data co \0""" Appendix 3. Statistics of Technological and Economic Activities of Selected Industries (1975) Royalty Technical sales by Exports by payments by fees in Industry Output bX 4 1ar~est Exports by 4 1ar~est 4 1ar~est turn-key industry{a) firms b) industry(c) firms d) firms e) projects(f) ($1,000) ($1,000) ($1,000) ($1,000) ($1,000) ($1,000) Food Processing 2,040,167 325,086 269,165 71,129 367.2 65.0 Synthetic Fibre 730,515 353,620 399,350 258,976, 474,6 1,237.6 Cotton Textile 1,365,903 210,602 742,520 187,535 13.8 21.0 Chemicals 660,602 256,688 75,085 51,085 1,400.0 458.4 Fertilizer 285,117 280,841 5,350 5,350 (2,246.7) 2,527.5 Oil Refining 1,915,465 1,591,762 124,302 124,302 (47,752.8) (47,752.8) Stee1 and Iron 925,053 466,012 224,736 170,635 2,796.7 459.1 Machinery 162,420 122,511 75,376 35,202 815.4 1,252.2 Electric and Electron Equipment 1,094,037 340,814 505,318 82,040 1,626.8 988.6 Transportation Equipment 860,208 484,478 (115,750) 111,615 1,596.6 3,698.0 Total 10,039,487 4,432,414 2,536,952 1,097,869 59,089.6 58,460.2 .... 1.0 0 Appendix 3. (Continued) Statistics of Technological and Economic Activities of Selected Industries (1975) Skilled and R&D R&D scientist~ semi-skilled Total Industry expenditures(g) and Engineers ) Engineers(i) workers(j) employment(k) Assets(l) ($1,000) (1 person) (1 person) (1 person) ($1,000) Food Processing 686.3 57 615 4,993 9,418 178,000 Synthetic Fibre 1,893.6 72 1,038 21,670 29,312 395,712 Cotton Textile 107.2 16 429 12,793 15,419 259,039 Chemicals 1,179.4 84 745 5,116 8,147 118,946 Fertilizer 476.0 18 593 2,603 4,487 258,137 Oil Refining 159.2 10 735 1,842 4,119 562,984 Stee1 and Iron 2,-701.0 133 1,141 8,421 12,682 721,649 Machinery 1,284.5 104 721 6,019 8,998 119,943 Electric and Electron Equip. 1,284.5 157 ·1,948 15,339 21,610 152,998 Transportation Equip. 1,451.3 146 2,668 18,020 23,475 415,436 Total 11,004.4 797 10,651 96,816 137,667 3,182,844 ...... \0 Notes: (a) and (c): data are from the working sheets of GNP estimates (1975) of the Bank of Korea. There are statistical discrepancies largely due to the nature of tentative estimates. (b) and (d): data are calculated from question #1 of my field survey questionnaires. (e) data are calculated from question #9 of my field survey questionnaires. The figures in () are calculated at 3% of firms' sales when they are involved in foreign investment. (f) data are calculated from question #5 of my field survey questionnaires. The figures in ( ) are calculated at 3% of firms' sales when they are involved in foreign investment. (g) data are calculated from question ~n of my field survey questionnaires. (h) data are calculated from question fft13 of my field survey questionnaires. (i), (j), and (k): data are calculated from question #12 of my field survey questionnaires. (1) data are from various sources, i.e. the financial statements submitted to the Korea Stock Exchange, The Korea Productivity Center's The Survey of Korean Enterprises: 1976, the bulletins published by firms, etc. t-' \0 N 193 Appendix 4. Survey Method and Questionnaire The statistical data used in this study were collected by means of a questionnaire which is attached to this appendix. The questionnaire was designed to discover information from each firm concerning selected economic and technological activities that constitute the major variables of this study. The field survey was carried out in Korea in 1976. Because of its complicated nature, the interview method rather 1 than mailing was employed. Without delicate and elaborate approaches to respondents, questionnaires are likely to sleep in the file cabinets of the respondents. After identifying the right person in a firm who can answer the questionnaire, I made an appointment for the first interview. It usually took one or two days for me to complete the initial processes of identifying the interviewee of a firm and explaining the questionnaire. The interviewees were usually from middle or high management who were in charge of planning and/or research and deve1op- mente In many cases the figures and answers on a questionnaire were taken from several different departments and sections of a firm. It usually took formal approval and cooperation from top management to gain approval for a corporation official. It was a rather tedious and time consuming process for the respondents to answer the questionnaire. I would like here to acknowledge their kind cooperation in responding to my questionnaire. 1 The difficulties of the latter method were vividly exemplified by B. CohenI s problems in carrying out his survey in South Korea, Taiwan and Singapore. see Benjamin Cohen, ~. cit. 194 However, six firms out of the 40 sample firms declined to answer. The reasons for declining to answer varied but they were mainly due to their firm I s policies. Data on the firms that would not cooperate were collected fran various sources: the financial statements submitted to the Korean Stock Exchange which provided useful information of sales, export, employment structure (e.g., employment statistics classified occupational groups, executive staff, engineers, and skilled and manual workers), etc.; the questionnaires of R&D surveys by the Ministry of Science and Technology which have been conducted annually supplied supplemental data on R&D activities of my questionnaire (e.g., R&D spending, the number of engineers and scientists engaged in R&D activities); and other sources, e.g., the daily newspapers and monthly magazines (journals) enabled me to collect data which were missed by my field survey. The 40 largest firms were selected from 10 selected industries in the manufacturing sector (with the four largest firms selected in each industry). The 10 industries were selected on the basis of their weights in terms of their strategic importance based on economic growth, techno logical characteristics, export performances, foreign investment, etc. The 10 industries are: food processing (except grain mills), cotton textile, synthetic fibre, chemicals (except oil refining and fertilizer industries), oil refining, fertilizer, steel and iron, electric and electronic equipment, and transportation equipment industries. In selecting the 10 industries the data in Table A-I were used: the table shows that the sample industries cover more than 90% of total foreign investment, royalty payments, and export by foreign firms in 195 Table A-I. Foreign Investment, Royalty Payments, and Exports by Foreign Firms in Korea Unit: US$ million Foreign Royalty Exports by Industry investment payments foreign firms (1953-70) (1959-73) (1970) Food Process 1.8 .4 .5 Textiles and Synthetic Fibre 20.5 2.5 23.7 Chemicals 23.5 3.3 29.4 Oil Refining 37.5 4.9 Steel and Iron 10.8 .2 1.2 Machinery 7. 3 2.3 1.0 Electric and Electronic 48.7 2.7 28.0 Transp. Equip. 10.9 Included in machinery Others 23.3 1.2 6.3 Total 205.4 112.4 Note: All numbers are at project approval basis. There are statistical discrepancies. Source: Economic Planning Board (Korea) 196 terms of US dollars. The four largest firms in each industry were selected in terms of their sales volume performed in the calendar year 1974. For the selection of the largest firms I referred to two information sources: Korea Productivity Center I s The Survey of Enterprises in Korea: 1975, and the list of the 100 largest firms in Korea which appeared on the daily newspapers of Korea on October 11, 2 1975. The decision to use the largest 'firms was due to the fact that they are crucial for the measurement of the degree of industrial concentration and that they are considered important agencies for international technology transfer on the theoretical ground that modern technology requires a sizable commitment of resources. The data of the 40 largest firms are not disaggregated at the level of the individual firm because the basic unit of analysis of this study is not the individual firm but the industry, and because the primary aim of this study is to investigate the characteristics of the industry. However, I found in the course of analysis that the group of the four largest firms in each industry clustered closely around the mean for that industry on the various variables, reflecting the characteristics of the industry. The data collected by ~ field survey were lUnited to the year 1975. The original intention to cover the period 1970-75 could not be carried out because the data were not available. 2 See Korea Productivity Center, Hankuk Kiupchae Josa Chongram (The Survey of Enterprises in Korea: 1974 and 1975), (Seoul: KPC, 1975 and 1976); and Hankuk Ilbo, October 11, 1975. 197 Questionnaire This is a copy of the questionnaire that was used for my field survey of the 40 largest firms of the 10 selected manufacturing industries in Korea. Name of Company: Address of Company: Phone: Product Produced: First Year of Production: (1) sales and Exports: Year Total Sales Exports (Million) ($1,000) 1970 1971 1972 1973 1974 1975 Total (2) What is the distribution of exports by major market? Unit: $1,000 Markets 1970 1971 1972 1973 1974 1975 U. S.A. Japan W. Europe Asia Others Total 198 (3) Export selling done mainly by: Primary Secondary 1. Your company or affiliate ( ) ( ) 2. Domestic commission agent ( ) ( ) 3. Foreign trading company ( ) ( ) 4. Others (please specifY) ( ) ( ) (4) Have you received any foreign capital in the form of foreign investment or loan? Form of Supplier Amount Period foreign or Remarks ($1,000) capital partner (5) What is the composition of foreign capital? Unit: $1,000 Equity or Cash Equipment and Machinery Raw materials Technical services* * Technical services include: 1) royalty payments for patents or know-how; 2) costs of engineering consultation by foreign experts; 3) costs of transferring engineering information; 4) costs of supervising the detailed engineer ing; 5) R&D costs involved in adapting the equipment; 6) other costs relating to technical services. (6) What are the main factors which led you to make a decision to induce foreign capital? Primary Secondary -Minor 1. To introduce equipment for ( )( ) ( ) new process 2. To introduce equipment for ( ) ( ) ( ) new products 3. To replace old machines () ( ) ( ) 199 4. To get financial capital ( ) ( ) ( ) (foreign exchange) 5. To get access to technical ( ) ( ) ( ) advantages (patent, know-how, ecc.) 6. To get access to int'1 market ( ) ( ) ( ) facilitated by foreign firms 7. To get advantage offered by ( ) () ( ) Korean government 8. Others (please specifY) () ( ) ( ) (7) Do you devote any part of your annual investment to research and development (R&D) expenditures? Are the R&D activities performed in your company or under contract with outside research institute(s) in Korea? Please give your appropriate annual expenditures. Unit: Million Classification 1970 1971 1972 1973 1974 1975 Basic Research Applied Research Experimenta1 Development Improvement Other Technical Activities Total Definitions: 1) Basic Research: original investigations for the advancement of scientific knowledge without specific commercial objectives; 2) Applied Research: investigations to try to discover or invent new scientific knowledge with specific commercial objectives in mind; 3) Experimental Development: the translation of research findings into products or processes; 4) Improvement: investment in learning for the adaptation of the product or process or design improvement; 5) Other Technical Activities: activities associated with technical assistance to production such as quality control, trouble-shooting, debott1e necking, maintenance, etc. 200 (8) What were the main effects of your R&D expenditures? For example, have you any patent or know-how derived from such expenditures or sales increase by design improvement, etc.? Please describe briefly. (9) Have you had any license agreement or technical assistance contract with a foreign company? How much did you pay for such arrangements? Unit: $lzOOO Payment for 1970 1971 1972 1973 1974 1975 Patents Know-how Trade-marks Technical services Management fees Others (please specify) Total (10) Have you ever replaced major production equipment during the period 1970-75? (a) What were the major reasons? Primary secondary Minor 1. To replace worn-out equipment ( ) ( ) ( ) 2. To expand capacity ( )( ) ( ) 3. To install new equipment for new products ( )( ) ( ) 4. Others (please specify) ( ) ( ) ( ) 201 (b) What was the composition of construction costs of production equipment or plant? Amount ($1,000) i. Equipment or other facilities ( ) 2. Payments for patents or know-how ( ) 3. Costs of engineering consultation ( ) 4. Costs of transferring engineering information ( ) 5. Costs of superVising the detailed engineering ( ) 6. R&D costs involved in adapting the equipment ( ) 7. Other costs ( ) Total ( ) (11) What do you think were the main advantages and disadvantages (weakness) of using foreign technical services in technical and economic terms, compared with using domestic technical services? Please describe briefly. (a) Advantages: 1. 2. 3. (b) Disadvantages: 1. 2. 3. (12) What is the composition of employment in your company? Occupational group 1970 1971 1972 1973 1974 1975 Executive and management Scientists and engineers Technicians and skilled labor Secretarial and clerical workers Unskilled workers Total 202 (13) How many scientists and engineers are engaged in R&D activities in your company? Year 1970 1971 1972 1973 1974 1975 Number Bibliography Adelman, M. A. "COlJIDlent on the 'H' Concentration as a Numbers Equivalent," Review of Economics and Statistics LI-1 (Feb., 1969), pp. 99-101. Agency for Science and Technology (Japan). Handbook of Science and Technology, Tokyo: AST, 1973. 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