December 2011 Korea Institute for Industrial Economics & Trade(KIET) 66 Heogiro, Dongdaemun-gu, Seoul 130-742, Korea Tel : 82-2-3299-3114 Fax : 82-2-963-8540 URL : http://www.kiet.re.kr
2011 Summary of Research Papers Published on December 30, 2011 in Korea by KIET 2011 KIET ISBN 978-89-5992-461-5 Contents
Policy Tasks for the Shared Growth between Big Corporations & SMEs 5 Regional Analysis on the Efficiency and Effectiveness of the Investment in the Korean Manufacturing Sector 23 Industrial Linkages and Business Cycles in Korea 43 A Study on the Relationship between Green Competitiveness and Productivity 61 Determinants of Technology Innovation Performance in the SMEs of Korea and Policy Implications 83 The Spatial Pattern Analysis of Economic Activity 105 The Change of Specialization Structure in Component and Material Industries among Korea, China, and Japan and the Suggestions for Korean Policy Issues 133 Employment Performance of the Innovation-type SMEs and the Policy Implications 155 Analysis of the Critical Factors of Job Creation in Gazelle Regions 189 A Study on the Development of Green Industry in Korea through the Analysis of Corporate Innovation Systems (CIS) 205 Analysis of Trade Effects of the Korea-Chile FTA and Implications 241 Policy Tasks for Enhancing Innovation Activities in Korea’s Service Industries 267 Structural Change Analysis and Policy Suggestions for Strengthening Competitiveness of Korean Retail Industry 309 Promoting Technology Commercialization in the Korean Private Sector 333 Industrialization Conditions of a New Growth Engine and It’s Policy Implications 361 R&D Outsourcing and Firm Performance in Korea 387 A Study on the Strategic Fit of Service Innovation Patterns 413 A Study on the Competition Factor in Exports 437 A Study on the Management & Investment Strategy in “Smart Era” for Improving Firms’ Competitiveness 461 Conditions and Policy Tasks for Sustaining the Growth of Korea’s Global Leading Industries 487 Indicator Analysis on Regional Development and Policy Implication 511 Determinants of German Green Industry’s Development and Implications for Korean Policy 535 Promotion and Improvement of Regional Industrial Promotion System 557 Facilitating a Convergence between Small-and-Medium Sized Enterprises in Different Business Sectors 581 Analysis on Firm’s Strategic Behavior for Recall 603 Analysis of Export Diversification Pattern in Korean Industry 627 An Analysis of the Effects of FTAs on the Direct Investment to and from Korea 647 Policy Issues for Promoting New Businesses and Strengthening Sustainability in Green Industry 663 Finance Mechanisms to Catalyze the Development of Newly Growing Sectors 695 Research Report 2011-590
Policy Tasks for the Shared Growth between Big Corporations & SMEs
Hyun Ju, Ji-Sung Hong and Seok-Il Hong
Policy Tasks for the Shared-Growth between Big Corporations & SMEs 7
Chapter 1. Introduction
This study was intended to actively promote growth shared by large chaebol conglomerates and small-/medium-sized enterprises (“SMEs”), and to propose what role and tasks the government should carry out in order to foster an industrial eco-system conducive to maximization of the results. Based on the discourses on business administration especially with regard to the collaboration between conglomerates and their counterparts, conventional studies presume that the two actors share common interests. Then, they go on to propose theories of the collaborative cooperation of the two, from the perspective of competitiveness and the value chain. In reality, however, large and small enterprises do not always share common grounds. Unlike the previous cooperation-oriented approach mainly focusing on corporate competitiveness, this study develops our view focusing on fair trade and cooperation aspects of shared growth. 8
Chapter 2. Attitudes on Shared Growth
1. Concept and Components of Shared Growth
Herein, growth shared by large and small companies refers to common economic activities designed to continue and develop mutually beneficial business relationship between them, and to achieve sustainable economic advance. In practice, “fair trade” and “cooperation” are the two main criteria for classification of corporate economic activities concerning shared growth of large chaebols and small enterprises. One of the major components of the growth lies in how to create a shared growth-friendly system contributing to the aforementioned two themes.
2. Necessity of Shared Growth
Shared growth is required in many respects. First, it is vital for securing a sustainable competitive edge in this ever-changing global management environment. Second, it contributes to advancement of our national economy in that it helps create quality jobs, coupled with sustainable growth. Third, it is conducive to realization of fair society where equal opportunity, fair competition, and merit-based distribution of results are to come true.
3. Roles of Large and Small Companies for Shared Growth
Large enterprises lead the efforts toward shared growth. Large Policy Tasks for the Shared Growth between Big Corporations & SMEs 9 chaebol conglomerates should recognize the necessity of shared growth and that of relevant strategies. Therefore, they should restrain themselves from abusing their superior power, and endeavor to boost the competitive edge of the entire corporate network, and enforce their social responsibilities with regard to sustainable growth. On the other hand, SMEs should qualify themselves to be partners for shared growth. They, for example, may establish autonomous ethical and transparent management and entrepreneurship, and improve their competitive edge as equal partners through continuous self-innovation. In addition, SMEs should endeavor to abide by the rules of fair trade and to strengthen cooperation.
4. Understandings and Attitudes toward Shared Growth
A survey was conducted to look into how the public, large chaebols, and small businesses understand and what attitude each of them has toward shared growth. The survey conducted on the public reveals that 81.2% of the respondents believe unfairness exists between large conglomerates and SMEs, while 88.1% of the participants deem shared growth important for sustainable advance of our national economy. In addition, 61% of the respondents South Korean see the level of shared growth in South Korea below what they deem appropriate. And additional 52.8% support a more active role by the government for that purpose. Yet additional 51.8% believe that the government policies on the growth help large chaebols 10 enterprises increase their global competitive edge. In the meanwhile, in a separate survey of corporations, 41.8% of the conglomerates responded that the business relationship is fair, while only 10.5% of the SMEs answered positively, showing a considerable gap between them. The two groups of corporations share a common understanding of the necessity and significance of shared growth with 90.9% of large chaebols enterprises and 93.8% of SMEs agreeing on its importance in achievement of sustainable economic growth. Further, 56.4% of the former and 14.5% of the latter responded that the groups share growth. Meanwhile, they also showed a sharp division as to the role of the government with 18.2% of the big companies and 62.9% of the small companies requiring an active role by the government. 58.2% of the large companies and 58.9% of the SMEs believe that the government’s policies for shared growth contribute to global competitiveness of the former.
Chapter 3. Attitudes on Shared Growth
It is necessary to understand shared growth itself and set forth effective policies to comprehend whether or not shared growth- oriented activities boost business activities and how, if any, the activities do so. We reviewed domestic cases, assuming that cooperative and mutual activities of large chaebols and small enterprises benefit companies participating in the shared growth drive. We take the objective and subjective financial indicators as Policy Tasks for the Shared Growth between Big Corporations & SMEs 11 variables in our empirical assessment of corporate performance: for the former, increase in gross sales volume (potential for growth) and operating profit ratio (profitability); and the contribution actually perceived by subject companies. Level of cooperation by each corporation for shared growth was measured by its level of participation in 19 subcategories including financial aids, R&D, production, sale, business management. Meanwhile, a scale of five points was employed to self-measure the level of mutual trust based on, for example, previous business deals. As basic statistic data for measuring analysis, explanatory variables were taken from the Survey on Collaborative Cooperation between Large and Small Companies (participated by 159 conglomerates and 1,032 SMEs), while the financial statement for each participant company, prepared by South Korean credit bureaus covering 2008 to 2010, was used to delineate variables indicating financial business growth of each. To assess each participant company’s level of shared growth- friendly participation, three parameters were set: active, average, below average. Neither large enterprises nor SMEs showed a statistically significant difference, through financial growth analysis, in terms of sales growth and operating profit ratio. They, however, showed a different trend in the subjective assessment of contribution perceived by each company. The analysis showed that the more active movement a company has made for shared growth, the more contribution it significantly feels than a less active one did. The findings mean that we need to consider or control the numerous variables affecting the financial performance of a 12 company than the activities for shared growth. In particular, the corporate performance of a domestic company hugely depends on factors like applicable industry, business size and economic situations at that time. Aware of the complexity, we adopted multiple regression analysis to control the compounding factors and to fine-tune our assessment of the impact on corporate performance of shared growth-oriented cooperation and mutual trust. Concerning gross sales increase and profit ratio, the analysis did not produce any statistically significant effect, in terms of the cooperation and mutual trust, with regard to large chaebols and small enterprises. On the other hand, the analysis proffered a statistically positive (+) correlation between shared growth- oriented activities/mutual trust and the subjective contribution perceived by participant companies. Putting into perspective the results of variance and multiple regression analyses of the shared growth-oriented activities’ effects on business growth, it seems appropriate to conclude that the activities and the trust factor contribute to the growth of a participant corporation, not because they are disconnected therefrom. Despite the principle that our analysis should be limited to the activities and ensuing contribution, our study must incorporate herein the lingering effects of additional factors, including limitations of measuring analysis itself, dire changes arising out of global financial crisis and trustworthiness of financial statements of SMEs. We conducted another variance and multiple regression analyses on the groups of large and small enterprises maintaining Policy Tasks for the Shared Growth between Big Corporations & SMEs 13 the same level of cooperation, with each taking the “perceived contribution” as final effect variable for its high statistical significance, to understand how the activities and the trust factor affect performance of a company. It followed that mutual trust between conglomerates and SMEs not only directly and positively (+) affects growth, but also indirectly, via shared growth-oriented activities, leaves positive (+) effects as well. In other words, when analyzing how effect variables affect through structural equation modeling, mutual trust directly contributes to corporate performance (as being felt by participant companies) by 0.22 for large chaebol companies and 0.24 for SMEs; and indirectly, via shared growth oriented activities, by 0.11 for the former and 0.07 for the latter. In total, it was estimated that it contributes by 0.33 to growth of conglomerates and by 0.31 to that of SMEs. It transpired that shared growth-oriented corporate activities make a 0.33 contribution to the growth of the former, and 0.31 to the latter. Considering the results of the aforementioned path analysis, mutual trust between the two sides is as important as shared growth-oriented activities, and doubles its impact on business performance when coupled with high level of trust. What follows is that it is necessary to address, in a very serious manner, how to boost mutual trust, along with the activities. 14
Chapter 4. Status and Evaluation of Corporate Programs for Shared Growth
1. Scope and Method of Analysis
For the purpose of our assessment, we classified shared growth-oriented programs of conglomerates into 7 categories after narrowing them down to 25 programs.
2. Status of Programs
Based on the programs of 31 conglomerates out of a total of 56 companies subject to evaluation for the shared growth index, we looked into how the programs had progressed. It followed that the programs are most active in the fields of improvement of trade conditions and cooperation concerning financial aids, and, industry-wise, in the fields of machinery, auto and shipbuilding. In regards to the features of each business area, programs are actively carried out across the board, expect for the area of cooperation in marketing. Especially, the programs are eagerly pursued with regard to fair trade practices and financial aids, and relatively actively pursued with regard to implementation of a system for shared growth. As to attributes of each industry, cooperation is actively conducted in connection with manufacturing in the industries of electricity, electronics, machinery, auto and shipbuilding, while it stands out in the areas of marketing and business management for wholesalers and retailers. In addition, communications, and information and Policy Tasks for the Shared Growth between Big Corporations & SMEs 15 technology industries watch a relatively high level of cooperation in the R&D area. Meanwhile, the survey revealed that large and small enterprises show a higher level of interest in shared growth- oriented programs than that of the previous year. It was verified that South Korean conglomerates provide a larger number of higher quality programs, showing an agreed-upon assessment by the two sides.
3. Programs’ Supply and Demand, and Contribution to Corporate Performance
The KIET (Korea Institute for Industrial Economics & Trade) conducted a survey titled “Report for Assessment and Revision of Shared Growth-oriented Programs” on 55 conglomerates and their 304 suppliers, and we analyzed valid responses therefrom to figure out whether or not supply of 25 shared growth-oriented programs meet the demand and how much contribution they make to corporate growth. First of all, large chaebols and small businesses show a considerable gap of perception as to supply and demand of the programs. The latter show a high level of demand in most of the programs, and deem the programs provided by the former insufficient to meet the demand. On the other hand, large enterprises believe their supply outpaces the market need, although they do not satisfy the need of their suppliers in some areas. The imbalance stands out the most concerning the programs 16 targeting terms of business such as increase of cash payment and shortening of pay cycle, a group of programs that both sides agree to be in dire shortage. But the big companies do not believe that their supply of programs is insufficient in most other areas of cooperation and system construction, considering the demand of their suppliers. Still, the former opined that their supply does not sufficiently meet their own demand concerning such fields as technology commercialization, domestic and overseas marketing assistance, joint advance into overseas markets, support for welfare, and sharing of profits. Next, according to the survey, both sides acknowledge that all of the 25 programs bring about positive effects to growth of them. Most programs, however, prove to be more helpful to SMEs than to large enterprises. They also show significant differences as to the individual programs that are helpful to each of the enterprises. Chaebol companies responded that the programs are contributory in the R&D area (e.g. joint R&D projects, and transfer, advice and exchange of technology), the manufacturing area (e.g. improvement of manufacturing process, assistance in quality improvement, provision of manufacturing equipment, and conveyance of businesses and facilities), and the area of implementation of shared growth-friendly system (e.g. strengthening of dialog, expansion of exchange, open bidding system, and advance notification of purchase orders. On the contrary, SMEs believe the programs have remarkably improved fairness in transactions, directly affecting corporate performance in terms of increased cash payment, shortening of pay cycle, and adjustment of supplying price. Further, also greatly Policy Tasks for the Shared Growth between Big Corporations & SMEs 17 helpful to business growth are the programs concerning joint R&D projects, direct financial aid, improvement of manufacturing process and quality maintenance, joint advance in overseas markets, sharing of profits, and advance notification of purchase orders.
4. Major Issues with Programs and Pragmatic Alternatives
We have scrutinized the programs of the private sector, and reviewed issues concerning major programs and possible alternatives. First, as to financial aid programs, large enterprises mainly concern themselves with the recoverability of their loans, and, therefore, try to loan funds to healthy SMEs alone. Healthy suppliers, however, seldom encounter the need to receive funds from the big counterparts. Hence, the financial aids from conglomerates focus not on enrichment of SMEs’ liquidity, but on relief of their operational burden. Chaebol companies should endeavor to strengthen their efforts to meet the actual monetary needs of SMEs, and help them in need of funds. Second, as global competition gets fiercer, pursuit of joint R&D projects has constituted the core of the shared growth initiative, yielding volumes of results, despite the differences of individual industries and corporations. But, improvements are yet to be made due to lack of shared understanding about the joint efforts, convention of conducting joint development projects behind closed doors, lack of correlation between achievement and rewards, and illegal leakage of specialized technology of suppliers. 18
Third, as to programs geared up for improvement of productivity, conglomerates assist their suppliers via a variety of vehicles, including technical advice, innovation of manufacturing process, and educational and training programs. Due to the priority on development of new products, the importance of innovative production has faded out. The situation highlights the necessity of narrowing the gap between understandings of the two, improving rewarding systems and lowering consultation quality. Fourth, despite the good intentions and expected effects surrounding the client’s material-supping programs, it has produced a number of problems during its operation such as dwindling size of suppliers’ businesses, risk of a supplier’s collapse into a pure processing entity, increasing pressure by a large chaebols enterprise to lower supply prices caused in connection with disclosure of the prices of raw materials, and conglomerates’ abuse of the program to expand their business territories. To appease the anxiety and concern of suppliers, it seems effective for the big corporations to enforce it only with the suppliers wishing to participate in it, and to reflect the price changes to raw materials in adjustment of supply prices, in consideration of suppliers’ higher demand for adjustment of supply prices than the client’s material-supping program. Firth, globalization of our conglomerates has instilled dynamic force in the category of joint advance in overseas markets. In most cases, the joint move was motivated by the needs of large chaebols enterprises. That way, they are able to share the investment risks with their suppliers. The suppliers, however, Policy Tasks for the Shared Growth between Big Corporations & SMEs 19 share the risks in addition to bearing their own risks from the investment. In other words, unfair burden arises. Therefore, it is necessary to relieve suppliers of their own risks, to guarantee them a certain volume of purchase and to secure conditions of fair trade for them. Sixth, it is important to provide long-term visions and plans for development and management of the programs. That way, human resources development brings about significant results. In addition, it also carries an importance to discover and promote exemplary cases, and, thereby, to have it applied to all conglomerates. What concerns participant SMEs most is the imbalance between what they need and what are provided to them. Therefore, in that context, it is required to reflect what suppliers need via feedback and monitoring. Furthermore, it is necessary to alleviate the anxiety of the suppliers that big enterprises abuse the programs to recruit qualified human resources of theirs in order to entice more active participation by them. Moreover, what poses another significant problem lies in how to expand the scope of the programs to 2nd- or lower-tier suppliers/subcontractors and to consistently and continuously enforce them. Seventh, the idea of sharing profits constitutes the very desirable model of cooperation in that economic initiatives entice voluntary efforts from the SME side and that large enterprises get to share part of the profits. The idea, however, has not been so widely adopted. We should produce the soil that is conducive to its wider adoption, and build incentive systems to encourage more participation of individual employees in the sharing. 20
Chapter 5. Government’s Role and Tasks as Guardian of the Eco-system
1. Overview
The relations between large chaebol companies and suppliers started to receive attention from mid- 2010, and the public attention placed the policies for shared growth earnestly back on track to implementation. Announcing the measures to pursue shared growth for large and small companies in September of 2010, the government proffered 15 agendas in 4 categories to be accomplished, and has been pursuing them in earnest. Reading the features out of the details of the policies, several features catch our attention: First, fair trade commands priority than cooperation; second, the scope of shared growth extends to 2nd- and lower-tier suppliers/subcontractors; third, it is intended to improve the trade relations between large chaebols and small companies, the relations that exist not only between the former as buyer and the latter as supplier, but also between the former as supplier and the latter as buyer; fourth, the policies aim at protecting the business areas of SMEs; fifth, improvement of a supplier’s competitiveness constitutes part of the growth policies; and, sixth, the government has set up the Commission on Shared Growth for Large and Small Companies, and has tallied and published the shared growth index to settle the system in society. Policy Tasks for the Shared Growth between Big Corporations & SMEs 21
2. Progress and Problems
Since the introduction of shared growth-oriented policies, our society has built up, for the past year, a consensus on the need for shared growth. That is the greatest achievement made so far. The government has gained other results as well, such as improvement of trade and cooperative relations between large chaebols and suppliers. The findings are confirmed by various surveys conducted on government bodies and corporate representative bodies (i.e. the Federation of Korean Industries for large companies and the Korea Federation of Small and Medium Business for small entities). Despite the palpable accomplishments of the policies, criticism and skepticism have continued. The core of the opposition alleges that the notion of shared growth rejects government involvement by its nature, and should be pursued voluntarily and autonomously by the private sector. In other words, the government should restrain itself from poking too much into the process. Instead, it should focus on its role as guardian for implementation of the eco-system, on the provision of legal and institutional infrastructure and on regulation of the market. 22
3. Principles and Strategies of Policies
Goal Implementation of industrial eco-system for shared growth
Encouraging Supporting Implementati Strategies Expanding adoption of Establishment programs to on of shared for the scope of reasonable of fair trade encourage growth- Implement shared payment practices corporate friendly ation growth methods cooperation system
4. Policy Agendas
Strategies for Tasks to be performed implementation a. Encouraging wider adoption of reasonable methods of Encouraging determining supplying price adoption of b. Encouraging wider enforcement of profit sharing reasonable payment methods c. Encouraging swift reflection of changes to raw material prices in adjustment of supply price a. Deterring arbitrary underpayment and oral order Establishment of fair b. Strengthening protection of suppliers’ technology trade practices c. Enforcing fair trade for 2nd- and lower-tier suppliers/subcontractors d. Strengthening control over unfair trade practices of large retailers a. Enhancing practicability of financial aids b. Supporting joint R&D programs Supporting programs to c. Supporting programs to increase productivity encourage corporate d. Alleviating anxiety over client’s material-supplying programs cooperation e. Preparing practical methods of support for joint overseas advance f. Supporting programs to develop human resources a. Expanding the pool of companies participating in shared growth
Expansion of the b. Pursuing collaborative cooperation with secondary scope of shared suppliers/subcontractors growth c. Establishing shared growth-oriented strategies tailored for each industry d. Strengthening state-owned companies’ leading role Implementation of a. Building private sector-led voluntary system for shared growth shared growth- friendly system b. Building support system for shared growth by the government Research Report 2011-591
Regional Analysis on the Efficiency and Effectiveness of the Investment in the Korean Manufacturing Sector
Jae-Gon Park, Chang-Uk Byeon and Yoon-Seon Jeong
Summary 25
Chapter 1. Introduction
The role of investment in bringing about stabilized growth and job creation within regional economies has long been emphasized. However, while a heavy emphasis has been placed on the activation of investment, interest in the efficiency of such investment has been limited, with practically no studies having been conducted on this topicIn addition, there has been a concrete lack of analyses and studies on the the extent to which investment has contributed to the growth of regional economies and job creation. Therefore, as part of efforts to develop the basic materials needed to establish regional investment policy that helps to improve the efficiency and effectiveness of regional investment, the present study reviews the efficiency of regional investment and analyzes the effectiveness of investment. The efficiency of investment can be measured based on the ratio of outputs to inputs. In this regard, capital productivity and the profit rate of capital are used as measurement indicators. The 26 effectiveness of investment differs depending on the nature of the goals sought through such investment. The review of the effectiveness of investment in regional economies conducted in this study is based on the following three premises. First, investment increases production through capital formation, which facilitates the growth of regional economies by increasing value added. Second, employment is created during the process of increasing production. Third, an increase in investment within a specific industry can generate a industrial linkage effect that in turn facilitates the growth of other industries. The results of this study can be used as basic materials with which to assess investment performance up until this point. This in turn will contribute to establishing region-specific directions for investment in the future so as to improve investment efficiency and heighten its contribution to economic growth. Furthermore, this study can also be used to increase the effectiveness of policies related to the establishment and planning of regional industrial policy.
Chapter 2. Data review and analysis of investment trends
This study examines the efficiency and effectiveness of investment across various regions and industries. To this end, this study employs the Mining and Manufacturing Survey because this document contains region and industry-based investment data. However, given some inherent differences with the data found in the National Accounts, a certain caution should be exercised with Regional Analysis on the Efficiency and Effectiveness of the Investment in the Korean Manufacturing Sector 27 regards to the data in the Mining and Manufacturing Survey. First, the data pertaining to value added found in the Mining and Manufacturing Survey can be considered to be somewhat overestimated when compared to related data found in the National Accounts. This is because the former includes only the direct production costs needed for production as an intermediate input, while omitting the indirect production costs needed for commercial transactions. As this influences the estimation of capital productivity and the profit rate of capital, extra caution should be exercised when interpreting this particular data. Second, in the data from the Mining and Manufacturing Survey, capital stock is estimated at 220 trillion won, a much lower figure than the 900 trillion won recorded in the National Wealth Statistics. Third, the share of labor income in the Mining and Manufacturing Survey is estimated at an average of 28%. However, it is estimated at 63% in the National Accounts when based on factor income and 51% based on value added. Because of the inherent survey data nature, the Mining and Manufacturing Survey is characterized by greater variances in general than the data from the National Accounts and lower consistency over time. Nevertheless, the use of the data from the Mining and Manufacturing Survey constitutes the only feasible way to prepare pertinent estimations at the regional and industry levels. The present study analyzes investment trends at the individual region and industry levels using factors such as the ratio of fixed capital formation, capital coefficient, ratio of capital accumulation, alternative investment ratio and the capital equipment ratio. A drop in the ratio of fixed capital formation and capital coefficient 28 was found to result in the speed of capital accumulation becoming slower than that of value added. Looking at investment trends by industry, the present study found that the electrical & electronics, petrochemical, steel, and transport equipment industries exhibited higher investment and capital stock levels than others. This outcome is believed to be the result of the fact that the increase in capital stock slowed down as the ratio of capital substitution increased, regardless of the drop in capital accumulation.. Moreover, it can also be attributed to the fact that capital obsolescence became faster as the use of capital increased. Capital accumulation and capital substitution were revealed to be particularly high in the electrical & electronics industry. A capital deepening phenomenon was observed when the capital equipment ratio increased.
Chapter 3. Analysis of investment efficiency
In addition to the quantitative expansion of investment, there is also a need to heighten the efficiency of investment. Investment efficiency is interpreted herein as capital efficiency. In turn, capital productivity and the profit rate of capital can be used as indicators for capital efficiency. As the correlation between capital productivity and the profit ratio of capital was found to be very high, the present study focused solely on capital productivity. To this end, capital productivity was found to continuously increase. While capital productivity was high in the capital area, southeast region, and the Daegu-Gyeongbuk region, the Chungcheong and Regional Analysis on the Efficiency and Effectiveness of the Investment in the Korean Manufacturing Sector 29
Honam regions exhibited low levels of capital productivity. Moreover, while the food & beverage, textile & apparel, and machinery & metal industries had high levels of capital productivity, , the wood & paper, petrochemical, non-metallic materials, steel, electrical & electronics, and transport equipment industries suffered from low capital productivity. Industries with high levels of capital productivity were found to have a high ratio
Analysis results of capital productivity by industry
Food Textile Machi Electr Trans Manu & & Wood Petro- Non- nery ical & port factur bever appar & chem metal Steel & electr equip ing age el paper ical lic metal onics ment Seoul Busan Daegu Incheon Gwangju Daejeon Ulsan Gyeonggi Gangwon Chungbuk Chungnam Jeonbuk Jeonnam Gyeongbuk Gyeongnam Jeju Note : indicates very high, indicates high, indicates average, indicates low, and indicates very low levels. The empty cells represent industries with capital stock levels that are low or lower than the average for the industry. 30 of labor, and typically belonged to light industries or industries with a relatively low ratio of capital stock such as the machinery industry. Only the capital productivity of industries whose capital stock exceeded a certain level was measured. While Gyeonggi, Ulsan, Gyeongbuk, and Gyeongnam exhibited high levels of capital productivity within the overall manufacturing industry, Chungnam and Jeonnam were found to have low levels of capital productivity. Viewed from the standpoint of industry, while the Gyeonggi region exhibited a high level of capital productivity as far as its machinery & metal industry was concerned, Gyeongnam and Incheon exhibited average levels for this industry. The Gyeongbuk region exhibited higher than average capital productivity in the electrical & electronics industry while Chungnam and Chungbuk exhibited low levels of capital productivity. Meanwhile, Ulsan exhibited very high capital productivity in the transport equipment industry. For their parts, Gyeonggi exhibited average levels of capital productivity and Gyeongnam low capital productivity.
Chapter 4. Analysis of investment’s contribution to economic growth
Investment is input to production via capital formation. The contribution of capital to economic growth, which represents one of the production factors, can be measured based on growth Regional Analysis on the Efficiency and Effectiveness of the Investment in the Korean Manufacturing Sector 31 accounting. In this regard, while value added was found to have increased by an annual average of 6.24%, the contribution of labor input was calculated at -0.25%. Meanwhile, the contribution of capital input was calculated at 2.77%, and that of total factor productivity at 3.72%. The contribution of capital to growth was very high in the Chungcheong region. However, in other regions such as the capital area, Daegu-Gyeongbuk, southeastern region and Honam region, it was in fact revealed to be low. From the individual city and provincial standpoint, Chungnam exhibited the highest contribution of capital to economic growth. This was followed by Gyeonggi, Chungbuk, Jeonbuk and Gyeongbuk. Meanwhile, the contribution of capital to growth was found to be negative(-) in the cases of Seoul and Gyeongnam. A look at the contribution of capital to growth by industry reveals that the highest levels can be found in the electrical & electronics industry. While the transport equipment industry exhibited a high contribution of capital to growth, the steel and machinery & metal industries exhibited average levels. The electrical & electronics and transport equipment industries exhibited both high growth rates and contributions of capital to growth during the period under analysis. Meanwhile, the petrochemical industry exhibited a high growth rate but a low contribution of capital to growth. For their parts, the steel and machinery & metal industries exhibited low levels of growth but average levels of contribution of capital to growth. A look at the size of capital stock of regions that exhibited levels higher than a certain level and the regional distribution of 32 capital stock based on the standardization of the contribution of capital to growth showed that the Gyeonggi, Chungnam, and Gyeongbuk regions exhibited large-scale capital stock and high levels of contribution of capital to growth. Meanwhile, although the Gyeongnam, Ulsan, and Jeonnam regions exhibited significant levels of capital stock, they also recorded low levels of contribution of capital to growth. Chungbuk and Jeonbuk
Analysis results of capital’s contribution to growth by industry
Food Textile Machi Electr Trans Manu & & Wood Petro- Non- nery ical & port factur bever appar & chem metal Steel & electr equip ing age el paper ical lic metal onics ment Seoul Busan Daegu Incheon Gwangju Daejeon Ulsan Gyeonggi Gangwon Chungbuk Chungnam Jeonbuk Jeonnam Gyeongbuk Gyeongnam Jeju Note : indicates very high, indicates high, indicates average, indicates low, and indicates very low levels. The empty cells represent industries with capital stock levels that are low or lower than the average for the industry. Regional Analysis on the Efficiency and Effectiveness of the Investment in the Korean Manufacturing Sector 33 exhibited lower levels of capital stock but high levels as far as the contribution of capital to growth was concerned. Incheon exhibited low levels of capital stock as well as contribution of capital to growth. Thus, Gyeonggi, which exhibited large scale capital stock as well as a high contribution of capital to growth, has played a preeminent role as far as the growth of the Korean manufacturing industry is concerned. Chungnam and Gyeongbuk also exhibited a high contribution of investment to growth. The analysis of the regional distribution of the contribution of capital to growth by industry revealed that while Jeonnam exhibited high levels in the petrochemical industry, Ulsan exhibited low levels. Moreover, while Chungnam and Gyeongbuk exhibited high levels in the non-metallic industry, Gangwon and Gyeongnam recorded low results. Although Chungnam and Gyeongbuk exhibited high levels in the steel industry, Jeonnam boasted low levels. Meanwhile, Gyeonggi, Chungnam and Gyeongbuk exhibited high levels in the machinery & metal industry, while Gyeonggi and Chungbuk exhibited average levels and Gyeongbuk low ones. Ulsan, Gyeongnam and Gyeonggi similarly exhibited average levels where the transport equipment industry was concerned. A comparison of the results of the examination of capital efficiency conducted in Chapter III with those of the contribution of capital to growth carried out in Chapter IV reveals starkly different results. While Chungnam exhibited low levels of capital efficiency in terms of its steel industry, the latter also boasted very high levels of contribution of capital to growth. Gyeongbuk exhibited a high level of capital efficiency but low levels in terms 34 of the contribution of capital to growth where the electrical & electronics industry was concerned. On the contrary, Chungnam exhibited low levels of capital efficiency but a very high level of contribution of capital to growth in the electrical & electronics industry. Meanwhile, Ulsan exhibited a very high level of capital efficiency but average levels of contribution of capital to growth in the transport equipment industry. In cases where capital productivity and the contribution of capital to growth are very different or contrary to one another, priority should be given to the contribution of capital to growth over capital productivity. High levels of capital productivity and low levels of contribution of capital to growth can be traced back to a slowdown in the accumulation of capital stock and investment. In this regard, it becomes necessary to expand capital stock through the facilitation of investment. More specifically, it is necessary to establish an investment strategy that takes into consideration the fact that capital efficiency and the contribution of capital to growth may vary depending on the characteristics of regional industries.
Chapter 5. Analysis of the job creation effect of investment
This chapter analyzed the influence of regional investment in facilities on employment. The analytical model employed included the employment and investment variables found in the previous models as well as employment wage and value added. Model 3, the name given to the model which included all of these Regional Analysis on the Efficiency and Effectiveness of the Investment in the Korean Manufacturing Sector 35
Note : the z value of the coefficient estimation can be found within the brackets ( ), * indicates a significance of less than 10%, ** indicates a significance of less than 5%, and *** indicates a significance of less than 1%. explanatory variables, in fact wielded the most outstanding estimation results. As a result, researchers analyzed the results using Model 3. The results showed that when facility investment was increased by 1%p, employment increased by 0.036%p. As such, investment significantly increased employment. An examination of the job creation effect at the industry level revealed that machinery & metal was the industry in which facility investment had the greatest influence on employment. This was 36
Analysis of the job creation effect at the industry level
Food Textile Petro Mach Electr Trans Manu & & Wood - Non- inery ical & port factur bever appar & chem metal Steel & electr equip ing age el paper ical lic metal onics ment Capital area Chungcheong Honam Daegu- Gyeongbuk Southeast region Nationwide Note : indicates very high, indicates high, indicates average, indicates low, and indicates very low levels. The empty cells represent industries with capital stock levels that are low or lower than the average for the industry. in turn followed by the petrochemical, food & beverage, steel, textile & apparel, and non-metallic industries. From a regional standpoint, this influence was highest in the Honam and Gangwon regions, followed by the capital area, southeast region, Chungcheong region and Jeju. The analysis of the job creation effect at the industry and regional levels found that the food & beverage and wood & paper industries in the capital area exhibited the most influence. Meanwhile, the petrochemical, non-metallic materials, and transport equipment industries in the Daegu-Gyeongbuk region also exhibited very high job creation effects. This implies that the differentiation of industries in which investment is made on a regional basis can heighten the job creation effect. Regional Analysis on the Efficiency and Effectiveness of the Investment in the Korean Manufacturing Sector 37
Chapter 6. Analysis of investment’s regional industrial linkage effect
Investment influences other industries within a region and other regions’ industries through a linkage structure that brings together regional industry. The industrial linkage effect of investment can be divided into the effect related to the supply of capital goods and that associated with the demand for capital goods. Industries that exhibited a high capital goods supply effect included the wood & paper, steel, non-metallic materials, and petrochemical industries, all of which belonged to either the capital goods or materials industry. Processing and assembly-type industries such as the electrical & electronics, and transport equipment showed a relatively lower capital goods supply effect. The Daegu-Gyeongbuk and Gangwon regions were found to have manufacturing industries that showed the highest capital goods supply effect. Moreover, while the Chungcheong and Honam regions showed an average capital goods supply effect, the capital area and southeast region exhibited a lower capital goods supply effect. The Daegu-Gyeongbuk region has a heavy concentration of materials and parts industries such as steel and automobile parts related transport equipment. The Daegu- Gyeongbuk region also exhibited a high inter-regional spillover effect, thus implying that regional products were used as intermediate goods in other regions. Although the Honam region exhibited an overall average capital goods supply effect, this effect was found to be high in the steel industry. This implies that 38 regions where the materials industry accounts for a high ratio were greatly impacted by the supply of capital goods. Meanwhile, the capital goods demand effect was highest in areas where the production of capital goods was high such as the
Supply inducement coefficient by region and industry
Average of the manufacturing 2.06 2.16 2.16 2.29 2.05 2.27 2.00 2.15 industries
Overall industry 1.93 2.00 2.01 2.06 1.94 2.02 1.87 1.98 average Regional Analysis on the Efficiency and Effectiveness of the Investment in the Korean Manufacturing Sector 39
Ratio of inter-regional spillover effect based on investment demand at the national level Unit: %
Average of the manufacturing 33.7 12.6 13.2 14.8 24.4 1.2 0.1 100.0 industries
Overall industry 45.4 11.3 10.8 11.1 18.4 2.4 0.6 100.0 average
capital area and the southeast region. The inter-regional spillover effect in terms of the manufacturing industry was found to be highest in the capital area, followed by the southeast and Daegu- Gyeongbuk regions. 40
The inter-regional spillover effect associated with supply and demand for investment was found to be greatest in the capital area and southeast region for the majority of industries. This can be explained by the fact that these two regions exhibited not only high ratios in terms of the production of capital goods but also with regards to the use of the intermediate goods needed to produce final goods. Therefore, the activation of investment can create a spillover effect into regions and industries that boast a high production ratio of capital goods via an increase in the demand for capital goods. In addition, the activation of investment also facilitates the growth of regions and industries that feature a heavy concentration of the parts and materials industry through capital accumulation and contributes to the growth of industries that employ parts and materials as intermediate goods. These results imply that the activation of regional investment can facilitate the growth of the relevant region and mitigate the growth gap between regions. Furthermore, this also implies that the activation of regional investment is in keeping with the direction of a national industrial policy that includes the development of parts and materials and capital goods industry.
Chapter 7. Conclusion and policy implications
The following policy implications are formulated based on the results of the analysis conducted above. First, the slowing of capital accumulation caused by the slowdown in investment Regional Analysis on the Efficiency and Effectiveness of the Investment in the Korean Manufacturing Sector 41 following the financial crisis makes it necessary to invest in the expansion of growth potential, and in particular the facilitation of facility investment. At this point, it is necessary to consider regional and industrial characteristics during the investment process. For example, the electrical & electronics industry has shown high levels of capital accumulation at the national level. However, viewed from a regional standpoint, while the Chungnam region has actively engaged in capital accumulation, the Gyeongbuk region has shown a downward trend. Consequently, the Gyeongbuk region needs to focus more on capital accumulation than Chungnam. Second, it is necessary to establish an investment facilitation strategy that takes into consideration capital productivity and investment’s contribution to growth. Although the efficiency of investment and the contribution to growth should both be heightened, the contribution to growth should, given the goal of expanding growth potential through investment, be regarded as more important when these two factors are different. Third, an investment strategy that heightens the job creation effect should be crafted. A panel regression analysis revealed that a 1%p increase in facility investment occasioned a 0.036%p increase in employment. Industry-specific differences were uncovered as far as the job creation effect is concerned. Regional differences were also uncovered across the same industry. Regarding job creation through investment, it is necessary to expand the growth of core regional industries into adjacent industries and to develop employment-friendly industries. This policy should be combined with related measures such as the 42 development of the human resources required by growth industries, and support programs designed to transform existing human resources into those required by the market. Fourth, the increase in production through investment influences not only related industries within the relevant region, but also industrial growth in other regions. The degree of influence is dependent on the upstream-downstream industrial linkage effects. As such, investment performance can be heightened by investing in industries which have a high industrial linkage effect such as the parts & materials industry, capital goods and intermediate goods industries, and in regions with a heavy concentration of such industries. Research Report 2011-592
Industrial Linkages and Business Cycles in Korea
Sunoong Hwang and Du-Yong Kang
The Efficiency of Investment in Regional Manufacturing Industries and Analysis of its Effectiveness 45
Chapter 1. Introduction
Objectives The financial crisis in European countries has led to the renewed spread of uncertainty in terms of domestic and international economic conditions. The need to develop an exact understanding of the process through which economic fluctuations are diffused and to limit the spread of negative effects has rendered it urgent to establish the necessary countermeasures. The global financial crisis of 2008 provided an opportunity to highlight the importance of the systemic risks stemming from inter-industrial networks. Although related studies have been carried out of late, there remains a lack of material pertaining to this theme. This study seeks to empirically prove the influence of the Korean industrial linkage structure on the diffusion of economic fluctuations. Such an exercise is intended to broaden the 46 understanding of the nature of economic fluctuations and to improve the effectiveness of economic stabilization policies. This study begins with a review of how inter-industrial comovements have changed in terms of outputs. Thereafter, the influence of the inter-industrial trading structure for intermediate goods on the comovements of inter-industrial outputs will be examined. The main finding of this study is that the Korean inter- industrial trading network boasts the characteristics of a complex network. In turn, this interactive structure makes the advent and spread of a large-scale economic slowdown phase possible. The results of this study will have important policymaking implications in terms of the efforts to decrease the systemic risks caused by inter-industrial networks.
Implications The present study is based on previous work in various fields. These include analyses of economic fluctuations, industrial linkages, systemic risks in the financial sector, networks, and complex networks. However, this study also encompasses various new endeavors both in terms of the research theme and methodology. Several new policy initiatives are also suggested. As far as the research theme is concerned, this study analyzes the effects of the topology of inter-industrial trading networks on the diffusion of economic fluctuations from the standpoint of complexity science. A keyword used to describe the characteristics of modern society, complexity has drawn great interest in various disciplines, within the media, and in the political discourse. However, few domestic or international studies Industrial Linkages and Business Cycles in Korea 47 have analyzed the problems of inter-industrial trading networks and economic fluctuations based on the concept of complexity. Furthermore, this study also deals with several important issues which have not been discussed in previous studies conducted overseas. Given the high probability that research in this field will increase exponentially in the future, the results of this study may very well emerge as important referential materials. What distinguishes the present study from its predecessor where analytical methodology is concerned is the utilization of not only traditional analytical methods employed in the study of economic fluctuations but also various other analytical tools ranging from spatial econometrics to statistical physics. Based on these analytical tools, the present study is able to provide new empirical information pertaining to the characteristics of economic fluctuations. This study also involves important implications from a policy standpoint. Existing economic stabilization policies have been dependent on macro-coordination tools such as monetary and fiscal policy. The representative agent model paradigm supported the existing approach. The response to local economic disturbances was regarded as ineffective or unnecessary. However, the existing approach may not bring about optimized results under a situation of complexity where large- scale failure can be caused by local disturbances. It is sometimes necessary to address local disturbances from the standpoint of the topology structure of inter-industrial trading networks. In addition, there is also an urgent need to establish preemptive risk management measures and to decrease the risk of cascading 48 failure by heightening the robustness of the system.
Chapter 2. Trends in inter-industrial output comovements
An inter-industrial comovement of outputs refers to a phenomenon in which the outputs of various industries move in the same direction during a particular period. This study analyzed trends in inter-industrial comovement of outputs using a new method called wavelet coherency. Wavelet coherency can be used to effectively analyze how the correlation between cyclic components during a specific period changes over time (Aguiar-Conraria and Soares, 2011b). Using the Morlet wavelet as a type of continuous wavelet, this study estimated the average inter-industrial comovement of outputs within the manufacturing industry during the period spanning from 1985-2011. The results of this analysis can be summarized as follows. A high degree of coherence was observed between the components of long-term cycles, namely cycles which lasted more than 8 years, and the components of one-year cycles. Meanwhile, the coherence between the components of cycles ranging from 1.5-8 years, which fell under the category of economic fluctuation cycles, underwent several large-scale fluctuations over time. This change has been particularly outstanding in recent years. The coherence of outputs within the economic fluctuation cycle started to strengthen during the mid 2000s, and remains high Industrial Linkages and Business Cycles in Korea 49 today. Wavelets have been perceived as an alternative method to overcome the limitations of traditional correlation coefficient analysis, and have as such drawn considerable interest from various fields. This study is the first to apply wavelets to the analysis of inter-industrial comovements. Such an exercise can be regarded as being of great significance from an academic standpoint. This study also involves important implications from a policy- making standpoint. The strengthening of inter-industrial comovements also increases the possibility that the amplitude of economic fluctuations will expand. In this regard, it is necessary to offset this pressure by establishing countermeasures.
Chapter 3. Trends in inter-industrial output comovements
Why do various industries with different demands and technical conditions engage in comovements during a specific economic fluctuation cycle? Two macroeconomic answers to this question can be proffered. The first theory is that of a common shock where an economic fluctuation influences all industries (Lucas, 1977; Dupor, 1999). Meanwhile, the second theory maintains the effect of a negative incident within a specific industry can spread to other industries through inter-industrial trading networks involving intermediate goods (Long and Plosser, 1983; Acemoglu et al., 2011). The 50 present study is based on the second hypothesis. Let us now review a realistic explanation which can help support this hypothesis. In terms of empirical analyses, special reference was made to Conley and Dupor (2003). If a macroeconomic common shock represents the only source of the comovement of inter-industrial outputs, then the intermediate goods inter-industrial trading structure will not influence the comovement of outputs. On the other hand, if the diffusion effect associated with local disturbances is also deemed to be important, then the value of the comovement of outputs between the industries that have the same trade partners for intermediate goods should be bigger than that of the comovement of outputs between industries that do not share the same traders. In other words, there is a strong likelihood of a positive (+) relationship between similar trading structure of intermediate goods and the comovement of outputs. This study employed a nonparametric local linear regression method to estimate the influence of the inter-industrial trading structure of intermediate goods on inter-industrial comovement of outputs. The results of the estimation conducted in Chapter II were used to measure the comovement of outputs. The sameness of the intermediate goods trading structure was expressed as a multiplicative inverse of the Euclidean distance function. The information regarding the trading structure of intermediate goods was obtained from the Industrial Interdependence Table for 1985, 1990, 1995, 2000, 2005, and 2009. The results of the estimation conducted based on the analytical model support the hypothesis put forth in this study. Industries Industrial Linkages and Business Cycles in Korea 51 with a similar trading structure in terms of intermediate goods were found to have a greater comovement of output cycle than industries which did not. This implies that not only do various industries move in the same direction because of common shocks at the macroeconomic level, but that the diffusion of local disturbances via inter-industrial trading networks also has an important impact on this process.
Chapter 4. The topological structure of inter-industrial trading networks: analysis of complexity networks
What are the characteristics of Korea’s inter-industrial trading networks? What industries have played a central role in this process? What influences does the topological structure of inter- industrial trading networks have on the scope of the diffusion of local disturbances? Chapter IV seeks answers to these questions using analytical tools associated with complexity science. The main results of this exercise can be summarized as follows.
Characteristics of clusters and the narrow world Korea’s inter-industrial trading networks boast a very low degree of density and are based on an asymmetrical networking structure in which the majority of trade is carried out in a unidirectional fashion. The possibility of cluster formation between adjacent industries 52 is 10-fold larger than in the case of random networks. This implies that the trading of intermediate goods between heterogeneous industries is not carried out in a random manner, but based on local rules rooted in technological limitations. Another characteristic of inter-industrial networks is that of the so-called small world. All industries are on average only 4~5 steps away from being connected to one another. This means that local disturbances can spread to other sectors in a rapid manner.
Characteristics of complexity networks One of the important contributions of this study is the revelation that Korea’s inter-industrial networks boast the characteristics of complex networks. A complex network is an unequally structured network in which the distribution of the degree centrality and strength of the network is based on the power law. More specifically, the probability that the degree centrality and strength of a complex network are bigger than k is proportionate to k- ‚ (1, 2). Korea’s inter-industrial networks are estimated at 1.4 in terms of the degree centrality of complex networks and 1.2 with regards to the strength of complex networks. The lack of an intrinsic scale capable of representing the entire network means that complex networks are generally regarded as scale-free networks. In this regard, the degree centrality of complex networks is not deemed to be as important as their rank and hierarchal order. The majority of industries prefer to form trade relations with only a few industries when it comes to intermediate goods. In this Industrial Linkages and Business Cycles in Korea 53 regard, only a very limited amount of industries have formed trade relations with large numbers of industries where intermediate goods are concerned. The reason why Korea’s inter- industrial networks can be referred to as a small world can be traced back to the fact that a limited number of hub industries have played the role of connector bringing together large numbers of industries.
Identification of hub industries Based on degree centrality at the industry level, the present study sought to identify the industries that have played a central role as far as the intermediate goods trade network in Korea is concerned. On the supply side, hub industries include those involving basic materials such as plastic, metal, steel, and chemicals. Meanwhile, on the demand side, assembly production type industries such as the automobile industry have performed the central role. Here it is important to note that the role and size of outputs do not always have a consistent relationship in inter-industrial networks. The output of industries which serve as a hub in inter- industrial networks is usually bigger than the average output of the manufacturing industry. However, as far as the industries with large scale output are concerned, while some are at the center of inter-industrial networks, others are located on the margins of such networks. As such, distorted results can easily be accrued if the importance of a specific industry is assessed solely based on the size of outputs. 54
Inter-industrial networks and the diffusion of the slowdown phase The importance of analyzing the topological structure of inter- industrial network can be traced back to the fact that such a structure also greatly influences the diffusion patterns of local disturbances. Complex networks are at once well protected from and susceptible to the large-scale failure risks occasioned by local disturbances (Albert et al., 2000). The majority of local disturbances have an extremely limited sphere of diffusion. However, a local disturbance in an individual industry may cause a large-scale failure within the overall system. Using a simulation based on the cascading failure model, this study examined the influence of the topological structure of inter- industrial networks on the diffusion of an economic slowdown phase. First, the emergence of negative disturbances in industries that serve as hubs within intermediate goods trade networks is accompanied by a high probability of a large-scale cascading failure. Examples include plastic, metal, engines and parts for automobiles, and motorized vehicles. However, even in such industries, the process of overall failure is carried out over various stages. This means that not only is the immediate effect important, but so are the direct and indirect cascade effects. Second, an industry which greatly influences hub industries, even if it has less degree of centrality, can cause a broadened diffusion of an economic slowdown phase. Examples include synthetic resin, which is employed as a major material for industrial plastic products. Industrial Linkages and Business Cycles in Korea 55
Third, inter-industrial cluster trends also greatly influence the scope of the diffusion of the slowdown phase. The emergence of a negative disturbance within industries that influence the hub industry in an individual or group manner and belong to the same industrial group can cause a large-scale cascading failure. To this end, examples include the petrochemical, chemical, steel and metal industries. Fourth, the scope of diffusion of the slowdown phase is very limited in the majority of cases. More to the point, the simulation conducted as part of this study revealed that the probability of a negative disturbance that emerged within an industry causing a macro-level economic slowdown was only 7%.
Chapter 4. Conclusion
Need for an economic stabilization policy at the industrial level Industrial policy has been perceived solely as a tool to facilitate and support long-term economic growth. Meanwhile, monetary and fiscal policy has been viewed as the tool for economic stabilization. The results of this study imply that it is necessary to overcome this dichotomous method and establish a new role and status for industrial policy. Stable economic growth requires more than a macro-coordination tool. Local disturbances should be dealt with by actively implementing a stabilization policy at the industrial level. 56
The best way to address cases in which a common shock at the macroeconomic level creates a strong impact is to create a monetary and fiscal policy that leans against the overall macroeconomic wind. However, in cases where the risk of a large-scale cascading failure increases when local disturbances that have emerged in individual industries spread to other industries, the priority should be placed on the implementation of a fine-tuning policy that takes into consideration industrial characteristics. To this end, it becomes essential that the epicenter of the local disturbance and the path of diffusion be clearly identified on the map of the inter- industrial network. Furthermore, a firewall should be promptly installed in order to prevent the additional diffusion of any negative impact.
The selective management strategy for core loop industries Inter-industrial networks boast the characteristics of complex networks. Therefore industrial-level economic stabilization policy should be focused on keychain industries. Many researchers and policy-makers have recently highlighted the need to focus more on the criteria, ‘too interconnected to fail’ than, ‘too big to fail’, when trying to determine whether financial support should be provided in cases where a crisis emerges (Acemoglu et al., 2011). The U.S. government’s provision of financial support to GM and Chrysler in 2008 was based on this logic. The Yuseong incident that erupted in Korea in May 2011 also holds similar lessons. More to the point, the following measures should be Industrial Linkages and Business Cycles in Korea 57 implemented. First, an early warning system that can promptly and precisely analyze trends within core loop industries must be established. Composite indexes which assign a bigger weight to core loop industries should be established and used as supplementary indicators when making economic determinations and predictions about the economy in the future. Second, prompt responses are very important whenever risks are detected within core loop industries. A firewall should be promptly installed before the situation quickly and uncontrollably spreads beyond the tipping point. The resilience of the system should be improved through cooperation between upstream and downstream industries and adequate financial support. Third, the fact that inter-industrial trading networks boast the characteristics of complex networks means that systemic risks affect different industries in different ways. To this end, it is necessary, from the standpoint of society in general, to distribute additional resources to risk management within core loop industries. The problem is that if such measures are ignored by a significant share of individual industries, there may emerge a situation in which the level of investment in risk management is lower than the socially optimized level. The government must make active efforts to supplement any market failure. It is necessary to focus on managing the stability of these industries by expanding the support for investment in risk management and strengthening the supervision and guidance system governing core loop industries. 58
Systemic risk management measures for inter-industrial networks There is an urgent need for preemptive mechanisms capable of decreasing the systemic risks faced by inter-industrial trading networks. First, it is necessary to conduct more advanced studies on the topological structure of inter-industrial trading networks and the implications thereof. There is also a need to conduct a study on the supply system at the enterprise level and to extend into a model which can also encompass the international and financial sectors. Must be a wide range of data established and joint research between researchers from various fields conducted. Second, there is a need to prepare not only financial stability reports, but also industrial stability reports that can be used by economic actors as referential materials with which to make rational decisions and establish policies. There is a need to regularly keep track of the main risk factors and expected losses within the Korean economy by implementing stress tests that take into consideration of the topological structure of inter-industrial trading networks. Third, efforts must be made to improve the inventory management system widely regarded as the topological structure of inter-industrial networks. The diversification of trade partners can be considered to be one of these measures. The problem is that there is a shortage of studies on the determination of the exact direction for institutional improvement. An errant policy can cause greater instability. As evidenced by past global financial crises, a diversification strategy at the microeconomic level can Industrial Linkages and Business Cycles in Korea 59 function as a factor which increases systemic risks at the macroeconomic level. Research on optimized institutional design should be further advanced, along with research on the characteristics of sectoral linkage structures.
Research Report 2011-593
A Study on the Relationship between Green Competitiveness and Productivity
Jin Woong Kim, Won-Kyu Kim and Young-Jin Ro
The Efficiency of Investment in Regional Manufacturing Industries and Analysis of its Effectiveness 63
Chapter 1. Introduction
Faced with the global challenge of creating a green-growth economy, countries around the world are now required to achieve economic growth and secure green competitiveness at the same time. In other words, there is a need to address the dual goals of economic growth and green competitiveness simultaneously. Therefore, the focus of this report is to analyze the macroeconomic factors that affect countries’ carbon emissions, and to determine if improving countries’ green competitiveness has had the positive impact of enhancing their productivity, the basis for economic growth. Towards this end, this report attempts to expand the models for the environmental Kuznets curve (EKC) hypothesis to identify the economic factors affecting the domestic carbon emissions. It also defines the relationship between green competitiveness and general productivity by performing a panel analysis of OECD nations at the international level, and a macroeconomic and 64 industry panel analysis at the domestic level. Based on the analysis results, the report offers policy suggestions to realize one of South Korea’s three main green- growth goals: “creating a virtuous cycle of the environment and the economy.” It summarizes the basic directions for green growth within the traditional framework, and presents suggestions to induce the voluntary improvement of the green competitiveness of the economic subjects.
Chapter 2. Definition and Current Status of Green Competitiveness
International comparison The position of South Korea in terms of green competitiveness as of 2008 is summarized as follows. First, South Korea’s green A Study on the Relationship between Green Competitiveness and Productivity 65 competitiveness is slightly lower than the average of the world and of major groups of nations (OECD, G20, and ASEM). Second, South Korea’s carbon productivity is above those of major countries such as USA, Canada, and China while its carbon productivity is only 35% of that of top-ranking Sweden, 48% of that of France, 63% of that of UK, about 73% of those of Singapore and Japan, and 78% of that of Germany. Lastly, South Korea’s average annual increase of carbon productivity for the period 2000-2008 was higher than all the averages of major groups of nations. In terms of the rate of increase of carbon productivity by year, however, it has slowed down dramatically in recent years, recording the lowest increase
Average Carbon Productivity of Major Groups of Nations, and South Korea’s Position (as of 2008)
South World OECD G20 ASEM EU Korea (140) (34) (20) (41) (27) Carbon productivity (level) 2.27 2.17 2.60 2.35 2.44 3.26 South Korea’s carbon productivity ranking - +2 28 13 34 - South Korea’s per-capita GDP ranking - 32 25 10 18 - Note: The number in the bracket refers to the number of nations in the group.
Carbon Productivity of Major Countries (as of 2008)
Unit: USD/kg CO2 South Germa Swed Singap Korea USA Canada France ny UK en ore Japan China Carbon productivity 2.27 2.10 1.91 4.76 2.93 3.61 6.50 3.13 3.13 1.66 (level) Note: The number in the bracket refers to the number of nations in the group. 66
Trend of Carbon Productivity (Increase)’ Comparison with Major Groups of Nations
1971~ 1971~ 1981~ 1991~ 2001~ 2008 1980 1990 2000 2008 2005 2006 2007 2008 Carbon productivity (%) World 1.52 1.22 1.37 2.05 1.39 1.84 2.11 2.24 1.91 OECD 2.03 1.98 2.63 1.50 2.01 2.39 3.57 1.71 3.30 EU 2.45 - - 2.73 2.10 2.93 2.99 4.58 3.10 G20 1.74 1.81 1.71 2.06 1.31 1.62 2.07 2.33 1.75 ASEM 1.49 1.15 2.05 2.06 0.47 0.72 1.14 2.43 1.06 South Korea 0.41 -2.68 2.35 -0.13 2.14 4.14 3.32 2.14 0.00 in 2008. The aforementioned facts indicate that while the economic power (per-capita GDP ranking) of South Korea has been sustained at a relatively strong level in major groups of nations, its green competitiveness (carbon productivity ranking) has not necessarily followed the same trend.
Domestic industries To determine the current status of green competitiveness of different sub-industries of South Korea, this study used the industry data of 22 different sub-industries within the manufacturing sector for the period 2004-2007. The average carbon productivity of 22 manufacturing sub-industries for the period 2004-2007 was 5.85, and the carbon productivity of high- energy-consuming industries was found to be extremely low. In other words, the average carbon emissions differed greatly by industry. A Study on the Relationship between Green Competitiveness and Productivity 67
According to the yearly data on carbon emissions and carbon productivity by industry for the period 2004-2007, the computer and office machinery sub-industry recorded the biggest growth in green competitiveness while the recorded-media publishing/ printing/reproduction sub-industry saw a decline in green competitiveness. The computer and office machinery sub-industry posted a yearly drop of 17.88% in carbon emissions and an increase of 36.27% in carbon productivity for the period 2004- 2007, showing the largest improvement in green competitiveness. Meanwhile, the recorded-media publishing/printing/ reproduction sub-industry experienced an increase of 23.93% in carbon emissions and a decline of 13.10% in carbon productivity during the same period.
Chapter 3. Analysis of the Factors Affecting South Korea’s CO2 Emissions
Estimation of the basic model for analyzing the economic factors affecting CO2 emissions Chapter 3 focuses on the analysis of the economic factors affecting carbon emissions. The most representative study related to this subject is the one on the environmental Kuznets curve (EKC). According to the research findings, most environmental pollution indicators show that the relationship between income and environmental pollution follows an inverted U-shape curve- i.e., the income of an economy grows over time, and the pollution level initially rises, reaches the peak, and then starts 68 declining when the income threshold level has been crossed. In this chapter, the domestic time series data from 1971 is used to come up with a basic STR (smooth transition regression) model that uses basic explanatory variables (per-capita GDP, exogenous technological progress) to verify the EKC hypothesis. Also, apart from the basic explanatory variables, an attempt is made to use various other control variables, such as the industrial-structure and investment-related variables, trade-related variables, and energy- related variables, to make an estimation based on the basic model, thereby identifying additional determinants of CO2 emissions. According to the estimation based on the basic STR model (estimated model #1) performed with the aim of verifying the validity of the EKC hypothesis, growth in per-capita GDP
Estimation of the Environmental Kuznets Curve (STR Model)
Note: PCO2 and PGDP refer to the per-capita CO2 emissions and per-capita GDP (as a constant standard, based on PPP), respectively. ***, **, and * indicate the statistical significance at the 1, 5, and 10% levels, respectively. A Study on the Relationship between Green Competitiveness and Productivity 69 consistently results in a rise in the per-capita CO2 emissions, regardless of the presence of regime switching. This means that the South Korean case does not support the EKC hypothesis, which postulates an inverted-U-shaped relationship. The analysis of South Korea’s TREND (time trend), which represents exogenous technological progress, showed that technological advancement does not have a significant impact on the per-capita CO2 emissions in the early stages of economic development, but it starts to reduce the per-capita CO2 emissions as economic development progresses. After re-estimating the model, excluding the insignificant variables, with a 10% statistical significance level (estimated model #2), it was found that all the included coefficients showed statistical significance at the 1% level, and that the overall estimation results were not much different from that of model #1. Estimated model #2 showed that a 1% increase in the per-capita GDP in South Korea translated into a 1.6% increase in the per- capita CO2 emissions. On the other hand, the impact of exogenous technological progress on the per-capita emissions was negative, with the value of the impact going down from - 0.0001 in 1971 to -0.0338 in 1991.This signifies that technological advancement itself has become more eco-friendly since the 1990s.
Analysis of the economic factors affecting CO2 emissions, taking the control variables into account The share of manufacturing in the GDP was used as an industrial-structure variable to determine if it has a negative impact on the per-capita CO2 emissions. This means that the 70 economic shift from a manufacturing economy to a service economy does not necessarily guarantee a reduction in CO2 emissions. It also implies that even if the share of the manufacturing sector eventually goes up, converting the industrial structure into a green industrial structure plays an essential role in reducing the per-capita CO2 emissions. The share of the energy-intensive sub-industries within the manufacturing sector was found to have a positive impact on the per-capita CO2 emissions, implying that efforts are required to reduce the share of the energy-intensive sub-industries or to lessen the carbon intensity of such sub-industries to continuously cut the per-capita CO2 emissions within the manufacturing industry in the future. The percentage of ICT in the manufacturing sector as an industrial-structure variable was found to have a negative impact on the per-capita CO2 emissions. This shows that making a continuous structural shift into a low-carbon, high- value-added industry within the manufacturing sector has a potential to contribute greatly to reducing the CO2 emissions of the South Korean economy in the future. On the other hand, investment as a share of the GDP was found to have an insignificant impact. This is because the drop in CO2 emissions attributable to the replacement of the existing decrepit facilities and to the installation of new eco-friendly facilities is offset by the rise in CO2 emissions caused by the increased production activities resulting from increased investment. Trade dependence was also used as a trade-related variable, and it was found to have a negative impact on the per-capita carbon emissions. This is because while trade liberalization may A Study on the Relationship between Green Competitiveness and Productivity 71 increase the carbon emissions to a certain extent through increased production activities to support more exports, it also accelerates the structural shift to a low-carbon, high-value-added industry within the manufacturing sector, contributing more to the reduction of the carbon emissions. The share of exports to advanced nations was found to have a negative impact on the per-capita CO2 emissions. Here, the pollution haven hypothesis cannot be applied to South Korea. Given the stage of South Korea’s economic development, it is unlikely that multinational firms will relocate to South Korea to take advantage of its lax environmental standards. The analysis results indicate that the
Results of the Analysis of the Economic Factors Affecting the Per- Capita CO2
Impact Related variables Estimated coefficient sign p-value Percentage of the manufacturing industry - 0.0000 Variables related to Percentage of the energy-intensive industrial manufacturing industry + 0.0011 structure and Percentage of the ICT - 0.0512 investment manufacturing industry Percentage of investment + 0.0029 Trade dependence - 0.0633 Variables Percentage of exports to related to developed nations - 0.0055 trade Percentage of imports from developing nations - 0.6464 Import prices of crude oil (USD) - 0.0030 Variables related to Import prices of crude oil (KRW) - 0.0089 energy Percentage of petroleum demand + 0.0000 72 structural sophistication of export goods destined for developed countries may contribute to the reduction of South Korea’s CO2 emissions. The share of imports from developing nations was found to have an insignificant impact. This implies that South Korea’s multinational companies are not yet relocating the production of their carbon-intensive goods to developing countries as pollution havens. The import price of crude oil (USD or KRW) was also used as an energy-related control variable, and the results indicated that the per-capita CO2 emissions were negatively affected. This means that the rise of the international oil prices reduces the volume of the overall oil imports, leading to the contraction of the domestic petroleum demand and the reduction of the carbon emissions. The share of petroleum consumption among the primary energy sources has a positive impact on the per-capita CO2 emissions, implying the need to lower South Korea’s dependence on petroleum - one of the energy sources with a high emission coefficient - to cut the country’s CO2 emissions.
Chapter 4. Analysis of the Impact of Carbon Productivity on Total Factor Productivity (TFP)
Background Enhancing energy efficiency or improving carbon productivity not only encourages the development of the energy industry but also promotes the creation of a low-carbon environment and A Study on the Relationship between Green Competitiveness and Productivity 73 raises the efficiency of the production processes, benefiting the overall economy. Against this backdrop, this study examines the impact of the changes in green competitiveness (i.e., carbon productivity) on total factor productivity (i.e., productivity), through a panel analysis of countries at the international level, and a macroeconomic and industry panel analysis at the domestic level.
International analysis Whether the improvement of green competitiveness has had a positive impact on productivity in 22 OECD countries was determined using the long-run equilibrium equation of the panel error correction model of Pesaran, Shin, and Smith (1997, 1999). The results of the analysis of the panel error correction model of 22 OECD nations through unit root tests and panel co-integration tests indicate that a long-run equilibrium relationship exists between carbon productivity (representing green competitiveness) and total factor productivity (representing general productivity), with the former having a positive (+) impact on the latter. Given that TFP is generally considered as a key growth factor, the
Long-run Equilibrium Relationship between TFP and Carbon Productivity (Panel of 22 OECD Nations)
PMG MG
X (green competitiveness) 0.415*** (0.000) 4.465*** (0.000)
Constant 0.427 (0.289) 4.540*** (0.000)
Note: ***, **, and * indicate the statistical significance at the 1, 5, and 10% levels, respectively. The numbers in the brackets indicate the p-values. 74 findings can serve as an international evidence of the economic validity of the low-carbon, green-growth drive in the future.
Domestic analysis A more detailed investigation into the relationship between green competitiveness and productivity was undertaken. First, using a domestic macro time series model, an attempt was made to carry out a dynamic analysis of the interrelationship between the two variables, through impulse response function analysis. Thereafter, the relationship between the two variables was further examined, referring to the industrial characteristics, using the industry panel data of the domestic manufacturing industries.
Domestic macro model A macro empirical analysis based on the domestic annual data for the period 1971-2008 was performed. The relationship between carbon productivity and TFP is presented using the results of the impulse response function analysis of the error correction model. According to the error correction model estimation and the impulse response function analysis using the estimation results, TFP (Y) increased significantly during the period 1 - 3 after the occurrence of an unexpected shock to carbon productivity (X) at period 0. On the other hand, an unexpected shock to TFP (Y) was found to have had an insignificant impact on carbon productivity (X). In other words, there is a causal link from carbon productivity (X) to TFP (Y), with X having a dynamic positive impact on Y, but there is no causality from Y to X. Such a A Study on the Relationship between Green Competitiveness and Productivity 75
Impulse response function
Carbon produtivity impulse Total factor productivity impulse
Carbon produtivity response
Total factor productivity impulse response
dynamic causality maintains robustness regardless of “ordering of variables,” one of the contemporaneous causality constraints resulting from the analysis methods. Changing the contemporaneous causality constraints to X Y or Y X produced the same dynamic causality results. The conclusion from the analysis of the time series model based on domestic aggregated data was that the improvement of green competitiveness had a dynamically significant positive (+) impact on productivity while the impact was insignificant vice 76 versa. It was found that while green competitiveness is clearly a crucial factor for sustainable growth, there has been a lack of interest in it. This implies the need to promote the awareness of all the economic subjects so that enhancing green competitiveness can be their main goal. Also, to realize one of South Korea’s three main green-growth goals - “creating a virtuous cycle of the environment and the economy” - in a more prompt and stable manner, there should be some form of policy intervention designed to induce companies to improve their fundamentals, implemented as necessary as long as they do not disturb the economy.
Domestic industry panel model Whether the enhancement of green competitiveness of the domestic industries helped improve their productivity (i.e., innovation) was investigated, using a panel model based on domestic industry data. The impact of green productivity on TFC was estimated using the panel model, based on the data of 22 different manufacturing sub-industries covering the period 2004- 2007. Due to the endogeneity issue of TFP and carbon productivity, the model that was used set the green competitiveness of the current period as the only variable, and made an estimate. Therefore, the basic model that was used for the empirical analysis is defined as follows:
Yi,l= i,l Xi,l+ l+ l+ i,l
where Yi,t = ln(TFPi,t) and Xi,t = ln(CPi,t). TFPi,t and CPi,t refer A Study on the Relationship between Green Competitiveness and Productivity 77 to TFP and CP of i industry at period t, respectively. The panel analysis showed that a 1 unit carbon productivity increase leads to a 0.28 TFP increase for the manufacturing industry at the 5% significance level. When the results were applied to the entire domestic industry, it was found that a series of economic activities aimed at enhancing carbon productivity (thereby, green competitiveness) has a positive impact on TFP within the economy. In addition to the above basic model, an attempt was made to use two extended models to determine the impact of green productivity on TFP for high/low-energy-consuming industries and heavy/light industries.
Extended model 1: High-energy-consuming industries
High Yi,l= i,l Xi,l+ i,l Di,l Xi,l+ l+ l+ i,l
Extended model 2: Heavy industries
Heavy Yi,l= i,l Xi,l+ i,l Di,l Xi,l+ l+ l+ i,l
where ______and ______are high-energy-consuming industry and heavy-industry dummy variables. According to the test that was conducted using a random- effect model, the changes in carbon productivity within both the high-energy-consuming industries and the heavy industries had a less-than-average impact on TFP. Dummy variables were used on five different high-energy-consuming industries with carbon emissions higher than the manufacturing average, and added interaction terms of carbon productivity and dummy variables to 78 estimate the model. The resulting coefficient of the term was -0.20 at the 10% significance level. The above analysis results signify that while the correlation between green productivity and TFP has a positive impact at a significant level in the high-energy- consuming industries, the actual size of the impact is only about 1/3 compared to that for the entire industry. For the heavy industries, the coefficient resulting from multiplying carbon productivity and the dummy variables was -0.15, implying that the impact of carbon productivity on industrial productivity is quite small compared to that of the light industries, at the 1% significance level. The results suggest that enhancing the green competitiveness of industries can induce innovation within the economy. The linkage between the two, however, was found to be rather weak for the high-energy-consuming and heavy industries of South Korea, which generally emit a large amount of carbon dioxide. Therefore, future support and regulatory policies aimed at promoting green growth should be focused on these industries to strengthen the linkage between green productivity and TFP. The
Industry Panel Analysis
Variable Basic model Extended model 1 Extended model 2 X 0.28*** (0.00) 0.32*** (0.00) 0.37*** (0.00) X *DUMMY - -0.20* (0.09) -0.15*** (0.01) C 1.82*** (0.00) 1.77*** (0.00) 1.81*** (0.00) R-Squared 0.96 0.63 0.70
Note: ***, **, and * indicate the statistical significance at the 1, 5, and 10% levels, respectively. A Study on the Relationship between Green Competitiveness and Productivity 79 results also imply that to encourage various stakeholders to recognize the urgency of the aforementioned environmental issues and to respond appropriately to these, there is a need to introduce institutional mechanisms to induce the voluntary participation of the industrial world.
Chapter 5. Conclusion and Policy Implications
Taken together (refer to the end of each chapter for the detailed implications), the following conclusion is derived. Studies show that green competitiveness does enhance national productivity, a major source of economic growth, highlighting the increasing need to strengthen it to secure sustainable growth in the future. Strengthening green competitiveness has become all the more important as countries around the world are now striving to achieve their greenhouse gas (GHG) emission reduction targets. Furthermore, the fact that the relationship between productivity and green competitiveness for some major industries of South Korea was found to be rather weak implies that the government needs to come up with aggressive support measures and regulatory policies. Against this backdrop, this chapter first presents the basic policy directions to strengthen green competitiveness. Next, it discusses the possibility of introducing an environmental- information disclosure (EID) system to promote the voluntary environmental compliance of the private sector, with the aim of advancing the current policy from the existing regulation-oriented, 80 market-based environmental policy. The EID system is an institutional mechanism that can induce the active and voluntary participation of the industrial world. The system is expected to have the positive effect of simultaneously increasing green competitiveness and productivity by encouraging companies to voluntarily improve their business fundamentals.
Basic policy directions to improve green competitiveness The greening of industries is a core determinant that is necessary to secure competitiveness (without environmental damage) and sustainable growth. The following basic policy directions are suggested to strengthen green competitiveness through the greening of industries.
Environmental information (public) disclosure (EID) system The environmental policies to date have been based on three main pillars: directions and regulations, market-based mechanism, and the environmental-information disclosure system. The first two pillars or instruments have their own limits, raising the possibility of considering the third one (the “environmental- information disclosure system”) as an alternative. It is a measure to promote green competitiveness by encouraging the voluntary participation of carbon-emitting economic entities, especially companies. In the examination of international case studies of the EID system (USA and three Asian nations), it was found that an effective EID system, well-equipped in terms of scope and target, can be a good alternative to the two traditional policy A Study on the Relationship between Green Competitiveness and Productivity 81 approaches. An EID system based on the voluntary participation of the private sector can serve as an integrated environmental instrument enabling the conventional function of environmental monitoring as well as self-regulation and social pressure at the same time through a centralized, public environmental performance rating system.
Basic Policy Directions for Industry Greening
Set the basic policy direction; create a policy environment - Strong leadership of the policy authority Provide active support for industry-driven greening initiatives Nurture and disseminate new environment-related technologies (Optimal) combination of relevant policies Market-based instruments Regulatory instruments Information-based instruments
Companies will respond strategically to the introduction of the EID system. The system will serve as a social pressure, reflecting the views of local environmental groups, investors, and consumers towards the companies. The companies will be induced to improve their environmental performance and to share the information regarding such with the public as doing so will enhance their corporate image and value and will ultimately raise their economic profits. In conclusion, the EID system can serve as an effective and comprehensive tool, raising awareness among the private sector of the fact that compliance with environmental regulations is not simply a constraint limiting their business activities but a 82 minimum requirement. To put it in another way, each company will be encouraged to enhance its fundamentals voluntarily to raise its productivity and to maximize its benefits from greening its business, rather than being concerned about the costs involved in greening. Therefore, the EID system is considered as one of the most efficient ways to raise green competitiveness and productivity at the same time. Research Report 2011-594
Determinants of Technology Innovation Performance in the SMEs of Korea and Policy Implications
Ji-sung Hong and Seok-il Hong
The Efficiency of Investment in Regional Manufacturing Industries and Analysis of its Effectiveness 85
Chapter 1. Introduction
The activation of the technological innovation of small & medium enterprises (SMEs) has emerged as an important policy task in Korea. However, concern has grown over the fact that investment sentiment as far as technological innovation in Korean SMEs is concerned has recently exhibited downwards signs amidst economic contraction and uncertainty over the future in the aftermath of the global financial and economic crisis. The intensity of the government’s financial support for SMEs has also decreased. There is a need to heighten the efficiency and effectiveness of the innovative activities carried out by SMEs, which see such undertakings as a realistic alternative. Put differently, the improvement of the actual effectiveness of the R&D investment made by SMEs, and of the government’s support policies, is predicated on the elimination of the obstacles to the smooth functioning of the innovative mechanism composed of 86 preliminary planning technological development activities technological achievements commercialization of achievements. The elimination of obstacles to the innovative activities of SMEs is predicated on the conduct of empirical analyses and research that is based on actual technological innovation within the relevant industrial sector. Although research on technological innovation has been activated in recent days, the majority of such works have been limited to cross-section analyses based on surveys conducted at a specific point in time and simple analyses of R&D inputs and innovation performance where performance analyses are concerned. As such, there has been a lack of complex analyses that have taken into account the uniqueness, diversity, and actuality of SMEs. In this regard, the present study examines how the behavior and performance of technological innovation changes in accordance with the experiences and competencies accumulated by SMEs in terms of the technological innovation. In addition, it also looks at the major factors that determine innovation performance by analyzing time series panel data at the enterprise level. More specifically, this study analyzes the current state of the actual field and the policy demands of SMEs in an in-depth manner, with the main focus being on the management of the technology (MOT) tools which are controllable by enterprises. Based on the results of these analyses, policy alternatives capable of improving the actual effectiveness of SMEs technological innovation are introduced as part of efforts to establish a virtuous innovation ecosystem. Determinants of Technology Innovation Performance in the SMEs of Korea and Policy Implications 87
Chapter 2. Analysis of behavioral changes in terms of the technological innovation of small & medium enterprises (SMEs) continuously engaged in R&D
Innovative activities such as the input of resources for technological innovation and the methods in which such activities are undertaken have emerged as important factors influencing innovation performance. As such, they have become important policy tasks. The establishment of a virtuous innovation ecosystem for small & medium enterprises (SMEs) that have continuously carried out technological innovation should be focused on the continuation of the expansion of R&D investment. Moreover, the methods in which R&D investment is implemented should be further developed, and performance should be continuously heightened. This study analyzes the evolutionary process of the innovative activities of 216 small & medium manufacturing enterprises that have continuously extended R&D investment since the mid 2000s. The evolutionary process is divided into three stages: input of resources-> development-> output. The results are summarized as follows. First, at the input of the resources needed for technological innovation stage, SMEs that have consistently engaged in R&D have also annually increased the budget set aside for R&D investment. However, the ratio of R&D investment to sales has decreased overall. Meanwhile, the level of organizational structuring in terms of technological development has constantly remained high. Moreover, the ratio of manpower engaged 88 exclusively in technological development has also remained somewhat higher than that of overall employees. This implies that the necessity for expenditures related to business activities such as sales and marketing has increased as the size of enterprises has gradually expanded. This reflects the change in the priority in terms of expenditures in the aftermath of the global financial crisis of 2008. Nevertheless, in the case of technological development organizations and human resources, enterprises have, despite the difficult external environment, tended to manage their R&D department in a conservative manner because of the fact that it takes a long period to employ, train, and use the necessary resources. Second, at the innovative activities implementation stage, new product development has accounted for the biggest ratio in terms of the various key technological development tasks. However, the ratio made up by the tasks related to the improvement of existing products has rapidly increased. A look at the novelty of the developed technologies based on the global diffusion of technological development tasks reveals that the main focus has been on the development of technologies that have already been developed in advanced countries. As such, there has been a weakening of technological novelty in the aftermath of the global economic crisis of 2008. In terms of the goals and motivations for technological development, this study found that the most common motivations were those related to production and technology, such as the improvement of the performance and quality of existing products. This ratio has in addition become even larger in recent days. This Determinants of Technology Innovation Performance in the SMEs of Korea and Policy Implications 89 would seem to indicate that the goals of the technological development undertaken by SMEs have become more passive and conservative. In this regard, the necessary task of strengthening radical innovation so as to ‘develop new markets’ can be included as one of the active goals of new technology development. Although self-development remains the main means of acquiring needed technologies, there has been an increased focus on joint development from the mid 2000s onwards. However, the fact that the use of cooperative partners such as universities (professors) and large enterprises, as well as with regards to the satisfaction with joint development ventures, has been sporadic indicates that there remains room for improvement. As far as the methods used to protect and employ the developed technology, the application of intellectual property rights has increasingly been accompanied by a focus on industrial confidentiality and the seeking of new markets. The focus on industrial confidentiality has been expanded since the late 2000s. Third, the success rate of technological development activities in terms of technological innovation outcomes was estimated at 51%, which was relatively lower than that of the comparative group. Furthermore, the success rate exhibited a steady downward trend even during the period under analysis. This should be improved. The success rate in terms of commercialization was only 32%, a result that was deemed to be in keeping with that of technological development. A look at the effect of efforts to heighten the financial management performance of technological innovation shows that 90 such endeavors have clearly contributed to increasing overall sales. However, the contribution in terms of the ratio of sales and exports, as well as the profitability of the developed product, has been irregular. In addition to technological innovative activities, it appears that other factors have also worked in a complex manner where financial management performance is concerned. In order to assess the heightening of overall enterprise competitiveness, an analysis of the ratio of enterprises that had been accredited as innovative ones by the government was undertaken. To this end, some 70% of enterprises were found to have been accredited as innovative enterprises. The fact that this trend continuously increased during the analysis period would seem to indicate that technological innovation constitutes an effective means of heightening enterprise competitiveness. However, while there has been an outstanding increase in innovative enterprises (Inno-Biz), the ratio of venture enterprises has decreased. Thus, we can see the necessity to strengthen innovativeness based on strenuous entrepreneurship.
Chapter 3. Analysis of the Factors Impacting Technological Innovation Performance
As part of efforts to identify the factors which impact the technological innovation performance of Korean SMEs, this study conducted a panel analysis of 216 SMEs that have continuously invested in R&D since 2003. First, technology performance, which represents a dependent Determinants of Technology Innovation Performance in the SMEs of Korea and Policy Implications 91 variable in the analysis of technological innovation performance, was calculated based on the number of intellectual property rights, success rate of technology development, and the level of technological competitiveness. In terms of the impact variables used to explain the analysis results, this study employed management of technology (MOT) variables controllable by enterprises such as R&D investment concentration, key development fields, and implementation methods, as well as the support policy of the government. Meanwhile, other conditions were controlled by using demographic variables such as industrial characteristics and size of enterprise as extraneous control variables. Although all of the analysis models were found to be statistically significant, the degree of statistical significance and the degree of significant impact variables tended to differ depending on which technological performance index was employed. The differences between the anticipated direction of the impact factors based on existing empirical analyses conducted in Korea and abroad and the actual results uncovered in conjunction with Korean SMEs in this study is summarized in the following table. The main results of this analysis were: First, in addition to R&D investment concentration, the other management of technology (MOT) variables controllable by the SMEs also significantly influenced technological innovation performance in a statistical manner. Thus, to heighten the actual effectiveness of technological performance, it is necessary to heighten not only the size of R&D investment, but also the actual effectiveness of other related activities. 92
The results of the panel analysis of the factors lmpacting technological innovation performance
Number of Success ratio Level of intellectual of technological property technological competitiven rights development ess
Extraneo Industrial dummy 2 + - + - us (high tech) control Industrial dummy 3 variables (mid tech) + + Size of enterprise (number of + + + - + + employees) History of enterprise + + + + +
Note : generally expected direction result of empirical analysis of Korean SMEs Determinants of Technology Innovation Performance in the SMEs of Korea and Policy Implications 93
Second, contrary to the results of previous studies, certain variables failed to record any statistical significance. Certain variables even went in a direction that was contrary to what was anticipated. Such variables were R&D investment concentration, task characteristics (new technology development), task innovation, researcher motivation, and the use of joint development activities as a technology development method. While such outcomes can be explained by the characteristics of SMEs, such as the level of developed technology, it also has something to do with the absence of an adequate implementation strategy that reflects development goals and task characteristics. The spread of borderless competition in both the domestic and international markets has rendered it necessary to heighten and ensure technological innovation performance through thorough preliminary planning and the concretization of joint development with external innovation actors, two factors whose importance has recently been emphasized. Third, extraneous variables such as the characteristics of the industry, to which the enterprise belongs, and size and history of the enterprise significantly influenced technological innovation performance. SMEs cannot control these extraneous variables. However, as they clearly make a difference in terms of technological innovation performance, it becomes incumbent upon the government to design differentiated or tailored policies that take these characteristics into consideration. Meanwhile, this study also conducted a panel analysis of the factors impacting commercial innovation performance, which can be regarded as the ultimate results in terms of the developed 94
Results of the panel analysis on factors impacting commercial innovation performance
Ratio of sales Satisfaction Rate of Rate of attributed with sales operatin to the contribution increase g profits developed to sales product
The usage strategy of developed technology 1 (legal and + + + + + - institutional protection)
The usage strategy of developed - technology 2 (internalization) + + + + Commerciali Sales source strategy 1 - - zation (large enterprise) + strategy variables Sales source strategy 2 (public sale) - Sales source strategy 3 (export) + - - The ratio of advertising costs + - Usage of external networks + + + + + + + Usage of internal networks + + + + + + + Policy Policy fund dummy (use) - variable + + + + Lehman scandal dummy (after) - - - - - Industrial dummy 1 (up-to-date tech) + + + + Extraneous Industrial dummy 2 (high tech) + + + + + control variables Industrial dummy 3 (mid tech) + - + + + + - Size of enterprise (number of employees) + + + + History of enterprise + - + - + Note: previously expected direction Result of post-empirical analysis Determinants of Technology Innovation Performance in the SMEs of Korea and Policy Implications 95 technology. As far as the dependent variables for commercial innovation performance are concerned, the present study employed the ratio of overall sales attributed to the technological product, contribution to growth (increase rate of sales), contribution to profitability (operating profits), and perceived degree of contribution to sales. In terms of the explanatory variables, the analysis employed as the extraneous variable industrial characteristics such as the size of enterprise and demographic characteristics. Meanwhile, certain technology management activities and government policy that could be controlled by enterprises were utilized as strategic variables. In addition, commercialization related variables such as those related to sales and marketing, which greatly influence financial management performance, were also considered. The result of the panel analysis of the 216 SMEs that have continuously engaged in R&D, whose technological innovation performance was measured above, is summarized in the following table. A comparison was conducted of the preliminarily expected directions and the actual directions uncovered as a result of this empirical analysis in terms of what impact factors would influence commercial results., expectations which were based on empirical studies conducted in Korea and overseas, with the actual directions uncovered as a result of this empirical analysis was conducted. This exercise revealed that while all analytical models were statistically significant, the nature of the statistically significant impact factors tended to differ depending on what performance indexes were being discussed. 96
The main characteristics uncovered by the analysis can be summarized as follows. First, various variables other than R&D investment concentration and the other management of technology (MOT) variables were found to influence commercial innovation performance; these included the commercialization strategy variables, the external management environment (the involved industry, global financial crisis), size of enterprise, and the history of the enterprise. In other words, the heightening of commercial innovation performance requires not only the management of technology (MOT) variables, but also harmonization with other variables such as those related to commercialization. Second, there were many variables which showed that product innovation has naturally exhibited a certain superiority over processing innovation in terms of the sales ratio of the developed product and the rate of increase with regards to sales. However, some of the variables proved to be unclear in terms of expected performance or even moved in an opposite direction. For example, R&D investment concentration and the success rate of technology development were found to have a negative relationship with profitability. Although this can be attributed to the time lag in terms of technological development performance, further improvements will nevertheless be required in the future. Third, in terms of the facilitation of the commercialization of the developed technology, the study emphasized the importance of preliminary efforts such as activities both within and outside of the network related to the protection and utilization strategy for the developed technology, and the ensuring of markets early for Determinants of Technology Innovation Performance in the SMEs of Korea and Policy Implications 97 the developed product. Thus, this particular task should be carried out in accordance with the enterprise’s development goals and the nature of the tasks.
Chapter 4. The actual state of the creation of technological innovation performance and related future tasks
The analysis of the factors impacting the technological innovation performance of SMEs revealed that the strategic management of technology (MOT) variables such as preliminary planning, joint development, protection and usage of the developed technology, and early securing of markets, were especially important in ensuring both technological and commercial performance. In conjunction with these variables, the present study examined the actual state of the implementation of technological innovation by SMEs, the difficulties they faced, and their demands at the policymaking level, in an in-depth manner. The population for the structured survey investigating the actual state of affairs focused on small & medium manufacturing enterprises registered in the data system of Inno-Biz and the Korea Enterprise Data which had engaged in R&D investment at least once. 418 SMEs were surveyed. The actual state of the implementation of the ‘preliminary planning’ found to be an important strategic management of technology (MOT) variable in terms of creating technological performance can be summarized 98 as follows. SMEs properly perceived the importance of the preliminary planning function in heightening technological performance. However, the survey also revealed that a lack of internal resources resulted in the development period and the funds for the preliminary planning being insufficient. The main actors responsible for the preliminary planning function were limited to the CEO of the enterprise and those in charge of technology development. Many enterprises have turned to outside help to overcome these limitations. The main difficulties associated with implementing the preliminary planning function included the lack of time and funds, uncertain market situation, and the lack of precise information. Enterprises were expected to in the future strengthen efforts to overcome these difficulties. Next, as far as the technological performance variable known as ‘development method’ was concerned, which also constitutes a strategic management of technology (MOT) variable, technology development methods exhibiting high degrees of development performance were found to include ‘enterprise-led development based on external cooperation’ and ‘self-development by enterprise’. The major decision-making factors in terms of technological development methods were development funds, market situation, and development manpower. Many of the participants identified the need to decrease ‘external-led cooperative development’ and ‘outsourced-consigned development’ as the main areas that will require improvement in the future, and to continue to focus on ‘enterprise-led development based on external cooperation’ and ‘self- Determinants of Technology Innovation Performance in the SMEs of Korea and Policy Implications 99 development by enterprises.’ Meanwhile, a look at the actual state of the implementation of the ‘protection and usage of developed technology strategy’ found to be an important management of technology (MOT) variable in terms of commercial innovation performance revealed that SMEs put great effort into the protection and usage of their technological outputs. In terms of detailed methods, SMEs employed: ‘application and registration of intellectual property rights,’ ‘protection of internal confidentiality,’ ‘design of products difficult to imitate,’ and ‘early release to the commercialization market.’ In terms of the implementation or degree of self- commercialization involving the use of the developed technology, the survey revealed that about 90% of SMEs had linked more than half of their developed technologies to self-commercialization efforts. In addition, they also intended to in the future further strengthen their efforts to implement the protection and usage of their technological development outputs. The examination of the actual state of ‘securing early markets’ for the developed product, which represents yet another MOT variable that determines commercial innovation performance, revealed that many SMEs are in fact aware of the importance of securing early markets as a means to heighten commercial performance in terms of technological innovation. The importance of domestic enterprises and overseas export markets in terms of sales markets was also highlighted. The difficulties associated with securing early markets when implementing the commercialization of developed technologies included the ‘securing and analysis of market information,’ securing and 100 management of distribution channels,’ and ‘ensuring purchasers’ trust’. Enterprises were expected to greatly strengthen their efforts to develop overseas markets as a means of securing early markets, and also to enter the large enterprise market as well as the public procurement market in Korea. Meanwhile, the government has established and implemented various supporting policies to heighten SMEs technological innovation performance, and in particular to activate the MOT variables mentioned above. The support policy for the factors determining technological performance has been concentrated on the provision of support for technological development. Various types of policy goal-based support have been provided from the standpoint of support targets, supported technology, and cooperation type. As far as preliminary planning support policy is concerned, the survey uncovered the existence of an ‘R&D planning support program’ designed to heighten the success rate by supporting the assessment of the feasibility of the new technology which SMEs intend to develop. However, this program has yet to be implemented in a full-scale manner. Next, the survey found that the majority of the policies enacted to support the factors determining commercial performance were designed to help secure early markets. Various support policies targeting specific markets such as domestic demand, domestic public procurement, and overseas exports have also been sought. The government’s efforts to prevent the demise of developed technologies has resulted in a general strengthening of support policies geared towards the protection and usage of the Determinants of Technology Innovation Performance in the SMEs of Korea and Policy Implications 101 developed outputs in recent days. A look at enterprises’ assessment of the government’s support policies reveals that, with the exception of the policies implemented in support of technology development methods, the support policies put in place by the government did not meet the demands of SMEs. Especially, the supply of support policies was found to be much lower than the demand with regards to the preliminary planning function. The supply-demand of policies related to the assessment of technological development methods was found to differ based on the method of development pursued. For instance, it was revealed that the supply of support policies related to self-development by enterprises and enterprise- led joint development did not meet the demands of SMEs. On the other hand, an examination of SMEs’ recognition, usage, and perception of government’s support policies’ contribution to performance revealed a generally high assessment of the support policies designed to secure early markets. However, SMEs’ perceptions of the government’s support policies linked to the preliminary planning function were found to be relatively lower than those for other factors, thereby indicating a need for improvement in this regard.
Chapter 5. Conclusion: Policy tasks
This study analyzed the actual state of the change of technological innovation activities as part of an effort to identify factors that impact technological innovation performance in a 102 statistically significant manner. Moreover, it also examined the strategic management of technology (MOT) variables by SMEs that have steadily invested in R&D in an in-depth manner. As a result, the necessity to bring about the following improvements to policies was identified. First, it is necessary to establish a virtuous cycle for technological innovation activities by bridging the gap in terms of the absence of linkages between technological innovation activities and technological innovativeness, a gap which has impeded active participation where investment in technological innovation is concerned. In addition to investment in technological innovation, other strategic management of technology (MOT) variables were also found to greatly influence technological innovation performance. As such, there is a need to heighten the actual effectiveness of technological innovation through the improvement or activation of innovation activities. Second, innovative, daring, and adventurous investment in technological development has decreased since the contraction of investment sentiment in SMEs’ technological innovation in the aftermath of the global financial and economic crisis of 2008. This in turn led to a further emphasis onf the need to strengthen innovativeness as far as SMEs’ technological innovation activities are concerned. The government’s policy of actively promoting and strengthening innovativeness must be combined with concurrent efforts to heighten technological innovation performance that are based on the technology independently developed by SMEs. Third, while the industry to which they belong, size of Determinants of Technology Innovation Performance in the SMEs of Korea and Policy Implications 103 enterprise, and history of enterprise are amongst the extraneous variables that SMEs are hard-pressed to control, these variables greatly influence technological innovation performance and activities.; Thus, as such, it is necessary to design and offer demander-oriented support policies that reflect the characteristics of the technological innovation undertaken by individual SMEs. In particular, the government needs to further develop a support system that is based on market competition in order to minimize policy failure. In addition, it should also provide support that is in accordance with the difficulties faced by SMEs in terms of innovation activities as well as their demands in this regards. In other words, rather than simply providing development funds, the government should concentrate on developing and providing the policies that are ultimately needed by SMEs. Given this basic policy direction, it becomes essential to implement the following concrete tasks. First, the establishment of a virtuous ecosystem for technological innovation by heightening actual effectiveness is predicated on the immediate strengthening of the linkages between planning, development, commercialization, and performance, the concretization of open-minded innovation such as joint development ventures, and the use and protection of developed technologies in a strategic manner. Second, the maximization of the spillover effect into the national economy through the improvement of innovativeness was found to require the inducement of active investment in technological innovation, the strengthening of the innovativeness of technological development tasks, and the provision of support 104 for SMEs to become global technological innovation enterprises. Third, in terms of the heightening of the actual effectiveness of technology support policies through further advancement, this study revealed the necessity to strengthen the policies related to the smooth functioning of the innovation system and to heighten SMEs competencies with regards to the management of technology (MOT). Research Report 2011-595
The Spatial Pattern Analysis of Economic Activity Focusing on Linkages between Regional Economic Activity and Migration
Chang-Uk Byeon, Yoon-Ki Choi and Dong-Soo Kim
The Efficiency of Investment in Regional Manufacturing Industries and Analysis of its Effectiveness 107
Chapter 1. Introduction
1. The background and necessity
The growing importance of regional economies has had the effect of moving the debate beyond their concrete expansion to the development of related polices. The successful planning and implementation of policies that closely reflect reality during this process is predicated on a review of whether individual mega- regional economic zones possess the basic conditions for indigenous development. A mega-regional economic zone policy based on economies of scale can only achieve results when the innovative capabilities of regional enterprises are developed and linked to job creation and increases in income through the synergy formed within the networks forged between enterprises. In this regard, it becomes necessary to conduct a thorough fundamental analysis of the patterns and factors related to regional economic activities. 108
Seeking to satisfy the recent significant interest in regional economies and the need for basic analysis of the effective implementation of related policies, the present study focuses on spatial patterns of economic activity. The main subject under analysis is the so-called population issue that plays the central role in the formation of the spatial patterns of economic activity. Specifically, as part of efforts to deal with the issue of population at the regional rather than the national level, particular attention is paid herein to population migration, a factor that greatly influences changes in regional populations.
2. The contents and scope of the study
This study focuses on the influences of population migration on regional economic activity, and conversely, on the influences of regional economic activities on population migration. Regional economic activity is analyzed centering on factors such as regional productivity and labor market outcomes. This focus on population migration as part of the analysis of the spatial patterns of economic activities can be explained in part by the importance of population migration in regional population changes. In addition, population migration is both theoretically and concretely correlated to regional economic activity. This study focuses on the following elements in conjunction with the roles and influences of population migration in changing regional economic activities. First, an examination of changes in the patterns of regional economic activity and population migration and the mutual relationship between the two is The Spatial Pattern Analysis of Economic Activity 109 conducted. Second, the study delves into the question of whether there is a causal relationship between regional economic activity and population migration. Such an exercise is designed to ascertain the influence of regional economic activity on population migration and alternately, the influence of population migration on regional economic activity. Lastly, an attempt is made to derive implications pertaining to population migration when establishing and implementing future regional policy. As part of wider efforts to examine the roles and importance of population migration in regional economic activity, the study begins with a perusal of related bibliographies. Moreover, tools including gap and cross-sectional trend analyses are used to evaluate the current state, patterns, and mutual relationships between regional economic activity and population migration. Efforts are also made to empirically analyze the correlation between regional economic activity and population migration using quantitative methods focused on the tasks that have been developed based on the analysis of the current state of affairs. Lastly, this study also introduces policy implications based on the main results derived from the analysis of the current state of affairs and the empirical analysis. Although many similar studies have been conducted, this study is unique in the following regards. At its core, the present study simultaneously analyzes the cause and effect relationship that exists between regional economic activity and population migration from the standpoint of their correlation. In addition, this study differs from existing studies in that it conducts an analysis that reflects population migration characteristics such as gender 110 and age, and then derives the necessary implications. Thus, this study can be regarded as being more advanced than others. Lastly, this study stands out from similar research in that it analyzes the correlation between the regional economic activity and population migration at the city, provincial, and regional levels, and derives the implications needed to establish policies at such levels.
Chapter 2. Theoretical review: correlation between regional economic activity and population migration
1. The theoretical discussion of regional economic activity and population migration
Under the traditional regional growth model, the mobility of goods and production factors has been viewed as inducing the convergence of inter-regional economic power. Especially, the mobility of production factors such as capital and labor induce the inter-regional homogenization of factor proportions and, based on this homogenization, inter-regional income convergence. Meanwhile, under the new economic geography and endogenous growth theories, inter-regional trade and factor mobility can potentially simultaneously lead to the convergence and divergence of inter-regional economic power. As such, under all models, factor mobility greatly influences regional economic power and economic activities. For example, factor mobility may very well simultaneously influence the convergence of inter- regional economic power and contribute to the divergence of The Spatial Pattern Analysis of Economic Activity 111 inter-regional economic power. As far as factor mobility is concerned, labor or population migration is known to in particular interest policymakers, in that, it greatly influences regional economic activity through its reaction to economic and demographic factors, and leads to the geographic relocation of the labor force. The study of population migration can be divided into two portions: While one examines the determining factors leading to population migration, the other analyzes the influence of population migration on regional economic activity. Population migration is influenced by social and cultural differences such as regional income levels and employment situations as well as economic activities. At the same time, population migration influences the regional labor market and productivity and leads to a regional gap in economic outcomes that in turn causes positive or negative effects in the regions where the population has increased or decreased.
2. Empirical analysis of regional economic activity and population migration
The empirical analysis of the factors determining population migration can be broken down into a micro analysis of individual tendencies and a macro analysis under which spatial characteristics are perceived as the main determining factor. Age, gender, academic background, and marital status are included amongst the important factors which motivate individuals to engage in population migration. In addition, spatial characteristics 112 such as the size of the regional population, distance between regions, income level, labor market, and environmental variables, also influence population migration. Meanwhile, the studies on the influence of population migration on regional economic activity can be divided into those dealing with the influence of population migration on the regional labor market and those concerned with its influence on regional growth. The studies on the influence of population migration on the regional labor market dealt with issues related to the regional unemployment rate, continuity of employment-to-population ratio, and the relationship between population migration and jobs. Meanwhile, those concerned with the influence of population migration on regional growth have consisted of theoretical studies and empirical analyses dealing with the question of whether population migration functions as a convergence factor which regulates the regional gap in terms of economic power. At the same time, studies have recently been conducted on the topic of its role in bringing about divergences in inter-regional economic power through skill-selective migration and the brain drain.
Chapter 3. Analysis of the current state of regional economic activity and population migration
1. Trend analysis of regional economic activity
Among the various regional economic activities, the present study focuses on regional productivity and regional labor markets. The Spatial Pattern Analysis of Economic Activity 113
In this regard, both are related to population migration and can be used to examine the regional economic situation and conditions from the standpoint of economic performance.
Trends in regional productivity The gross regional domestic product (GRDP) increased by an annual average of 4.6% during the period spanning from 1989-
Labor productivity gap by industry
Regional Level Coefficient of variation Coefficient of variation in the in the manufacturing service industry and overall industry industries
Manufacturing industry service industry overall industry
City & provincial Level Coefficient of variation Coefficient of variation in the in the manufacturing service industry and overall industry industries
Manufacturing industry service industry overall industry 114
2009, with the Chungcheong region experiencing the biggest productivity improvement, which expanded by an annual average of 5.9% . This improvement in productivity in the Chungcheong region can be attributed to a population increase that was in keeping with the national level, and the highest annual average GRDP increase (6.5%) nationwide. The regional gap in productivity has continuously expanded in the 2000s at the regional, city, and provincial levels. This can be explained by the continuous expansion of the regional gap in the improvement of labor productivity within the manufacturing industry since the late 1990s. The improvement of productivity in the Chungcheong, Chungnam, and Gyeonggi regions, where the growth of the manufacturing industry and employment increase was relatively higher, has had a great influence on the expansion of the gap in labor productivity between the various regions’ manufacturing industries. On the other hand, the improvement of productivity within the service industry has been much lower than that in the manufacturing industry, and the inter-regional gap has also remained very limited as well. While the difference in the growth trends between the service and manufacturing industries has been limited, the above results can be regarded as the result of the outstanding increase in employment in the former. Due to factors such as labor force mobility between industries and regions, and the new employment created during the changing process of the industrial structure marked by the shift to a service economy and deindustrialization, employment has by and large been concentrated in the service industry. However, improvement in The Spatial Pattern Analysis of Economic Activity 115 productivity has been slow due to the fact that industrial growth remains relatively low amidst a situation in which no progress has been made in terms of the activation of domestic demand.
Trends in the regional labor market With the exception of the Jeju region, the regional gap in terms of the regional, city, provincial labor markets remains limited when compared with the gap in productivity. Certain continuity across periods is also evident. The continuity of the labor market indicators was much more pronounced at the regional level than the city and provincial ones. This would seem to indicate that there have been few changes in terms of the gap between regional labor markets. In the case of the labor market at the city and provincial levels characterized by relatively lower continuity, the labor market is seen as being regulated by population or labor mobility. Elements such as the regional demand for labor and supply factors have played a comprehensive and determining role where regional labor market indicators are concerned. In this regard, the higher the economic activity participation ratio exhibited by a region, the higher its employment rate became. Meanwhile, regions with higher economic activity participation rates (employment rate) boasted low unemployment rates. While some regions exhibited characteristics that deviated from this trend, this denouement can be attributed to factors such as the regional industrial structure and characteristics of the metropolitan region. As far as the economic participation and employment rates at the regional level based on academic background and age were 116 concerned, the study found that the Chungcheong region exhibited relatively high levels amongst highly educated individuals and younger workers; meanwhile, the Honam area recorded high levels amongst the middle-aged and older workers as well as amongst those who did not achieve a high school degree. From the city & provincial levels, the study found that Chungnam Province exhibited high economic activity participation and employment rates amongst university graduates and younger workers. For its part, Jeonnam Province exhibited high economic activity participation and employment rates amongst those with a limited education and middle-aged and older workers. The unemployment rate was high in the capital area and in metropolitan cities. The unemployment rate amongst highly educated individuals with at least a university degree was found to be high in the Honam and Gwangju regions. The unemployment rate amongst those did not obtain a high school degree was high in the capital area, and in particular in Seoul and Incheon. These results appear to have been caused by a mismatch between the level of jobs associated with specific academic backgrounds and the demands of regional job seekers. In terms of the unemployment rate by age group, the study found that while the Honam region had a high degree of unemployment amongst younger workers, the capital area exhibited a high unemployment ratio across all age groups. While Gwangju exhibited the highest unemployment levels in terms of the younger workers at the city and provincial levels, Incheon featured the highest unemployment ratio where middle- aged and older workers were concerned. Regional and local The Spatial Pattern Analysis of Economic Activity 117 deviations in terms of the labor market indicators were found to decrease across the board when the subject was a young male who possessed a higher academic background. To this end, higher the inter-regional population migration amongst those possessing these characteristics resulted in the much more active regulation of the regional labor market. Furthermore, the regional deviation was found to be larger than the local deviation of women’s economic activity participation and employment rates. Analyzing the convergence of employment related indicators, we find that the regional gap in terms of the economic activity participation rate and employment rate exhibited similar trends during every period under analysis, namely that after expanding from the late 1990s to the early 2000s they began to ease from the mid 2000s onwards. At the city & provincial levels, the gap has, despite certain fluctuations, remained as is or even decreased since the mid 2000s. Nationwide, employment increased by an annual average of 1.5% during the period spanning from 1989-2010. Moreover, while the Jeonnam region recorded a decrease, the capital area, Chungcheong, Gyeonggi, Incheon, Daejeon, and Chungnam regions actually showed an upswing in jobs. In terms of jobs and variables such as gender, academic background, and age, the study found that although the number of jobs for women, university graduates, and the older population greatly increased, the number of youth jobs increased by an average that was lower than that recorded for overall jobs. Meanwhile, the number of jobs available to those who did not graduate from middle school decreased. 118
The regional gap in employment related indicators
Regional Level Coefficient of variation Coefficient of variation in the in the unemployment employment rate and economic rate activity participation rate
City and Provincial Levels Coefficient of Coefficient of variation in the variation in the employment rate and economic unemployment rate activity participation rate
As far as job creation for younger workers is concerned, a group that exhibited a lower increase than other age groups, the study found that many of the jobs desired by youth require an undergraduate degree or higher. However, given the slow pace of job creation and of the regional demand for labor, the above- mentioned regional gap may very well have more to do with the fact that there simply are not many jobs available to those with a The Spatial Pattern Analysis of Economic Activity 119 higher education. This has emerged as a factor that has greatly complicated youth’s ability to engage in job-seeking activities within the region. As such, these seemingly continuous regional deviations amongst the younger workers are expected to have a significant influence on the current and future regional economy.
2. Analysis of the current state of population migration
Analysis of population change and movement The Korean population increased by an annual average of 1.0% during the period spanning from 1970-2010. However, this increase has slowed in recent days. Viewed from the standpoint of age, the proportion of the population that is 60 or older has increased by an annual average of 3.9% as Korea move towards becoming an aging society. This trend has been especially pronounced since the 1990s. Meanwhile, the increase amongst the youth has been limited to a level of 1.3%, and even decreased since 1990s. Finally, children and teenagers decreased by an average of 1.0% during the same period. The decline in the birth rate and extension of average life expectancy has had the effect of moving Korea’s population structure from the pyramid-type structure characterized by high birth and death rates during the 1970s to the bell-type structure found in advanced countries during the 2010s. Although a similar population structure has been evident at the regional level, the capital area has in particular been characterized by a high ratio of younger workers between the ages of 20-39. Meanwhile, the southeast region recorded a high ratio of middle-aged workers, 120
Population pyramid
Female Female male male
and the Honam region of older workers. In terms of population change, net migration has played an important role in the dynamic movement of population within regions. A natural change in the population is supposed to have a positive (+) value across all regions. However, based on the difference in net migration, areas are in fact separated into population-increased and-decreased areas.
Analysis of migration rate The migration rate, which is defined as the in-migrant and out- migrant population at the inter-regional and city and province levels, was revealed to be 2.7~3.9% at the inter-regional level and 5.4~7.5% at the inter-city and provincial levels. This implies that many elements of regional economic activity can be greatly influenced by population migration. The migration rate has shown itself to be sensitive to short-term economic fluctuations. Over the long term, this rate has decreased amidst the easing of urban concentration caused by the development of transportation and telecommunications. The Spatial Pattern Analysis of Economic Activity 121
Inter-regional Economic cycle Inter-city and migration rate / business cycle provincial migration rate
Changes in the migration rate by age and gender (1995-2009)
Inter-regional level Inter-city and provincial level
Female Female male male
Regardless of whether we are talking about inter-regional or local migration, the migration rate amongst the youth whose ages ranged from 20-39 was found to be higher than the average rate. In particular, the inter-regional migration rate amongst those whose ages ranged from 25-29 was 6.2%; meanwhile, the inter- city and provincial migration rate was 11.8%. Across all points in time, young workers between the ages of 20-39 and 25-29 exhibited a continuity that was not evident in the overall migration rate between regions, cities, and provinces. The intra-region and city & provincial migration rates were higher than the inter-regional, city, and provincial migration rates. 122
The gap in the intra- and inter-regional migration rates was found to be particularly big, a denouement that can be explained by the fact that inter-regional migration involved relatively long distances and moving costs that were deemed to be higher because of the existence of various cultural differences. The intra-regional migration rate was found to be high in the capital area and metropolitan cities. Here, the conclusion was reached that the motivation to migrate from the present region to another was not very strong because of the presence of good physical and economic infrastructure in the former. The capital area as well as the Chungcheong region has exhibited a positive (+) net in-migration since 2000. Viewed from the city and provincial levels, a net in-migration emerged in Gyeonggi, Incheon, Daejeon, and Chungnam; meanwhile a net out- migration occurred in Jeonnam, Jeonbuk, Busan and Seoul. Amongst the younger workers, who exhibited high migration rates, the intra-regional migration rate was estimated to be 20.7% and the inter-regional migration rate 4.4%. Similar to the overall migration of population, the net in-migration of younger workers has only occurred in the capital area as well as the Chungcheong region since 2000. Viewed from the city and provincial levels, the net in-migration of younger workers occurred in Gyeonggi, Incheon, Daejeon and Gyeongnam, a net out-migration emerged in the cities and provinces of Honam region such as Jeonbuk and Jeonnam. The migration of younger workers accounted for half of the total population migration rate. The in-migration of younger workers to the capital area was particular significant. In the case of those between the ages of 25-29, which The Spatial Pattern Analysis of Economic Activity 123 exhibited the highest migration rate, while a high intra-regional migration rate was recorded for women, a significant inter- regional migration rate was uncovered for men. The linking of the high intra-regional migration rate to labor market conditions lends itself to the conclusion that the deviation of the regional employment rate spurred women to opt for intra-regional migration. The highest in-migration ratio was from the Honam and Chungcheong regions to the capital area. As far as the other regions are concerned, the in-migration ratio was found to be high in the case of Honam -> Chungcheong, southeast region -> Honam, southeast region -> Daegu-Gyeongbuk, Chungcheong -> Gangwon, and southeast region -> Jeju. The highest in-migration rate amongst younger workers was found to be that from the Honam region to the capital area.
3. Linkage analysis of the current state of regional economic activity and population migration
The potential linkage between the two variables was investigated based on an analysis of the cross-sectional trends in terms of regional economic activity and population migration. When approached from the standpoint of labor productivity, a certain causality was uncovered between the gap in inter-regional productivity and population migration. From an individual industry standpoint, a strong causality can be anticipated between productivity convergence within the service industry, where a great increase in employment has taken place, and population 124 migration. A particularly significant linkage between the migration of younger workers and the increase in employment is also evident. Although no examination of whether the gap in labor market outcomes was increased by population migration was conducted, a linkage between the two variables is nevertheless believed to exist in the form of changes in the size of labor supply wrought by population migration. However, the possibility also exists that labor market outcomes may be expanded as a result of population migration between regions; moreover, the latter may also impact productivity convergence between cities & provinces. Significant linkages were uncovered between population migration and labor market outcomes within individual regions.
Chapter 4. Empirical analysis of regional economic activity and population migration
An empirical analysis was undertaken of the linkage between regional economic activity and population migration. This analysis focused on the following aspects as follows. First, using a cross-sectional trend analysis, an attempt was made to empirically confirm the existence of causality between regional economic activity and population migration. Second, the influence of regional economic activity on population migration was reviewed based on an empirical analysis. Here, particular attention should be paid to the extent of sensitivity of population migration to jobs, age and gender. Various other factors related to population migration were also The Spatial Pattern Analysis of Economic Activity 125 examined. Third, the influence of population migration on productivity outcomes and regional labor markets, which constitutes one of the main areas of interest in studies on population migration, was also examined.
1. Analysis of the mutual causality of the population migration gap and regional economic activity
While the analysis of the mutual causality between the population migration gap and regional economic activity based on the Granger Causality Test did in fact reveal the existence of such causality between the two variables, the latter tended to vary depending on whether the unit of analysis was city and province or region. A causality test of GRDP per capita, which constitutes the variable used to measure the productivity gap, in a specific region versus GRDP per capita at the national level was conducted. Put differently, this can be regarded as a causality test between relative GRDP per capita and the net migration rate. In this regard, at both levels of analysis (region, and city & province), no causality was uncovered between the two variables across the entire sample. However, the net migration rate amongst younger workers at the regional level during the period spanning from 1995-2009 was found to influence the relative GRDP per capita. This means that the population migration amongst younger worker either increased or decreased the relative productivity gap of a specific region vis-á-vis the national average. However, the 126 influence of the inter-regional productivity gap on in-migration or out-migration was not statistically significant. As far as the labor market was concerned, the mutual causality between the labor market gap, which was measured as the relative ratio of the national average for the employment rate, unemployment rate, and economic activity participation rate, and the net migration rate was examined. In terms of population migration across all age groups, the analysis revealed a strong mutual linkage between inter-regional migration and the labor market gap between regions, and in particular where the economic activity participation rate and employment rate is concerned. This would seem to indicate that the state of the labor market not only increases or mitigates the inter-regional gap, but is also closely related to the inter-regional in-migration or out- migration of population. The population migration between cities and provinces showed a mutual linkage with the gap in unemployment rate between the cities and provinces. Meanwhile, the inter-regional migration of younger workers did not exercise any control over the labor market situation. However, the regional gap in the unemployment rate and economic activity participation rate vis-‡-vis the national average was found to be a factor of influence on migration amongst younger workers.
2. Analysis of determining factors for population migration in terms of regional economic activity
While the present study also analyzed the determining factors The Spatial Pattern Analysis of Economic Activity 127 in terms of population migration, it differs from previous studies in that it focuses on the characteristics of the key actors involved in population migration and the range of the migration region. A comparison of the coefficient values estimated based on factors related to intra-regional and inter-regional migration revealed that intra-regional migration was more impacted by jobs, income, and educational conditions than inter-regional migration. Meanwhile, inter-regional migration was more influenced by innovative environment, land price, and the difference in the level of local public goods. A look at gender across the entire sample revealed that men showed a higher degree of sensitivity in conjunction with all factors other than job position. In the case of women, who exhibited a higher intra-regional than inter-regional migration rate, the jobs available to women within a region proved to be the most significant explanatory factor. For their part, men involved in inter-regional migration tended to be more sensitive to income and innovative environment. While the emphasis on income can be explained by the fact that men are usually the ones responsible for supporting their families, younger workers strong focus on innovative environment can be attributed to men ‘s adventurous nature of men. Middle-aged and older workers showed statistically insignificant results in conjunction with elements of the working environment such as jobs and income. However, the positive (+) value recorded in conjunction with land prices has been interpreted to mean that a preference for investment in assets facilitates population migration. Meanwhile, younger and middle- 128 aged workers were more impacted by educational conditions, a result which serves to highlight parents overall concern with education. The preference for a dynamic regional environment characterized by elements such as innovative creation was found to be statistically significant, with younger workers registering the highest coefficient value. In the case of inter-regional population migration, the study found that sensitivity decreased across all age groups where jobs and income was concerned. The sensitivity of younger workers to the innovative environment further increased in the case of inter-regional population migration.
3. Analysis of the influences of population migration on regional economic activity
The influence of population migration on regional economic activity youth labor was analyzed using a panel growth regression model. The estimation of the productivity convergence equation, which includes population migration, showed that the convergence of productivity did in fact, albeit in a limited manner, wield an influence at the regional level since 2000 and over the entire period under analysis at the city and provincial levels. In particular, it was revealed that population migration has influenced inter-regional productivity convergence more than inter-city and provincial productivity convergence since 2000. The migration of younger workers, which have exhibited a strong tendency to engage in population migration, also had a significant influence on productivity convergence. The migration of younger The Spatial Pattern Analysis of Economic Activity 129 workers played an important role in inter-regional productivity convergence. While population migration at the regional and city & provincial levels did not influence productivity convergence in the manufacturing industry at all, the migration of younger workers exhibited a statistically significant influence on productivity convergence in the service industry. Productivity convergence within the service industry has contributed to productivity convergence across all industries at the regional level and in particular, the migration of younger workers has contributed to productivity convergence in the service industry. Population migration also had a significant influence on labor market convergence. However, this value was not as significant as productivity. Although population migration did not influence inter-regional labor market convergence, it influence economic activity participation rate and employment rate convergence in a positive (+) manner; meanwhile, it also influenced unemployment rate convergence in a negative (-) manner. In particular, the migration of younger workers has recently influenced youth labor market convergence. The estimation of the convergence equation of labor market indicators revealed that population migration had a statistically significant influence on the economic activity participation rate only on younger workers at the city and provincial levels since 2000. This result was based on a convergence equation that included the population migration variable in the economic activity participation rate used to exhibit the number of job seekers vis-‡-vis the population size. The convergence equation of the employment rate revealed that population migration across all ages did not statistically influence 130 the convergence of employment rate at both the regional and city & provincial levels. However, the migration of younger workers has recently helped to mitigate the gap in younger workers at the inter-city and provincial levels in a positive (+) direction. As far as the unemployment rate is concerned, population migration did not influence the inter-regional unemployment rate convergence. However, the migration of younger workers was found to influence the unemployment rate convergence amongst younger workers in a negative (-) direction.
Chapter 5. Conclusion
Based on the results of the present study, the following elements related to population migration should be considered during the process of establishing and implementing regional policy. First, it is necessary to design and support regional policies which take into consideration the population structure and population migration. The inter-regional gap in the population structure, and in particular population change, should be considered during the process of designing regional policy. In addition, it is essential that not only the value assigned to population related indicators be increased during the process of providing support to regions that somewhat lag behind, but that such population indicators be diversified. The resolution of population problems is predicated on the design of regional policy not in a segregated manner, but rather in an integrated The Spatial Pattern Analysis of Economic Activity 131 manner that takes into account the mutual complementarity between policies seeking to achieve similar goals. Second, the regional gap problem remains an important issue for regional policy. The gap in inter-regional productivity has led to the expansion of the growth gap. The continuous migration of population to regions with high growth trends means that regions where growth has been relatively not as strong can expected to have a hard time trying to achieve the fundamental conditions needed to promote indigenous development. Furthermore, the improvement of regional competitiveness may turn out to be a hollow goal that has little to do with reality where regional policy is concerned. Third, it is necessary to continuously implement policies at the mega-regional level and to establish employment-related outcomes as the central goal of such policies. There has been a greater migration of regional economic actors at the intra-regional rather than inter-regional level. Moreover, there has been more regulation of the labor market and a greater easing of the gap at the city and provincial levels than at the regional level. These results imply that the current mega-regional policies have not been feasible as far as the expected outcomes are concerned. Furthermore, there is a need to establish a balance in terms of jobs and to create quality jobs, with this task being especially urgent where younger workers are concerned. The efficiency of mega-regional economic policies designed to form a global competition hub can only be ensured through the development of new industries that in turn make possible the creation of jobs. In-depth deliberations should be held regarding the competency 132 of the relevant industry to create employment during the process of developing new industries. In addition, in the case of women who greatly influence demographic issues, it is necessary to induce the active circulation of population within the mega-region by implementing support that is based on the general conditions women face that back the creation of jobs for them. Fourth, efforts should be made to develop the regional service industry and to improve productivity at the mega-regional level. Moreover, there is a need at the mega-regional level to develop service industries such as production-related service. Production- related services, which constitute a supporting industry, act as an intermediate for innovation, boast high productivity, and have a great spillover effect. As this kind of service industry involves a demand for high-quality human resources, it is expected to create jobs and to have a positive effect in terms of inducing the im- migration of younger workers. Research Report 2011-596
The Change of Specialization Structure in Component and Material Industries among Korea, China, and Japan and the Suggestions for Korean Policy Issues
Mok Sakong , Moon-Hyung Lee, Hyon-Soo Shin and Chuel Cho
The Efficiency of Investment in Regional Manufacturing Industries and Analysis of its Effectiveness 135
Chapter 1. Introduction
After the global economic crisis, the business environment has been changing rapidly. A few examples are the enhancement of Korea and China's economic positions in North-East Asia, the facilitation of material technology innovation, and the narrowing of the technological gap. Therefore, there is an increasing necessity to carry out in-depth analysis on changes in industrial specialization structure among three North-East Asian countries - Korea, China, and Japan. The industrial specialization structure among Korea, China, and Japan has complimentary aspects to each country, but also has aspects of competitiveness as well. In the material sector in particular, Korea and Japan have a surplus with China, while Korea has a trade deficit with Japan. As China's strategy on economy growth is currently transitioning to their domestic market and away from export-led growth. The Chinese government is determined to foster the material industry, which is currently relatively uncompetitive. Despite weakened competitiveness 136 of some of end-line products, Japan regards the material industry as the source of their highest competitiveness are focusing on enhancing their competitiveness in the small and medium manufacturers as a cornerstone of their economic policy. They are doing this in an effort to remain highly competitive in the material section. During the earthquake that recently hit east coast of Japan, the presence of the Japanese material industry has been magnified once again. Accordingly, there is increasing necessity for an in-depth study on the topic, since factors such as the discussions on the Korea-China-Japan FTA have led to increased interest in the industrial specialization of the three countries. Also, the conflicts which arise because of the rapid growth of China, Korea's effort to catch up to Japan, and Japan's drive to hold onto its lead in the region have all stimulated changes in specialization in the component and material industries in these three countries. The objective of this research is to determine urgent issues and solutions by conducting in-depth study and comparison on status of competition and collaboration in Korea-China-Japan component and material industries in pre and post global economy crisis. Being differentiated from previous studies, this study is mainly focusing on analysis of changes in Korea-China-Japan component and material industry specialization before and after global economy crisis. Various methodologies including literature research, statistical analysis (foreign trade statistics and components/materials statistics), and interview with specialists have been used in the study. This study is also differentiated from previous studies since it The Change of Specialization Structure in Component and Material Industries among Korea, China, and Japan and the Suggestions for Korean Policy Issues 137 has conducted broad range of study on overall changes in Korea- China-Japan component and material industries, particularly, case studies for the representative sectors such as LCD (components), automobile parts (components), steel (materials) and seeking solutions via comprehensive research on policies and direction of development in those three countries’ component and material industries.
Chapter 2. Changes in the Specialization Structure and Competitiveness Analysis of the Korea-China- Japan Component and Material Industries
As of 2010, the proportion of components and materials exports for Japan and Korea are 52.7% and 49.1% respectively. On the other hand, components and materials exports from China are 34.7%; that is to say 1/3 of the nation’s total exports. However, the proportion of component and material imports in China is the highest among the three nations at 46.2%, followed by Korea at 35.6% and 26.5% for Japan. In 2010, components and materials exports account for roughly 70% of the total exports in all three countries. Korean components and materials exports to Japan and China show trade surpluses with China and a chronic trade deficit with Japan. Two thirds of Korean exports to China consist of electronic components and chemical materials. Korea imports electronic components, basic metals, and electric machine parts from China. Trades to Japan include exports of electronic components, basic 138 metal products, and chemical materials and imports of basic metal products, chemical materials and chemical materials. As of 2009, the export competitive relationship of components and materials between Korea and China is the highest, and is similar between Korea and Japan, or China and Japan. The categories of trade between Korea and China were computer components, electric components, rubber/plastic products, general mechanical parts, and electro-mechanical components. These areas showed a relatively high competitive relationship. In 2009, intra-industry trade relationship is also higher between Korea and China compared to Korea and Japan. Areas showing active intra-industry trade between Korea and China were components field such as computer components, electro- mechanical components, assembly metal products, electronic components, and general mechanical components. Areas showing active intra-industry trade between Korea and Japan were electric components, fibers/textile materials, metal assembly components, computer components, and general mechanical parts. The market share of component and material industries of Korea, China, and Japan in the international stage was the following: China's market share showed rapid growth from 3.6% in 2000 to 11.4% in 2009. Korea’s market share showed gradual growth from 3.9% in 2000 to 5.0% in 2009. On the contrary, Japan dropped from 12.0% in 2000 to 8.2% in 2009. Looking at the RCA index, all three countries showed a comparative advantage in the components industry rather than the materials industry. Since 2005, Korea and China showed improvement in the components industry while the materials industry’s competitiveness improved The Change of Specialization Structure in Component and Material Industries among Korea, China, and Japan and the Suggestions for Korean Policy Issues 139 in Japan. In detail, China, Korea, and Japan showed comparative competitiveness in different industries. Korea showed comparative competitiveness in electric components. China showed comparative competitiveness in fiber/textile industry, computer components, electric components, and electro- mechanical components. Japan showed comparative competitiveness in nonmetal minerals, precision instrument components, electric components, and transport equipment parts. Looking at the Trade Specification Index, Korean competitiveness in the components industry in comparison to China has been steadily rising since 2000, while the materials industry has been in a steady decline. As of 2009, chemical materials, electric components, precision instrument components, transport machine components, and general mechanical components show significant comparative competitiveness over China. However, fiber/textile materials, nonmetal minerals, and computer parts show relatively low comparative competitiveness. Comparative competitiveness of the component and material industry of Korea in relationship to Japan shows a drop in the component and material industry. Especially in 2009, nonmetal minerals, precision machine components, rubber/plastic products, electro-mechanical components, chemical materials, and basic metal products show significant weakness in competitiveness. The competitive edge of Korea over Japan and China is determined after considering 4 factors. These four factors are the export scale, export ratio, amount of increase in exports, and changes in competitiveness. As a result, hot-rolled and stainless steel from the metal industry, TV/Computer LCD screens, 140
Memory/non-memory ICs and their associated parts, cellular phones/communication equipment parts, electric condensers from the electronics industry, and automotive engines and the associated parts from the automotive industry were selected as high potential export items. Likewise, exports to Japan are central to metal industry items such as hot-rolled and stainless steel, electronic items such as displays, semi-conductors, general communication equipment/parts, modems, and solar panels. The scale of automotive exports to Japan is not as large because the Japanese automotive industry has a better competitive edge in the world market. However, automotive exports are selected as a potential export item due to the high exchange rates between KRW and JPY in recent years as well as quality improvements in Korean automotive products. Aside from the automotive engine components, potential export items to Japan are diodes, semi- conductor devices, digital camera parts, and PCB components. Moreover, semi-conductor devices, LCD devices, and other automotive components all items are in the comparative disadvantage category, meaning Korea must rely on imports from Japan because these key items are impossible to produce domestically.
Chapter 3. Strategy to Improve Competitiveness of the Korea -China-Japan Component and Material Industries
The Japanese trade balance with China and Korea shows large gains. The Korean trade balance with China has gained, but the The Change of Specialization Structure in Component and Material Industries among Korea, China, and Japan and the Suggestions for Korean Policy Issues 141 trade balance with Japan has been in decline over the past few years. The exporting structure of both Korean and China is to import components and materials from Japan to create their own goods for export. Korean components and materials’ world market share was 6th (2009) in the world. That accounts for 4.6% of the total market share. In contrast, Japan is attempting to resolve their chronic loss in international trade of components and materials. In 2010, the proportion of components and materials out of all imports from Japan accounted for 59.2%, while components and materials accounted for 67.2% of trade loss with Japan. The proportion of Japanese parts out of all parts imported in Korea is 25.2%. In 2010, the percentage of components exported to Japan was only 6.0% of all exports to Japan, while the total components exported to China was 36.3%. With regard to the developmental policies of three countries, Korea is pushing to domesticate the production of components and materials, as well focus the developmental policies of component industries in an effort to resolve the trade deficit with Japan and to achieve a self-sustaining economy. A supporting foundation was created by the Act on Special Measures of Components and Materials in February 2001. About KRW 1.5 trillion has been used over the past decade (2000 ~ 2010) to develop technologies that allow Korea to better participate in the global sourcing components and materials with high potential for growth. Moreover, a total of KRW 363 billion has been used to improve the quality of the components and materials. Korea supports M&A to bring about specialization and 142 expansion of the material industry. Korea supports participation in the global market through global partnership programs. Through a vote by the Knowledge Economy Committee of the Korean National Assembly in August 2011, the Act on Special Measures of Components and Materials (to be scheduled for expiring in December 31, 2011) is being pushed to extend for another 10 years. The Korean government has also been pushing to build a Japanese Components and Materials Industrial Park to attract investment by Japanese corporations within Korea, and to resolve the trade deficit between Japan and Korea. Kit based products in the Japanese component and material industry still maintains a strong competitive edge although the competitiveness of kit based products in general is relatively lower. The Japanese government recognizes the component and material industry as the origin of economical strength and is implementing different policies to strengthen and maintain the industry. To this end, the Japanese government has created the Fundamental Technology Enhancement Policy for small to medium sized enterprises, the Manufacturing Support Policy (called Monozukuri), and Innovation Program. To implement these policies the Japanese government has mapped out a strategy to research and develop components and materials technologies. Also, by creating ‘Industrial Structure Vision 2010’, the Japanese government set out a new goal to implement a 'New Industrial Structure' that connects the latent advantage to businesses through a transition in industrial structure. Chinese components and materials related policies are categorized based on their functions, but an integrated structure The Change of Specialization Structure in Component and Material Industries among Korea, China, and Japan and the Suggestions for Korean Policy Issues 143 does not exist yet. Hence, China does not have an independent components and materials policy that compares to that of Korea. Instead, the components and materials policies exist as part of Policies by Industry, Technology Policies, Foreign Currency Attraction Policies, and Medium and Long term Economic Plan. China is pushing component and material industry growth policies as part of Strategic Emerging Industry Growth Policy (10 Industries Promotion Plan: 2009 ~ 2011), and the 12th 5-year plan. The characteristics of the Chinese components and materials growth policies are specification of the year when the selected components and materials will be produced within China, implementation of enterprise focused innovation system and request for a stronger R&D, emphasis on developing environmentally friendly, energy conserving, and digitalized component materials and new materials, request for the applicable enterprise to become globalized, expanded, and specialized. All three countries propose their vision to enhance the component and material industry with different policies and strategies. Korea legislated Materials and Components Vision 2020 (2011) and promoted New Growth Engine Industries; Japan created New Industry Creation Strategy, Industrial Structure Vision 2010, and New Economic Growth Strategy; and China has Strategic Emerging Industry Growth Policy, and the 12th 5-year Plan. The components and materials development directions of Korea, China, and Japan are all towards energy conservation related industries, next generation automotive component development, medical equipment, and high IT utilization 144 components. Because they have a common developmental direction, the competition of the three countries in the future is expected to be intense.
Chapter 4. Case Study of Competition and Collaboration in the Major Component and Material Industry among Korea, China, and Japan
Although Korea has the largest competitive advantage in the LCD industry, Korea still heavily relies on Japan for LCD manufacturing equipment and materials. Recent price drops in LCD products due to fierce price competition are becoming more challenging to overcome. China does not have a large market share in LCD panel production, but investment in LCD panel products by Korea, Japan, and Taiwan is expected to expand and the pursuit to take the largest market share is expected to become fierce in the future. Japan does not have the competitive edge in large-panel LCDs. However, they specialize in high-end smaller sized LCD panel products and maintain their role as a strong provider of LCD manufacturing equipment and component materials. With fierce pursuit from China and a re-structuring of LCD marketing strategy from Japan taking effect, Korea needs to develop a new media and the associated applications that can replace LCD. Moreover, Korea needs to domesticate the supply of LCD manufacturing equipment and its associated components and materials, and they need to diversify their suppliers to overcome their dependency to Japan. The Change of Specialization Structure in Component and Material Industries among Korea, China, and Japan and the Suggestions for Korean Policy Issues 145
In terms of automotive components, Korea, China, and Japan are complementary to one other rather than competitive. Korea and Japan invest heavily in the Chinese automotive component industry, but China does not invest in the Korean and Japanese automotive component industries. Korea does not invest in the Japanese automotive component industry either. Major Korean and Japanese automotive corporations expanded their manufacturing to China in order to benefit China’s manufacturing efficiency, and also to import generic parts from China. Looking at the trade structure of Korea, China, and Japan, Japan has the absolute competitive advantage over Korea and China. The Trade Specialization Index (TSI) in 2010 of Korea in regards to Japan is - 0.471. The TSI for China in regards to Japan is -0.623. The collaboration or competition structure of the three countries in the automotive industry is not expected to change. However, the competition will become intensified with the introduction of next generation technologies such as electric cars. China has achieved noticeable growth and has taken the top place in terms of crude steel manufacturing; Japan holds 2nd place, and Korea is 6th place. Korea is importing hot-rolled steel from China and Japan to meet their supply needs. However, the break down structure of imported and exported steel between Korea and China reflects the technological gap between the two countries. Metal products such as bar steel, steel piping, thick steel plates, and hot-rolled steel that are low-end and require a low degree of technological know-how are imported from China, while high-end and technology intensive metals such as cold- rolled steel, and electrical steel are exported to China from Korea. 146
China imports high-end steel products from Japan. Looking at the investment relationship among the three countries, Japan invests in Korea and China, Korea invests in China to meet their domestic market needs, but Chinese investment into Korean or Japanese market is almost nonexistent. POSCO of Korea and JFE of Japan establish a strategic alliance such as holding mutual shares, and obtaining raw material together. In descending order, the cost effectiveness of production is: China, Korea, and then Japan. And in descending order, the technological competitiveness is: Korea (POSCO), Japan (JFE), and China (Baoshan). The future of the steel industry depends on raw material cost effectiveness and differentiation of end products. Hence, establishing a survival strategy to ‘future-proof’ against competition paradigm change, as well as collaboration with the Japanese and Chinese steel producers, is necessary.
Chapter 5. Remarkable Structural Changes and Political Problems in Division of Labor for Manufacturing Parts and Materials in Korea, China, and Japan
1. Structural Changes and Issues in Division of Labor for Manufacturing Parts in Korea, China, and Japan
The results of research into the import-export structure, and competitive and complementary relationships among Korea, China, and Japan are followings; The Change of Specialization Structure in Component and Material Industries among Korea, China, and Japan and the Suggestions for Korean Policy Issues 147
First, all three countries have placed much more emphasis on parts rather than materials in their import-export strategies since the parts industry is growing along with the electric and machinery industries. Only the percentage of the chemical materials and primary metals has grown due to the price surge of international raw materials in 2000s. Second, Korea has shown a chronic deficit with Japan, but a surplus to China in trading parts and materials. This is because Korea is relatively weak in material trading. Regarding the parts area, Korea has shown an increased surplus with China and progress in electrical parts, transport machines, and general machines but has shown a deficit plateau to Japan. Third, trade with China is more active than with Japan in the parts and materials industry. The reason is that industry and trade are livelier when factor endowment and the technical gap between the countries are smaller. Also, the expansion of trade between corporations by the increasing investment to China, small cost differentials with China compared to Japan, high percentage of electric parts which need lots of division seem to be the reasons. Fourth, as opposed to end-line products, there is stronger competition with China than Japan in the parts and materials area. The reason for this stronger competition with China in the global market is electric parts, has more weight in trading with China and there is less technical gap with China, compared to Japan. Fifth, we can see that Korea and China have strengthened their comparative advantages in the parts sector, while Japan has done so in the materials sector by observing the changes in 148 competiveness of Korea, China, and Japan since 2005 through the RCA index. In regards to global market share, Japan is losing market share while Korea and China are increasing their competitiveness - both in parts and materials. According to these results, China is beginning to threaten Japan for Korea’s parts and materials exports. Furthermore, the research shows that an adverse trade balance with Japan cannot be solved in a short period of time due to structural problems caused by the technical gap between Korea and Japan. This is not only because of a competitive difference in technology in the parts area, but also because Korea depends heavily on Japan’s main parts. Due to China’s rapid growth in parts and materials industry, it is uncertain whether Korea’s trade surplus with China will be maintained in the long run. In terms of electric parts, in which Korea has a large trade surplus with China - China is beginning to threaten Korea in the global market and the competition between the two countries is increasing. Meanwhile, regarding the trade of components and materials, competition between the two countries is getting fiercer between Korea and China while the cooperative relationship is getting stronger. This implies that it is possible to find a better way of developing a cooperative relationship between the two countries. Electronic components are a high percentage of trade between the two countries because the level of technical skill between the two countries is nearly equal, and B2B trades are being spread by increasing investments in China, trading is reasonably cost effective, and product specialization is vital. There is a high probability of expanding the trade relationship between the two The Change of Specialization Structure in Component and Material Industries among Korea, China, and Japan and the Suggestions for Korean Policy Issues 149 countries. This can be achieved by exporting high quality components, such as steel, car components, and electronic components to China, while importing widely-used components from China.
2. Policy to Accelerate Specialization Structure in Korea, China, and Japan
There are eight policy and implementation suggestions to accelerate specialization structure among Korea, China, and Japan. The first suggestion is to set policy goals on becoming a leading country in component and material industries in the North east Asia region. The Korean government has already outlined its policy goals in the “Materials and Components Vision 2020.” In the future, additional support structures for the development of material industries should be formed, and existing catch-up strategies should be transformed into leading strategies based on innovative research and development activities. Furthermore, regarding technical development policy, it is necessary to more focus on “materials” than components that have made a considerable success. We should consistently try to build healthy ecosystem of materials and components such as localizing development equipment of material and components, building financial environment, and building government support system for material and components business etc. The main goal of future policy for consistent development of component and material industry is to construct an ecosystem-considered Total 150
Cycle support system. We should make support for service areas such as material and component-merged S/W and culture rather than manufacture industry-focused components. R&D also should turn into Open Innovation securing strategy from the closed technical security strategy. It is also important to continuously expand the foundation for material and components growth by training work forth for future material and components, and information basis. The second suggestion is to construct a procurement system for Korean enterprises through the following efforts: Formulation of a plan to reduce the level of dependency on key Japanese items; Import substitutions for Japanese items which are in demand; Diversification of Japanese trade partners for a single item where there is sole dependency on Japan; Building of production bases for Japanese enterprises inside Korea by promoting Japanese FDI to alleviate risk for Japanese enterprises in Korea.
The third suggestion is to build a strategy of separating labor and the penetration strategy into the Chinese market. How Korean enterprises allocate their products and value chain is very important task because China is our main export counter regarding component and material industry, and also a target country for investment. The product may have different characteristics from low price to high even they are the same type of. Furthermore, as the value chain of the enterprise or industry The Change of Specialization Structure in Component and Material Industries among Korea, China, and Japan and the Suggestions for Korean Policy Issues 151 lies across various fields such as R&D, design, components and materials supply, sales, and service after sales. It is needed to find out the best way to efficiently deploy them. Various positioning strategies based on analysis of the level of economic development, as well as the characteristics of consumers in each local market in China should be utilized. We should access markets especially for local markets through market segmentation, while actively utilizing the penetration strategy related to forming regional industry clusters especially for new growth engine or development policy of Midwest of China. The fourth suggestion is the creation of a foundation for specialization in component and material industries among Korea, China, and Japan by developing and strengthening fundamental industries through the following efforts: Support for the development of key technologies to improve global competitiveness; Transformation of characteristics in fundamental industries from 3D (Dangerous, Dirty, Difficult) to ACE (Automatic, Clean, Easy); Facilitation in inflow of capable labor forces in fundamental industries and development of core human resources; Construction of Total Supporting System for SMEs in fundamental industries.
The fifth suggestion is to standardize components and materials products and to improve commonality in components among the three countries. The existing North East Asia Standardization Forum should be more effective, and the 152 cooperation among the three countries in enacting standards in international society should be strengthened. In the future, standardization, mutual certification, and commonality in components among the three countries should be discussed with institutionalized support. The sixth suggestion is the consolidation of cooperation in emerging industries among the three countries through the establishment of the Circum-Yellow Sea Component and Material Industry Agency. New potential growing power industries such as IT (information technology), BT (biological technology), NT (nanotechnology), and other industries and new energy technology are similar in that their components and materials are the main components for green industries. Among those industries, energy and environmental industries are easy to organize cooperation within the three countries. Joint investigations of the supply network of components and materials are needed to accelerate specialization. Therefore, it is worthwhile to consider establishing the Circum-Yellow Sea Component and Material Industry Agency for cooperative handling in crises and committing to collaborative business. The seventh suggestion is to unify trade and industry codes among Korea, China, and Japan and to establish the Trade and Industry Code Unification Commission through the participation of public and private sectors in three countries. The process of unifying codes trade and industry will enormously contribute to the three countries in terms of analyzing cooperative and competitive relationships. The eighth suggestion is to arrange circumstances in a way The Change of Specialization Structure in Component and Material Industries among Korea, China, and Japan and the Suggestions for Korean Policy Issues 153 that increases Korea’s investment in Japan and M&A activities. Our investment in Japan is considerably lower than compared to Japan. Japan invested USD 2.08 billion (16.2% of Korea foreigners investment) in 2010 based on legitimate records, Korea invested just USD 0.42 billion (1.2% of Korea overseas investment). Since 2000 to July 2011, Korea attained 118 M&A Japanese companies (JPY 213.3 billion) while Japan accumulated 299 M&A Korean companies (JPY 567.2 billion). As shown in the digits above, there are large gaps between the two countries. So, we need following efforts: Arrangement and increment of funds for the investment in component and material industries; Relief of negative atmosphere of Japanese enterprises in Korean enterprises M&A activities by improving the national brand image of Korea; Construction of statistical database and the establishment of foundation relevant to M&A activities; Utilization of Japanese M&A agencies; Gradual expansion of business after building trust with existing customers and increasing capital participation.
Research Report 2011-597
Employment Performance of the Innovation-type SMEs and the Policy Implications
Heeseon Choi, Minwoong Ji, Jinhwan Jo and Jung-Woo Kim
The Efficiency of Investment in Regional Manufacturing Industries and Analysis of its Effectiveness 157
Chapter 1. Introduction
The importance of growth and employment creation through innovation has been increasingly emphasized as Korea has approached the technological frontier and its growth paradigm has been altered from ‘follower’ to ‘first-mover.’ This study evaluates the employment performance of innovative small & medium enterprises (SMEs) and suggests measures to expand employment creation through innovation. Chapter 2 consists of a review of existing studies related to the impact of innovation on employment. For its part, Chapter 3 analyzes the current state of innovative SMEs using macroeconomic data, data provided by associations of innovative firms, as well as the data used for empirical analyses in Chapter 4. Chapter 4 estimates the impact of innovation on employment based on an empirical analysis. The proxy variables employed for innovation consist of the ‘accreditation of innovation-type SMEs’ and ‘investment in intangible assets.’ Thus, an SME which is 158 accredited as an innovative SME or that possesses large amounts of investment in intangible assets is regarded as having achieved innovation. Innovation had a significant impact on employment when ‘investment in intangible assets’ was used as a proxy variable for innovation. Therefore, Korean SMEs should view innovation as having a positive effect on employment. This result implies that Korean SMEs can increase employment by promoting innovation through effective investment in intangible assets. Meanwhile, ‘accreditation of innovation-type SMEs’ was found not to be significantly related to any increase in employment when used as a proxy variable for innovation. This result implies that the current accreditation system for innovation-type SMEs is laden with problems when it comes to selecting innovative SMEs.
Chapter 2. Impact of technological innovation on employment
Using an economics-based approach, this chapter reviews the employment creation through innovation mechanism. The impact of investment in innovation on enterprise employment has been analyzed in many economics-related studies, and has generally been separated into works on product innovation and process innovation. Product innovation increases labor demand by enhancing the demand for the relevant product. It also has a strong likelihood of having a long-term positive effect on employment. Meanwhile, the impact of process innovation on employment is rather uncertain. As it is usually implemented for Employment Performance of the Innovation-type SMEs and the Policy Implications 159 the purpose of improving productivity or reducing costs, process innovation can decrease labor input. Of course, process innovation can also generate an expansion of demand through a price effect. Moreover, the scope of the compensation effect can differ depending on the elasticity of demand for the enterprise product, the market competition environment, management within the enterprise, and the reaction of agents such as labor unions. However, unlike product innovation, process innovation causes a strong displacement effect. This displacement effect makes it much more difficult to estimate the long-term net effect of process innovation on employment than is the case with product innovation. In short, it is not easy to theoretically explain the direction of the net effect of technological innovation on employment. In this regard, the impact of technological innovation on employment must inevitably be analyzed based on an empirical study.
Impact of innovation on employment
Displacement Compensation
Productivity effect Price effect (>0): Process cost reduction, depend on innovation (<0): less labour for passed on to price, enterprise agents a given output expands demand
Productivity variance Demand Product of new product (>0 enlargement effect depend on innovation or <0) (>0) competition
Source: Harrison et al. (2008) 160
Existing empirical studies have found that product innovation has had an overall statistically significant positive (+) effect on employment; meanwhile, no agreed conclusion was reached on the impact of process innovation on employment. Korean SMEs have exhibited a high degree of innovation (OECD 2010). 21.9% of all SMEs introduced product innovation, a level close to that achieved by German SMEs (23.8%) and significantly higher than Japan (14.0%) and France (14.8%). Meanwhile, 52.6% of all large enterprises in Korea had introduced product innovation, a total that is close to the 59.2% recorded by large enterprises in Germany. However, the ratio of introduction of process innovation in Korea is lower than that of Germany, France, Japan, as well as even Spain and England, in the case of both SMEs and large enterprises. The overall ratio of introduction of process innovation was estimated at 6.5% for Korean SMEs, and 12.2% for large enterprises. In the case of Germany, 17.8% of SMEs and 43.8% of large enterprises were found to have introduced process innovation. The fact that technological innovation within Korean SMEs has been carried out centering on production innovation implies that the introduction of innovation will positively influence employment performance in a relatively less significant manner than in the case of the SMEs from other countries. As innovation helps SMEs grow, innovation-type SMEs can be included as high-growth and high-employment SMEs (Gazelle enterprises). The OECD’s SMEs policy has been concerned with innovative high-growth SMEs. Of course, high-employment SME’s technological level is not always high, and there are many cases Employment Performance of the Innovation-type SMEs and the Policy Implications 161 in which such enterprises are not regarded as innovation-type enterprises. Furthermore, Gazelle enterprises do not have a direct relationship with the high-tech industry (Henrekson and Johansson, 2008). However, according to Holzl (2009), high- employment SMEs generally have a relationship with innovation- type SMEs in countries which have approached the technology frontier. From the standpoint of employment policy, high-growth and high-employment SMEs or Gazelle enterprises are especially important. While SMEs are enlarged in an organic manner, large enterprises have a tendency to be enlarged mainly through M&As. In realizty, existing studies on Gazelle enterprises have shown that net employment creation in a specific economy is led by a few small-sized enterprises boasting high growth called young Gazelle enterprises.
Chapter 3. The current state of employment of innovation-type SMEs
Innovation-type or innovative SMEs have a higher level of investment in technological innovation than regular SMEs. Moreover, they also create technological innovation outputs, such as the development of innovative products and intellectual property rights, as well as boast outstanding management performance. In order to remain consistent with the empirical analysis conducted in Chapter 4, the present study defines an innovation-type SME as an enterprise with a high level of 162 investment in intangible assets or as an enterprise that has obtained accreditation as an innovation-type SME. In the case of the latter, the term accredited innovative SME is also employed. Accredited innovative SMEs refer to SMEs which have been accredited by Venture, Inno Biz, and Main Biz associations. Viewed from the standpoint of analytical indicators, innovation-type SMEs are not very different from technology- intensive SMEs. Both types of SMEs can be distinguished from regular SMEs in terms of input-related indicators such as the R&D investment ratio and R&D manpower, and the output-related indicators used to exhibit technological capabilities such as patents and new products. This study focuses, from a policy- making standpoint, on new technology-based SMEs. New technology-based SMEs, which can be regarded as symbolizing technology-intensive SMEs, are new technology-intensive SMEs established by universities and research institutes to commercialize new technologies. Viewed from the development stage of an enterprise, the employment of high quality-human resources such as R&D manpower is generated during the start- up period. As production expands, employment is by and large extended. As such, technology-based SMEs are especially important from the standpoint of employment policy. This type of SME not only symbolizes entrepreneurial innovation, but is also representative of small, dynamic fast-growing firms. Currently, the accreditation of innovation-type SMEs is carried out based on various indicators related to an enterprise s innovation capacity and performance. An accredited innovative SME can be assumed to be an enterprise that has accumulated a Employment Performance of the Innovation-type SMEs and the Policy Implications 163 significant amount of innovation. In the case of the firms accredited by Inno BIZ, 30% of the accreditation of innovation score is made up by technological innovation capability, 30% by commercialization capability, 20% by technological innovation management capability, and 20% by technological innovation performance. While the evaluation indicators used in conjunction with the accreditation of innovation-type SMEs are mostly composed of indicators related to the securing of technological advantage, human resources and personnel management only account for 10% of the accreditation criteria. Employment creation outcomes were not adopted as an indicator for accreditation of venture and management innovation-type SMEs; moreover, they only accounted for 0.9% of the accreditation criteria in the case of the firms accredited by Inno Biz. Tax and financial benefits are where the biggest differences can be found in terms of venture, Inno Biz, and management innovation-type SME support policies. The most characteristic support-related benefit proffered to venture biz is additional tax benefits. As far as the support provided to accredited innovative SMEs is concerned, the study found that support for manpower and management purposes has been very indirect and passive. Employment creation within Inno Biz-accredited enterprises has been supported through contracting-out government services such as the job matching program. Meanwhile, employment creation in management innovation-type SMEs has been supported through internships and their subsequent staying on of such interns as regular full-time employees. However, no 164 evaluation of actual employment creation has been conducted yet. Next, let us take a look at the current state of the accredited innovative SMEs. The number of SMEs which have obtained accreditation as innovation-type SMEs has continuously increased. This number increased from 12,482 in 2001 to 57,530 in 2010. In particular, the number of Inno Biz SMEs greatly increased from 3,454 to 14,626 during the period spanning from 2005-2008. The accreditation rate, which refers to the ratio of SMEs that have successfully applied for accreditation as innovation-type SMEs, is very high. For example, 93.3% of businesses that had applied to Inno Biz for accreditation in 2012 received such a designation. According to data released by associations of innovative firms and some research data, innovative SMEs enjoy higher management performance than regular SMEs. However, many other studies have claimed that the management performance of innovative SMEs is not very different from that of regular SMEs in terms of not only sales growth and profitability, but also with regards to the ratio of R&D costs to overall sales and ownership of industrial property rights such as patents. Although their manpower structure has differed depending on which data is used, innovative SMEs have exhibited a higher ratio of skilled manpower than regular SMEs. In addition, the ratio of skilled manpower in innovative SMEs vis-á-vis other workers has continuously heightened. Although the manpower structure of innovative SMEs is ahead of that of regular SMEs, the ratio of highly-educated technical manpower in SMEs remains lower than that of large enterprises. A survey of the industrial technology Employment Performance of the Innovation-type SMEs and the Policy Implications 165 labor force uncovered that as the size of an enterprise increases, the ratio of highly-educated technology manpower to technical manpower is also increased. A look at the current state of the supply-demand for manpower in innovative SMEs reveals that innovative manufacturing SMEs have exhibited a shortage of skilled manpower. This phenomenon becomes more pronounced as the size of enterprises decreases. Innovative SMEs have exhibited lower manpower shortage rates than non-accredited innovative SMEs in conjunction with overall manpower. However, they have exhibited manpower shortages where research and technology positions are concerned. The fact that the manpower shortage rate is high for innovative SMEs and small-sized manufacturing SMEs, and in particular in terms of the high shortage rate of specialists and technical manpower with masters and PhD degrees, implies the necessity for government support for the provision of highly-skilled labor.
Chapter 4. Empirical analysis of the employment performance of innovative SMEs
1. Model used for the estimation of innovative SMEs’ employment performance
Using the ‘accreditation of innovation-type SMEs’ and ‘investment in intangible assets, including R&D costs’ as the proxy variables for innovation, this chapter conducts an empirical 166 analysis of whether innovative SMEs exhibit relatively higher employment levels than non-innovative SMEs. To this end, a labor demand model is theoretically established in this chapter at the firm level in order to help understand the results of the empirical analysis in later chapters. In keeping with the above-mentioned studies, the theoretical model used in this study divides innovation into process innovation, which changes the production factors of a firm, and product innovation, where innovation is linked to the creation of a demand for the product. However, these two types of innovation are so closely related to each other that it is difficult to technically separate them. In this regard, this study focuses on clearly proving what mechanism is used to determine aggregate employment when these two innovation types are applied to a firm at the same time. Based on this, the empirical results estimating the impact of the proxy variables for innovation on the aggregate employment of a firm can be effectively interpreted. The proxy variables simultaneously include process and product innovation factors. Considering the assumption put forward by Van Reenen (1997), namely that all firms face a perfectly competitive market, and that based on a CES production function where returns to scale are consistent, they produce only one product, the theoretical implications of the model introduced in this chapter are as follows. Over the short-term, where production or stock of capital remains unchanged, the impact of technological innovation on employment depends on the elasticity of substitution between labor and capital. In this regard, the employment effect of short- Employment Performance of the Innovation-type SMEs and the Policy Implications 167 term innovation can only be ascertained based on the results of process innovation. To be more specific, technological innovation decreases employment when the elasticity of substitution between labor and capital is inelastic. On the contrary, technological innovation increases employment when the elasticity of substitution between labor and capital is elastic. However, for the elasticity of substitution between labor and capital to be elastic, the relative price of labor should be much lower than the capital and the quality of labor should be complementary in nature to technological innovation. As this situation is rare in regular SMEs, there is a high possibility that short-term technological innovation decreases employment in general. Meanwhile, over the long-term, where the production or stock of capital changes, the impact of technological innovation on employment is determined by the elasticity of substitution between labor and capital, the elasticity of marginal costs with regard to innovation, and the elasticity of product demand with regard to price. Therefore, the impact of technological innovation on employment from the long-term standpoint can be regarded as the sum of the impact of process innovation and product innovation. For example, as technological innovation decreases the rate of change in the marginal cost of the product, the price can be decreased under the situation where the quality of the product remains unchanged or the quality of the product can be improved for the same price. This increases the demand for the product, and as a result, increases employment. Of course, it is difficult to estimate the aggregate impact of innovation on employment when the elasticity of substitution between labor and 168 capital is inelastic because technological innovation simultaneously decreases employment. Nevertheless, technological innovation increases employment if the increase effect of labor demand based on product innovation is bigger than the decrease effect of labor demand based on the elasticity of substitution. In addition to these theoretical implications, the model employed in this study also suggests the following points that can be used to directly induce the econometric model which will be used in the empirical analysis, and which must be considered in the econometric model. First, the proxy variables of technological innovation, which are the main focuses of this study, as well as the employment costs per capita of a firm and its tangible assets, must be included in the regression equation. Second, as an unobserved time effect can cause a bias in the estimated value, a year dummy should be added to the regression equation to control this unobserved time effect. Third, the unobserved firm heterogeneity, which does not change over time, can also cause a bias in the estimated value by causing an endogeneity problem. As such, firm heterogeneity variables which can influence aggregate employment, including the industry type to which a firm belongs and the region where the firm is located, must be included in the regression equation. In reality, unobserved firm heterogeneity should be eliminated using a panel fixed effect analysis. The analytical data used in this study is based on the 1st, 2nd and 3rd panel survey conducted by the Korea Labor Institute. The panel analysis made use of the balanced panel composed of the firms recorded in the data from the 1st~3rd panel surveys, the firms Employment Performance of the Innovation-type SMEs and the Policy Implications 169 recorded only in the data from the 1st and 2nd panels, and the unbalanced panel composed of firms recorded only in the 2nd and 3rd panel surveys. The analysis of the balanced panel involved relatively stable firms which have been in business for more than 5 years. The unbalanced panel shows the analytical results reflecting the entry and exit of firms.
2. Summary of analytical data
The analytical data employed in this study was taken from the 1st~3rd panel surveys conducted on a biannual basis by the Korea Labor Institute since 2005. This panel survey includes elements of firm heterogeneity such as aggregate employment, employment costs per capita, tangible assets, and various other data deemed essential to conducting the empirical analysis. However, the panel survey does not contain any information regarding the accreditation of innovation-type SMEs, which is the main focus of this study. In this regard, the Inno Biz Association, Main Biz Association, and Korea Venture Business Association (KOVA) provided the researchers a list of accredited innovative SMEs from 1998 to 2009 that was, using their business registration numbers, combined with the panel survey. The firms which were accredited as innovative SMEs but were not included in the panel survey were omitted during this combination process. However, as the panel survey is carried out based on a random selection process, no major problems can be identified when it comes to using the panel survey to analyze the impact of the accreditation of innovation-type SMEs on employment as long as the number 170 of accredited innovative SMEs is not outrageously lower than the number of non-accredited SMEs. In order to heighten the reliability of the results, firms which boasted the three following characteristics were excluded from the analysis; 1) firms with more than 300 workers, 2) firms that belong to the public sector, 3) firms in which it was unclear whether the scope of financial information could be attributed to the relevant firm. Furthermore, firms falling under the following cases were also excluded from the panel analysis: cases where a firm moved to another region during the survey; cases where a change in the industrial classification code was recorded; cases where a firm was only surveyed in either 2005, 2007 or 2009; cases where a firm was included in the panel survey in 2005, omitted in 2007, and included again in 2009. Lastly, one more matter should be mentioned with regards to the composition of samples. In many instances, the panel survey was unable to collect all the values related to the financial information of a firm that was employed as control variables in the regression analysis conducted in this study, such as employment costs per capita and tangible assets. As such, whenever a firm that had been selected as a sample’s financial information values were missing, the said firm was in the end not employed as a sample in the regression analysis because it did not meet the above-mentioned criteria. As a result, only the effective samples, which consisted of 1,331 observed values, were used for the pooled OLS analysis. Of these, 259 of the observed values were related to firms that had obtained Inno Biz, Venture, Employment Performance of the Innovation-type SMEs and the Policy Implications 171 or Main Biz accreditation at least once at some time from the past to the current year. There were 261 observed values related to firms which had obtained the Inno Biz or Venture accreditation at lease once. Meanwhile, 61 observed values related to firms that had obtained Main Biz accreditation at least once were uncovered. On the other hand, an estimated 1,126 observed values in the effective samples were actually used in the unbalanced panel analysis. Of these, 220 of the observed values were related to firms that had obtained Inno Biz, Venture, or Main Biz accreditation at least once at some time from the past to the current year. 181 of the observed values were related to firms which had obtained the Inno Biz or Venture accreditation at lease once. Meanwhile, 56 of the observed values were related to firms which had obtained the Main Biz accreditation at least once. Lastly, 719 observed values in the effective samples were used in the balanced panel analysis. Of these, 146 were related to firms which had obtained Inno Biz, Venture, or Main Biz accreditation at least once at some time from the past to the current year. Moreover, 122 observed values were related to firms which had obtained the Inno Biz or Venture accreditation at least once and 35 to firms that had obtained Main Biz accreditation at lease once.
3. The employment performance of accredited innovative SMEs
Based on an econometric model which is directly derived from the above-mentioned theoretical model, the present study analyzes the impact of the accreditation of innovation-type SME on aggregate employment. 172
The government has managed the Inno Biz, Venture, and Management Innovation accreditation systems used to select and develop innovative SMEs from amongst small and medium-sized enterprises. In this regard, the accreditation of innovation-type SMEs can rightfully be used as a proxy variable for innovation. However, there is one thing that should be cautioned when using the accreditation of innovation-type SMEs as the proxy variable for innovation. As innovation is the result of the investment accumulated in innovation in the past, it can have a long-term and continued impact on employment. In reality, the accreditation criteria include the current innovation achievement level as well as potential innovation factors over the near future. Seeking to reflect the dynamic process of innovation, which can impact employment not only in the relevant year but also over the next few years down the road, this study conducted an empirical analysis of the impact of the accreditation of innovation-type SMEs in the pertinent year on the employment level in the relevant year, the impact of the accreditation obtained at a time point between the immediately preceding year and the relevant year on employment during the relevant year, and the impact of accreditation obtained between an unspecified time point and the relevant year on employment during the relevant year. The main results of this empirical analysis are summarized in the following table. According to the pooled OLS analysis of all industries, no statistically significant differences were found between the firms which obtained one of the Inno Biz, Main Biz, or Venture accreditations during the relevant year or previous year and the Employment Performance of the Innovation-type SMEs and the Policy Implications 173 firms which did not obtain any accreditation during the same period in terms of employment during the relevant year. However, employment was 13% higher in firms that had obtained more than one accreditation during the past - relevant year than in firms which did not obtain any accreditation during the same period. The results of the analysis conducted based on the pooled OLS model involving all industries following their division in accordance with their accreditation types revealed that 13% of the firms had obtained the Inno Biz or Venture accreditation and 20% of the firms had obtained the Main Biz accreditation. Based on a comparison with the firms which did not obtain any accreditation during the same period, these firms were found to exhibit a high level of employment during the relevant year. The employment performance of the accredited innovative firms was found to be consistent, especially amongst those firms which had obtained Inno Biz or Venture accreditation. According to the results of the pooled OLS analysis involving only the manufacturing industry, the manufacturing firms which had obtained Inno Biz or Venture accreditation at some point between the past and the relevant year exhibited an employment level that was 12% higher than that of manufacturing firms who had not obtained any accreditations during the same period. The above results of the pooled OLS analysis imply that when a firm is accredited as an innovation-type SME in a specific year, employment begins to greatly increase thereafter, albeit not during the relevant or following year. However, it is too early to conclude that firm innovation 174
The employment performance of accredited innovative SMEs
The employment level of the firms that have obtained one of the Inno Biz, Main Biz, or Venture accreditation in t-year
Accreditation period/ Overall Manufacturing Overall Manufacturing Overall Manufacturing industrial classification industries industry industries industry industries industry
No No No No No No Accredited in t-year difference difference difference difference difference difference
Accredited from the 17% No No No No No previous year to t-year higher difference difference difference difference difference
Accredited from the 20% No No No No No past to t-year higher difference difference difference difference difference
Note : The subject of comparison was the employment level of firms which did not obtain any accreditations in t-year. Employment Performance of the Innovation-type SMEs and the Policy Implications 175 increases the employment level after some time has elapsed solely based on these results. In actuality, the results of the panel analysis to the effect that ‘a firm that obtained accreditation as an innovation-type SME a long time ago has a higher level of employment than a firm that has not obtained any accreditation’, negatively impact the persuasive power of the results of the above pooled OLS analysis which interprets such a result as ‘employment performance caused by innovation’. The unbalanced panel analysis of overall industries revealed no differences between the firms which had obtained the Inno Biz, Venture or Main Biz accreditation(s) and those which did not obtain any of these accreditations as far as the employment level was concerned. These results were also consistently recorded in conjunction with all the results of unbalanced panel and balanced panel analyses of manufacturing industries. The dissimilarity of the results of the pooled OLS analysis and the panel analysis can be traced back to whether unobserved firm heterogeneity, which remains invariable over time, was effectively controlled. In the panel fixed effect analysis, which completely eliminated firm heterogeneity, no major differences were uncovered in terms of the employment level of accredited and non-accredited firms. On the other hand, the pooled OLS analysis, which placed relatively few controls on firm heterogeneity, a higher level of employment was recorded in firms that had been accredited for some time than in non-accredited firms. As such, unobserved firm heterogeneity causes an endogeneity problem which in turn simultaneously impacted a firm’s accreditation and employment and distorted the results of the pooled OLS analysis. 176
Put differently, the accreditation status of a firm is in reality determined by an ‘invisible capability that can increase the employment level in the near future rather than the innovation leve’ - for example, outstanding management skills -, and not by an ‘observable innovation level which has been accumulated until the relevant year’.
4. The employment performance of innovative SMEs as viewed in terms of investment in intangible assets
Based on the above-mentioned results, it can be deduced that the accreditation status of a firm has not in reality impacted employment. The latter has not been determined by the innovation level which a firm achieved from the past to the current point. In other words, while adhering to the hypothesis that firm innovation increases employment over time, Korea’s accreditation system has been based on an improper evaluation of the innovation level of firms. This is related to the fact that the over-issue of accreditations has resulted, as seen in Chapter 3, in an explosive increase in the number of accredited firms. However, some may argue that the results of the panel analysis prove that employment has not increased because the accredited firms have in fact engaged in process innovation. As was pointed out during the discussions on the theoretical model employed in this study in Chapter 1, process innovation only has a low possibility of increasing employment. That being said, the accreditation criteria have not been particularly focused on process innovation factors. Employment Performance of the Innovation-type SMEs and the Policy Implications 177
Another interpretation is also possible regarding the results of the pooled OLS analysis and panel analysis: “Unobserved firm heterogeneity such as outstanding management skills impacts not only employment creation in the near future, but also the achievement level of innovation in the future. As such, it is only natural that accreditation in the past does not appear in the results of the panel analysis that effectively eliminate these factors to impact employment creation at the current point in time.” These interpretations imply that although a firm has not achieved innovation at the time of accreditation, it nevertheless achieved innovation soon after, thereby insinuating a positive view of the accreditation system from the standpoint of the evaluation of innovation evaluation. In fact, the Inno Biz, Venture, and Main Biz accreditation systems evaluate firms based not only on the innovation level which a firm has achieved up to the current point, but also on their future innovation potential. In addition, the main actors serving as evaluation organization are banks whose incentive is to recollect the invested funds in the near future without having incurred any losses. Viewed from this standpoint, this assertion would appear to make sense. However, this interpretation loses its persuasive power when confronted with the results of the analysis conducted in this chapter where the proxy variable of innovation has been replaced with ‘intangible assets invested during the early part of the relevant year’. One of the main methods to stimulate the innovativeness, creativity, and dynamism of a firm is investment in intangible assets such as R&D investment. 178
However, contrary to accreditation status, the increase of investment in intangible assets was found to increase firm employment in the results of the pooled OLS analysis as well as of all the panel analyses. Even in the panel analysis in which unobserved firm heterogeneity was eliminated, Korean SMEs that promoted innovation through investment in intangible assets created employment. The detailed results are summarized in the table above. Contrary to the results in the previous chapter, the majority of the empirical analyses showed that intangible assets invested during the early part of the relevant year significantly increased employment at the end of the relevant year. In particular, it was revealed that in the case of manufacturing SMEs, investment in specific intangible assets -industrial property, copyright, software, and R&D- was linked to an increase of employment in all
The employment performance of innovative SMEs as viewed from investment in intangible assets
The impact of the intangible assets invested during the early period of the relevant year on employment at the end of the relevant year
Innovation Overall Manufacturing Overall Manufacturing Overall Manufacturing variables/industrial industries industry industries industry industries industry classification
No Total intangible assets 3.70% 3.20% 2.40% 3.10% No impact impact
Total specific No No 3.40% 3.40% 2.60% 2.30% intangible assets impact impact
Note : Total specific intangible assets = industrial property + copyright + software purchase + development costs Employment Performance of the Innovation-type SMEs and the Policy Implications 179 analyses. For example, the balanced panel analysis showed that the employment level at the end of the relevant year was increased by almost 2% when investment in specific intangible assets during the early period of the relevant year was increased by 1%. This result implies that a Korean SME which promotes innovation through investment in intangible assets can increase employment. At the same time, this reconfirms the fact that the granting of accreditation of innovation is not in reality based on a firm’s efforts to achieve innovation.
Chapter 5. Policy Implications
Based on the empirical analysis conducted in Chapter 4, Chapter 5 discusses the policy direction and detailed measures which should be implemented to expand the employment performance of innovative SMEs. The expansion of the employment performance of SMEs through innovation is predicated on increasing and effectively using investment in intangible assets such as R&D costs. To this end, the current study advocates the expansion of intellectual property (IP)-driven R&D as a means to support the innovation of existing firms, the strengthening of the motivation of R&D workers to engage in innovation through the compensation of employees who invent something, and the provision of support for the highly-skilled manpower needed to strengthen the competitiveness of SMEs. In addition, measures to expand employment performance by supporting the start-up of innovative firms are also introduced. 180
The estimation of the employment performance of innovative SMEs
Existing studies on the impact of innovation on employment performance (Chapter 2)
- When innovation is achieved, employment is generally increased as time passes.
The results of the empirical analyses conducted in this study (Chapter 4)
- The innovative SMEs which invest in intangible assets exhibit high employment performance. (proxy variable for innovation: intangible assets) - The employment performance of accredited innovative SMEs has a hard time being positive (+). (proxy variable for innovation: accreditation of innovation- type SME)
Measures to expand the employment performance of innovative SME
Measures to expand the employment performance of innovative SME
Select innovative firms as accredited Support innovation Support the start-up innovative firms and within existing firms of innovative firms effectively support them
- Expand the intellectual property- -Support the start-up driven R&D of innovative SMEs - (Strengthen the - Strengthen the motivation of R&D motivation of R&D workers through the workers through compensation for - Reorganize the compensation for inventions by accreditation system inventions by employees) for innovation-type employees SMEs - (Support for highly- - Support for highly- skilled manpower skilled manpower needed to needed to strengthen SMEs’ strengthen SMEs’ competitiveness) competitiveness Employment Performance of the Innovation-type SMEs and the Policy Implications 181
Lastly, measures to select and support innovative firms as accredited innovative SMEs based on a reorganization of the accreditation system for innovation-type SMEs are presented.
1. The expansion of IP driven R&D
Above all, it is necessary to heighten employment performance by increasing investment, including R&D investment, in intangible assets. However, effective investment has currently become an important issue in Korea; in this regard, it is necessary to expand investment efficiency through effective investment. The rapid increase in R&D investment has resulted in the quantitative production of intellectual properties such as patents reaching the global level. However, the creation and securing of outstanding intellectual properties from a quality standpoint has remained a problem. Therefore, it is necessary to consider a new R&D paradigm that would revolve around the expansion of intellectual property (IP)-driven R&D. Such a strategy will help to prevent any overlap in terms of R&D. In addition, in the case of firms, the increase in rapidly evolving market condition risks has heightened the need to approach the planning stage of R&D from the standpoint of intellectual property. The IP driven R&D strategy has become particularly entrenched as the R&D model for pharmaceutical industry (Moran M. et al., 2005). This strategy has been conducted abroad in conjunction with industries such as chemicals and semiconductors which have a short product lifecycle and are targets of product innovation. In Korea, the government supports the IP-R&D 182 linkage of firms. The R&D Patent Center operating under the guidance of the Korean Intellectual Property Office provides support for the advanced parts and materials industry s IP-driven technology strategies and IP-driven R&D strategies. However, as Korea has yet to establish a related information infrastructure and DB while the technology trade market remains inactive, the spillover effect of an IP-driven R&D strategy would be rather limited. The proper management of this strategic program requires the establishment of a basic information infrastructure that encompasses the evaluation of modular technology, trade market information, information pertaining to R&D workers, and information related to funding.
2. Strengthening the motivation of employees through a compensation system that rewards invention
The outcomes of innovation or R&D are dependent on how individual R&D workers efforts are directed. The provision of compensation for employees’ inventions can provide strong motivation for R&D workers. A compensation system for employees’ inventions eliminates conflicts related to compensation by making the remuneration and compensation for invention outcomes transparent. This also provides a strong motivation for R&D workers. The ability of a compensation system for employees’ inventions to facilitate R&D and function as an institution capable of attracting highly-skilled manpower is predicated on a compensation system for employees’ inventions that functions as Employment Performance of the Innovation-type SMEs and the Policy Implications 183 an incentive-based compensation system. However, a review of Korea s laws and institutions, as well as of the management of the legal system, wields few examples of a compensation system for employees’ invention that function as the incentive-based compensation system. The upgrading from a system to mediate the conflicts between the inventor and user to a system to promote invention, can only occur when reasonable compensation for the outcome, or concretization of the institution, has been carried out. Although the majority of the large enterprises have introduced a compensation system for employees’ inventions, such systems are mostly for public relations purposes. Many SMEs have yet to introduce this system. Large enterprises efforts to heighten the compensation level in order to produce actual effects should be supported. Meanwhile, SMEs needs support in introducing the compensation system for employees’ inventions. To this end, it is necessary to first introduce an accreditation system for outstanding firms that have implemented a compensation system for employees’ inventions, a notion which the Korean Intellectual Property Office already has taken under consideration. Such an accreditation system has the advantage of providing those seeking employment as an R&D worker that they dealing with a good firm. Second, as Korean law defines the standard for determination of justified compensation as being based on the justification of procedures during the process of determining compensation, it does not guarantee justified compensation that reflects actual contribution. In this regard, it is necessary to establish a consultation mechanism that could be 184 used to expand the negotiation power of employees. Third, support programs for highly-skilled manpower such as the Technical Research Personnel (alternative military service fulfillment) and Technical Manpower Support Program should limit the scope of its beneficiaries to firms which have introduced a compensation system for employees’ inventions.
3. Support policies for the highly-skilled manpower needed to strengthen the competitiveness of SMEs
Under the situation where the working conditions of SMEs, such as the wage and employment environment, have continuously worsened, vis-‡-vis large enterprises, increasingly number of individuals who have obtained Master s or PhD degrees in the science and engineering fields have been avoiding getting jobs within SMEs. Viewed from this standpoint, the Ministry of Knowledge Economy s support policies for highly- skilled manpower -such as the program to support SMEs hiring of highly-skilled workers and the program to support technological innovation-type SMEs hiring of a workforce - constitute an important means to support the strengthening of the competitiveness of SMEs. The program to support SMEs hiring of highly-skilled workers is aimed at strengthening the R&D competency and technological competitiveness of SMEs by facilitating employment in SMEs through the provision of support for the labor costs of highly- skilled researchers. This program was changed from a one-year support program to a prolonged support program that can last up Employment Performance of the Innovation-type SMEs and the Policy Implications 185 to three years, a denouement that can be regarded as being desirable from the standpoint of maintaining stable employment and the competitiveness of firms. The program to support technological innovation-type SMEs hiring of a workforce started out as one of the development strategies for global companies in 2010. It provides technical support to SMEs based on the dispatch and transfer of R&D workers from government-funded research institutes. This program represents a new type of personnel support for SMEs in the form of technical support as well as a new path of technical support. The operators of the program directly select the R&D workforce demanded by SMEs, and employ them as R&D workers in a government-funded research institute before dispatching them to SMEs for a period of three years or more. The labor costs for the R&D workers are covered by the government (50%) and the firm (50%) during the dispatch period. While the government s financial support for the SMEs participating in this program has been significant, the satisfaction of the participants has been high. However, there has been a shortage of highly-skilled applicants. During the process of preparing supplementary measures, the identity of this program has become unclear. More to the point, the lack of interest from those working for a government-funded research institute has led the government to employ external workers and dispatch them to SMEs. This move can be traced back to the difficulty of getting highly-skilled R&D workers to move from a government-funded research institute to an SME under the current market conditions. This program needs to minimize the supply-demand mismatch 186 between applicants and firms by raising the qualifications of the firms that join the program. For example, SMEs can offer stock options or reasonable compensation for employees inventions as one of the incentives for the applicants to the government programs pertaining to the dispatch of R&D workers. These two support programs can attract a technical workforce that prefers an employment contract with an aggressive compensation method. This can be used as a criterion for ready and prepared SMEs to participate in such programs.
4. Support for the start-up of innovative SMEs
The start-up of technology-based SMEs is important from the standpoint of ensuring future growth engines. In addition, support for start-ups has also been identified as the basic direction of the OECD s job creation policy. The facilitation of the start-up of technology innovation-type SMEs is predicated on the reform of various regulations pertaining to fund raising and taxation that can potentially impede the start-up of SMEs. In particular, there is a need to ease the regulations related to the commercialization of university research outcomes so that university researchers can establish venture and innovative SMEs based on the research they have developed (OECD, 1998). Any strategy to facilitate the start-up of technology innovation type SMEs must include a discussion on a strategy to support the activation of venture start-ups by university professors and researchers. The activation of technology-based start-ups by professors and researchers requires the implementation of a Employment Performance of the Innovation-type SMEs and the Policy Implications 187 support program for entrepreneurs related to the technology start- ups by professors and researchers (Song Wan-heup, 2011). In order to achieve differentiation with university student-centered entrepreneur support centers, tailor-made fund raising programs, new business clinics, and the technology market and sales market analysis needed to secure markets after start-up, should be put in place. In addition, it is necessary to consider the introduction of a Proof of Concept Center for professors and researchers which would serve as a support program designed to facilitate the commercialization of original technology at the national level. Given the development process in Korean universities, such centers should first be introduced to research-oriented universities. In particular, there is a need to heighten the ratio of support for labor costs and infrastructure.
5. The reorganization of the accreditation system for innovation-type SMEs
The results of the empirical analyses conducted in Chapter 4 reveal that the employment outcomes of accredited innovative SMEs cannot be regarded as having actually been achieved through innovation. In other words, the accreditation of innovation can be regarded as being achieved based on the unobserved growth and employment creation capability of a firm rather than its actual innovation level or innovation potential up until the relevant period under analysis. Viewed from the standpoint of employment creation, investment in intangible 188 assets was found to be a much more efficient indicator of innovation than innovation accreditation status. Therefore, it is necessary to review the following points related to the accreditation system for innovation-type SMEs. First, doubts can be raised as to whether the typical Korean- style industrial policy, in which the government selects and supports the innovative SMEs, can be continuously effective. As Korea approaches the technological frontier, it would become harder to expect technology based growth from the preliminarily selection of SMEs with growth potential. Second, should the existing industrial policy of selecting and supporting innovative SMEs be deemed to still be effective, it will then become necessary to improve the current reckless accreditation system. As far as criteria for the accreditation of innovation-type SMEs are concerned, indicators related to financial outcomes such as growth rate and profitability, employment structure, personnel management, human resources related CEO leadership, incentive structure and the performance distribution system should be considered. In addition, as far as the criteria for the support of innovative SMEs are concerned, there is a need, where firms below a certain age are concerned, to consider not only the above-mentioned criteria for accreditation, but also the quantity and quality of the employment created. Research Report 2011-598
Analysis of the Critical Factors of Job Creation in Gazelle Regions
Jeonghong Kim, Jingi Hong and Gisung Nam
The Efficiency of Investment in Regional Manufacturing Industries and Analysis of its Effectiveness 191
Chapter 1. Introduction
As part of ongoing efforts to suggest regional industrial policies that can actively support job creation, this study analyzes the critical factors leading to job creation in the Gazelle regions that have exhibited quality business start ups and outstanding job creation. Here, a Gazelle region is defined as a region where the local government falls within the top 10% in terms of its contribution to opening up new firms and creating jobs over the past five years. This type of research is necessitated by the fact that the increase in the budgets for regional programs has rendered it important to design regional programs that can be linked to increased revenues and job creation for the firms located in a particular region. In addition, it is necessary to improve the conditions of non-Gazelle regions by analyzing the factors that have helped to increase job creation and business start ups within Gazelle regions that have exhibited a high ratio of job creation 192 and business start ups. From this viewpoint, future regional industrial policy should be geared towards strengthening the support for regional industry and businesses with the highest employment, and to induce the implementation of regional programs that can be linked to new job creations. The critical difference between existing studies and this research is that this study simultaneously examines business start ups and job creation at the Gazelle region level. In particular, this research seeks to analyze the critical factors in determining job creation in regional industry, job creation differences between enterprises in Gazelle and non-Gazelle regions, and the differences in job creation between participant and non- participant enterprises in regional programs within the Gazelle region. Based on this exercise, an attempt is made to develop a better understanding of the characteristics and differences between business start up and job creation in Gazelle and non- Gazelle regions.
Chapter 2. The Gazelle region as the center of job creation
The main theoretical factors impacting job creation include entrepreneurship, firm size, firm age, knowledge spillover and industrial diversity based on the accumulation of human capital, and the existence of innovation support organizations within the region such as science parks. In this regard, many debates have emerged in conjunction with the factors of size and age of the Analysis of the Critical Factors of Job Creation in Gazelle Regions 193 firm. Existing empirical studies have maintained that younger and smaller-sized firms have exhibited more significant outcomes than the older and larger firms in terms of job creation. This study analyzed the industrial characteristics of Gazelle regions from 2004-2009 using the ‘Census on Establishments’ database published by Statistics Korea. As a result of the statistical analysis, 22 (about 10%) of the 232 basic local governments were classified as Gazelle regions, the majority of which were large regions with populations in excess of 200,000 that served as manufacturing industry centers. These Gazelle regions accounted for 78.3% of the the number of business established at the national level over the past five years and 32.5% of employment across all industries. In the case of the knowledge-based industry, half of the businesses and employment created at the national level occurred in Gazelle regions.
Enterprise characteristics in Gazelle regions
Major variables Results of statistical analysis Results of 2-test and t-test
Distribution of Slightly more Gazelle enterprises Gazelle Exhibited a significant in Gazelle regions enterprises in difference (2.2%p difference) Gazelle regions
More SMEs were located in Gazelle regions (the difference in Exhibited a significant Size of firm the average number of difference employees was 60)
Lower age of firms in Gazelle Exhibited a significant Age of firm regions (two years difference) difference
High ratio of high-tech firms in Existence of Exhibited a significant Gazelle regions high-tech firms difference (10%p difference) 194
In addition, it was determined that key manufacturing and knowledge-based industries produced similar outcomes in Gazelle regions. Next, this study analyzed the characteristics of enterprises in Gazelle regions, using the KOCO info (TS2000) database published by the Korea Listed Companies Association for the period 2004-2009. This analysis revealed that Gazelle enterprises tended to be situated in Gazelle regions by a relative margin. In addition, Gazelle regions, which are defined in a similar manner to Gazelle enterprises, for the most part consisted of smaller-sized enterprises than those found in non-Gazelle regions. Furthermore, high-tech SMEs had a higher rate of occupancy in Gazelle regions than in other regions.
Chapter 3. Survey of business start up and job creation by regional type
The objective of this survey is to derive policy improvement measures by analyzing the characteristics of business start ups and job creation based on the industry-academy-research institutes that have participated in regional programs. Based on this survey, an examination of the contributions to the opening up of new business start ups and the creation of jobs based on regional type (existence of Gazelle region), participation in regional programs, and enterprise size was conducted. In addition, the factors which should be concentrated on and the improvements that should be made from the standpoint of policy were also introduced. Analysis of the Critical Factors of Job Creation in Gazelle Regions 195
To this end, a survey of 800 enterprises was conducted. The results can be summarized as follows. First, Gazelle regions had relatively more SMEs than non-Gazelle regions. In this regard, Gazelle regions scored relatively lower in terms of R&D investment, number of patent registrations, and number of employees with a high academic background than the non- Gazelle regions. However, the rate of increase in terms of these factors was higher in Gazelle regions. Second, the infrastructure of Gazelle regions, such as the presence of high-tech industrial complexes, was quite good when compared with what they received in software support. On the contrary, participant enterprises from non-Gazelle regions were found to be relatively larger and to receive more software support from the basic local government. Third, the participants included the provision of funds, securing of manpower and securing of markets as important business start up factors and difficulties. The strong emphasis on these factors may have a lot to do with the fact that the majority of the participants in the survey were small-sized enterprises. Fourth, enterprises participating in regional programs exhibited an increase of twenty jobs over the past five years. Six of these jobs were directly attributed to the regional programs, with three added during the implementation of regional programs and the other three added after the completion of the regional programs. Meanwhile, enterprises not participating in regional programs only experienced an increase of three in terms of the number of jobs during the same period, thereby exhibiting a significant gap with the enterprises participating in regional programs. Fifth, local enterprises identified the decrease of 196 corporate taxes and provision of low-interest loans, as well as easier recruitment conditions as factors that helped to increase employment. These results are directly linked to the emphasis on the ease with which funds could be provided to business start ups, a result which showcases the necessity to improve financing and tax related institutions.
Chapter 4. The characteristics of job creation in Gazelle regions and empirical analysis of critical factors
An empirical analysis was conducted using the database of the ‘Census on Establishments’ published by Statistics Korea during the period 2004-2009. The results of the empirical analysis are as follows. First, an analysis of whether a new enterprise that enters a specific region impacts the increase of employment in the region within 1-2 years following its entrance was conducted. This implies that the measures to activate business start ups within the region are connected to the measures to increase employment. Second, an analysis of the causal relationships revealed that in the case of enterprises in overall regions and non-Gazelle regions, the GRE of the manufacturing industry entailed the GRE of services industry. On the other hand, the GRE of manufacturing and services industries exhibited an inter-causal relationship in Gazelle regions. As such, Gazelle regions appear to have the conditions to trigger the GRE of other related industries regardless of the industry under analysis. Analysis of the Critical Factors of Job Creation in Gazelle Regions 197
The results of the regression analysis of GRE to EC
Knowledge Key Knowledge Overall Manufacturing Services based manufacturing based services industries industry industry manufacturing industry industry industry
Regres Signific Regres Signific Regres Signific Regres Signific Regres Signific Regres Signific sion ance sion ance sion ance sion ance sion ance sion ance coeffici probab coeffici probab coeffici probab coeffici probab coeffici probab coeffici probab ent ility ent ility ent ility ent ility ent ility ent ility
Note : dependent variable- EC, independent variable- GRE 198
The results of the regression analysis of GRE to EC
Observa Significa tion Null hypothesis F-value nce level
The GRE of the manufacturingindustry does not result in the GRE of the services 2.01634 * industry. Overall regions 2,090 The GRE of the services industry does not result in the GRE of the 0.01465 manufacturing industry.
The GRE of the manufacturingindustry does not result in the GRE of the services 4.12375 *** industry. Gazelle regions 196 The GRE of the services industry does not result in the GRE of the 3.87609 ** manufacturing industry.
The GRE of the manufacturing industry does not result in the 3.43771 ** GRE of the services industry. Non- Gazelle 1,892 regions The GRE of the services industry does not result in the GRE of the 1.38211 manufacturing industry.
Note: *: p<0.1, **: p<0.05, ***: p<0.01
Third, the regression analysis of the factors impacting regional job creation revealed that factors such as human capital, participation in regional programs, existence of Gazelle regions, knowledge-based industry, and an increase in patents significantly impacted job creation. Analysis of the Critical Factors of Job Creation in Gazelle Regions 199
The impact of major variables on employment
Results of the Research Results of the survey Results of the methodology existing conducted in this empirical analysis theoretical survey study in this study Large increase Research target Impact on rate of Impact on employment employment employment Entrepreneurship + Not verifiable Non-significant Size of firm - + + Human capital + + + Existence of innovative support + Low satisfaction Non-significant organization Age of firm - Not verifiable + Participation in + regional Not verifiable + (partially programs significant) Existence of Gazelle regions Not verifiable + + Existence of high-tech + Not verifiable Non-significant industry Increase rate of patents Not verifiable Not verifiable + + Formation of + Not verifiable (partially clusters significant)
Chapter 5. The employment policy of Michigan
The state of Michigan can be regarded as being as close as possible to the definition of a Gazelle region presented above. According to the Financial Times, the number of factory workers 200 in Michigan, which is the center of the automobile industry, increased by 29,800 from March 2010 to March 2011, the highest of such increases in the United States. The outstanding results achieved by Michigan in terms of employment can be linked to the establishment of the 2 billion dollar in scope 21st Century Jobs Fund through the Michigan Economic Development Corporation (MEDC) and the provision of employment subsidies. The goals of the 21st Century Jobs Fund are to commercialize Michigan, improve the potential for job creation, facilitate investment, and implement joint programs based on a matching of funds with external sources. The 21st Century Jobs Fund has the characteristics of a composite fund which provides support to all of Michigan in that it includes various types of funds related to job creation such as the ‘Michigan Pre-Seed Capital Fund’ and ‘Investment Fund’ in which SPARK plays a central role. In addition, the Michigan Economic Development Corporation (MEDC) also established the Michigan Life Science and Innovation Center (MLSIC) in conjunction with Wayne County, SPARK, and a private foundation. Wayne County provided a 250,000 dollar subsidy to the MLSIC that is to be provided as support for business start ups. Meanwhile, SPARK has implemented business start up related tasks. The low taxation rate in Michigan also helps to create a good environment for businesses. Approximately 70% of businesses in Michigan were subject to tax exemptions in 2007. The corporate tax rate, which stands at 4.95%, is also relatively lower than in most states. In particular, businesses whose annual gross receipts amount to less than $350,000 do not have to file income tax Analysis of the Critical Factors of Job Creation in Gazelle Regions 201
The composition of and budget for the 21st Century Jobs Fund, Michigan (2010)
Matching fundsbetwee Program and Budget input n the private Leverage Total type by Michigan and federal rate (B/A) budget (A) government (A+B) (B) Loans for commercializati 89.9 283.1 3.7 373.0 on Subsidies for commercializati 64.9 201.7 3.6 266.6 on Pre-seed fund for business start 14.8 34.2 2.6 49.0 up New technology fund 4.2 17.7 9.1 21.9 Investment fund 104.0 257.4 7.3 361.4 SMEs loan program 3.5 80.3 26.8 83.8 Funds for diversification of industrial 13.4 47.2 7.0 60.6 structure
Support program for commercializati on of 42.9 360.0 8.4 402.9 outstanding energy centers
Fund of choice 9.0 270.0 30.0 279.0 Total 346.6 1,551.6 4.5 1,898.2 reports, and as the state government does not impose taxes on these businesses, they are well suited to protect their business start ups during the early stages. In addition, Michigan provides various types of tax credits such as tax credit for start ups, tax 202 credit for R&D investment, tax credit for investment in production facilities, and a tax credit for job creation. Moreover, business start ups at the early stage of development have had 25% of their investment in the region returned in the form of a subsidy.
Chapter 6. Measures to activate business start ups and job creation at the regional level
The following measures should be reviewed as means to increase business start ups and job creation. First, the results of the survey conducted herein and of the case study of Michigan highlight the necessity to establish job funds. In order to better connect them to job creation, such job funds should be used to provide support for not only businesses that are at the early stages of start up, but also for businesses at the preparatory stage of start up. Second, it is necessary to establish a ‘mega-regional economic zone human resources development council’ responsible for training and providing the human resources desired by enterprises. The main roles of this council should be to separate the demands for human resources made by the various regional industry types into production and office workers, view such jobs as either short or long-term ones, and accordingly play a central role in providing human resources. Third, there is a need to implement an industry-academic cooperation employment support program in conjunction with regional specialized industries where a serious mismatch between Analysis of the Critical Factors of Job Creation in Gazelle Regions 203 the supply and demand of human resources exists. In other words, universities, research institutes, enterprises and associations should organize consortiums at the city and provincial level that revolve around regional specialized industries. The consortiums should uncover the human resources desired by SMEs and designate human resources education & training agencies which can cope with the demands of enterprises. During this process, it is essential to offer curriculums which reflect the demands of SMEs in the region where new human resources should be employed. Inducements should be provided to the relevant SMEs to hire employees who complete the relevant curriculum. For instance, whenever a person actually takes a job at such an SME, an employment subsidy should be granted to the relevant SME. Fourth, the job creation suggested in this study requires an increase in the budget for active regional industries and programs to create more jobs through regional programs. To this end, it is essential to differentiate budget allocations at the early stage, post- evaluate the degree of actual business start up and job creation through an annual assessment, and then reflect the findings of the latter in the budget allocation for the next year. Fifth, there is a need to move beyond manufacturing-centered regional industrial policy and provide support for knowledge- based service industries. One of the most significant characteristics of Gazelle regions is that a high degree of job creation can be attributed to the knowledge-based service industry. In addition, in cases where it becomes difficult to differentiate knowledge-based service industries between mega-regional economic zones, 204 measures should be sought to implement super mega-regional linkage cooperation programs. Sixth, there is a need to analyze the reasons why business start ups and job creation have decreased in certain regions, and to search for measures to mitigate these problems. In addition, it is also necessary to develop, at the basic level, knowledge-based service-related enterprises in urban areas and, also at the basic level, to make efforts to attract enterprises based on the improvement of location in mid-and small-sized rural areas. Lastly, based on the fact that regions where knowledge-based industry-centered complexes were located exhibited a greater activation of business start up and job creation, it becomes necessary to provide industrial complexes which reflect the characteristics of regional industry. Furthermore, the activation of a linkage program between industrial complexes that reflects regional industrial characteristics can also help strengthen the competitiveness of regional industry. Research Report 2011-599
A Study on the Development of Green Industry in Korea through the Analysis of Corporate Innovation Systems (CIS) Based on Win-Win Strategies for both Large and Small-Medium Enterprises
Doohee Lee, Young Seop Shim, Youngjoo Lee and Sun Bae Kim
The Efficiency of Investment in Regional Manufacturing Industries and Analysis of its Effectiveness 207
Chapter 1. Introduction
In the 21 century, nearly every country in the world has increased investment at the governmental level for the expansion of green industry and concentrated on investment in R&D to secure technology. However, even more important has been the corporate strategy used to engage in green industry and produce related goods. The majority of green industries remain at the growth stage or even at stages prior to the growth stage where specialization and the division of labor based on value added chains have not yet been implemented. From the standpoint of the overall industry, there is a more urgent need to secure the internalization and systemization of innovation through the establishment of vertical or horizontal business cooperation networks rather than through the delivery of innovation resources through the market. Regardless, there have been almost no studies conducted on the corporate innovation system (CIS) of firms engaged in the green industry. The majority of green 208 industry enterprises that have not reached the maturity stage are closely related to innovative SMEs (small and medium sized enterprises) in that they have produced innovation-related goods and they can be regarded as playing a very important role. On the other hand, it is also important for large enterprises at the forefront of the market to effectively employ an innovation system that is linked to innovative SMEs. Despite this fact, very few studies have been conducted on the innovation systems of large enterprises and SMEs involved in the green industry. There has also been a dearth of industrial growth theories and studies based on the innovation systems of green industry-related large enterprises and SMEs. Based on the rising awareness of this problem, the present study prepares a development strategy and measures for the green industry in accordance with an innovation based system approach to large enterprises and SMEs. The objectives of this study can be summarized as follows. First, a Corporate Innovation Systems (CIS) theory and CIS framework are developed in order to derive sustainable growth strategies for the firms engaged in green industry. Second, using the CIS framework, a development strategy for Korean green industry is developed based on case studies and empirical analysis of green industry-related firms. Third, based on an analysis of the cooperation system between large enterprises and SMEs, the policy tasks and development measures needed to establish the basis for the sustainable growth for the firms engaged in the green industry are introduced. In particular, this study focused on introducing sustainable growth measures for SMEs based on a green industry-centered CIS. A Study on the Development of Green Industry in Korea through the Analysis of Corporate Innovation Systems (CIS) 209
The Corporate Innovation System (CIS) is regarded as the ultimate main actor and core factor determining the orientation and eventual implementation of the innovation system. Nevertheless, existing studies have concentrated on analyzing national innovation systems (NIS), regional innovation systems (RIS), and sectoral innovation systems (SIS) that exist on the periphery of CIS. In this regard, this study helps to establish the foundation for the conduct of full-scale studies on CIS. Green industries, including photovoltaics, have not yet reached the maturity stage.Green industry, which features many cases of flexible rather than fixed industrial ecology, can be regarded as an industrial sector for which a desirable CIS can be sought. Due to its industrial characteristics, green industry can be considered as a sector where product innovation can be brought about by combining large enterprises and SMES in a convoy manner. Thus, there is a strong necessity for this study. In this respect, this study stands out from previous ones in that it analyzes innovation systems from a vantage point in which large enterprises and SMES constitute the main innovation actors. The results of the study of CIS, which goes through system processes such as input-process-feedback-output, can immediately be used as strategic alternatives for the development of green industry. Another point of departure from existing studies is that this study analyzes the joint development cooperation between large enterprises and SMEs and conducts an empirical study from the standpoint of innovation systems. Employing a gradual cooperation model, this study adopts a realistic approach to the large enterprise-SME cooperation 210 process. This study also extends the scope of the studies on innovation systems beyond the national, regional and sectoral levels to the firm level.
Chapter 2. Theoretical review and analytical framework
As green industry remains in the early stages of the industrial life cycle, large enterprises as well as innovative SMES have naturally focused on the development of dominant products. Therefore, the establishment of an innovation system (IS) that revolves around related enterprises can be the most effective alternative in terms of strategies for the development of green industry. This is why theories supporting Corporate Innovation Systems (CIS) are desperately needed. The CIS theory is not limited to the simple listing of the factors and capabilities of innovative firms. The CIS theory indicates a system that makes the dynamic growth of a firm possible by producing innovative and dominant products in a market characterized by the organic network called the ‘input-process- feedback’ and self-control mechanism (Iansiti and Levien, 2004). This CIS concept emphasizes both the supply and demand aspects from the position of the firm. In terms of supply, the CIS concept is based on the rapid progression of borderless corporate activities, the segmentation of value activity areas, and the division of labor. From the demand standpoint, demands for the systematic integration of segmented value activities (Kim Ki-chan, 2009) have been on the rise. The diversity of market demands, A Study on the Development of Green Industry in Korea through the Analysis of Corporate Innovation Systems (CIS) 211 increased speed of change, technological complexity, and the shortening of the technology life cycle have caused great changes in corporate behavior and increased the pressure for an approach based on the CIS concept. The continuity of innovation becomes hard to guarantee when even large enterprises must depend solely on internal resources due to the rapid increase in R&D costs, specialization caused by the shortening of the technology and product life cycles, and the globalization of technology and markets. The main factors that make up the CIS consist of input, process, feedback and output. The innovation actors, which constitute input factors, include large enterprises, SMEs, governments, universities and research institutes. The enhancement elements of innovation, which represent the
Analytical framework
Current state of green industry
Government
large enterprises SMEs FEEDBACK university
Competition (S3)
Specificity (S1) Diversity (S2)
Innovation cluster (S4) Building trust Large enterprise’s Building trust CIS SMEs No Innovation joint growth (dominant product) SMEs Capability Condition enhancement formation SMEs Yes Development of green industry 212 process factor, consist of competitiveness, diversity, specificity, and innovation clusters. The feedback factor is determined by the presence of cooperation and open systems between large enterprises and SMEs. At the output stage, evaluation is based on the presence of innovative products and dominant products. This study introduces an analytical framework created by organically connecting the input-process-feedback-output processes, and applies this framework to the large enterprises and SMES engaged in the green industry. The analytical framework suggested in this study is found in .
Chapter 3. Analysis of the CIS of green industry and development strategy
1. Analysis of the current CIS of green industry
Korea’s green industry currently dominates the market for early stage-technology. However, the possibility of emerging new technology disrupting the market cannot be ruled out at any time. In other words, the Korean green industry has faced a reality in which product innovation can result in leading or dominating the market. To that extent, the green industry’s ecological system is a fluid one. Under these circumstances, it is only natural that the competition amongst market participants be focused on the development of dominant products. As such, it is appropriate that measures to heighten the competitiveness and further the development of the green industry be based on these contexts. A Study on the Development of Green Industry in Korea through the Analysis of Corporate Innovation Systems (CIS) 213
Summary of the CIS analysis of green industry
CIS Large Photov Contents (main indicators) SME LED component enterprise oltaic - SME research center, research SME manpower and R&D Large - company research center, research Innovation actors Enterprises manpower and R&D (Input) Universities - University research institute and R&D - Public research institutions, research Governments manpower and R&D Specificity - R&D, product selection and (S1) concentration Innovation Diversity(S2) - R&D, product diversification enhancem - Number of firms within the CIS (or ent including spin-out companies) Competition (Process) - Number of venture companies (S3) (including spin-off ventures) - Entry of new firms
- Accessibility to core company and energy infrastructure Factor - Business services (especially, financial condition system etc) - Highly or skilled industrial manpower pool - Domestic market type and size - Overseas market type and size Demand - Quality-demanding consumers condition (demander) - Product price - Cooperation and linkage of value or supply chain Innovation - Competitiveness of suppliers clusters - Establishment of global supply (system networks economy, Related - Protection of patents (knowledge S4) industry and property rights) (Process) support - Institutional support (specialty, certification etc) - Financing (startup funds) support (financial policy) - Tax benefits (fiscal policy) - Public procurement - Joint prosperity cooperation strategy Corporate bringing together large enterprise and strategy, SME structure - Technology-led or market-led strategy and - R&D network cooperation competition - Tailored design, production, delivery condition competency scope - Organical organization 214
- Activation of private finances such as venture capital (VC) - Easiness of business startups
- Condition formation Innovation Shared - Trust building feedback growth - Capability enhancement (Feedback) - Open innovation strategy - Epochal innovation related patent or product - Product innovation related patent or Innovation product Innovation output - Dominant prod design type (Output) - Process innovation related patent or product - Gradual innovation related patent or product
Market formation has yet to take place where green industry is concerned. In this regard, the market has been created based on government subsidies and industrial protection-oriented regulations. However, given the importance of eventually establishing indigenous growth and market creation based on technology and product competitiveness, there is a need to engage in innovation efforts at both the industrial and firm level. Viewed from this standpoint, green industry must focus on erecting an ecosystem in which product innovation can be continuously implemented and accelerated until the emergence of a dominant product. To this end, the green industry requires not only large enterprises but also innovative SMEs. R&D cooperation should also be established between universities, research institutes, and enterprises. In addition, an open innovation system which can attract the the participation of overseas R&D capabilities should also be promoted. A Study on the Development of Green Industry in Korea through the Analysis of Corporate Innovation Systems (CIS) 215
The analysis of CIS determinants based on the analytical framework employed in this study has helped to shed some light on the following important variables: the role played by public research institutions in the innovation actor sector, R&D specificity in the innovation enhancement sector, financing and tax support in the innovation cluster sector, and condition formation and trust building in the innovation feedback sector. Product innovation was identified as the key determinant in the innovation output sector.
2. The developmental stages of green industry and the establishment of a development model
The CIS analysis revealed that the Korean green industry remains at the innovation environment and industrial development stage characterized by immature factor and demand conditions. The photovoltaic and LED industries fell under the fluid phase, which constitutes the stage prior to the emergence of dominant products. In this regard, a developmental model for the green industry that focuses on the development of dominant products and new products based on the convergence of green technology should be established. Above all, it is necessary to develop dominant products based on the core base technology for green products and a module-type product architecture centering on large enterprises. SMEs play the role of producers specializing in the core parts, materials and equipment required by green products, and can actualize the development of joint prosperity through linkages with large enterprises. 216
The developmental stages of green industry
Dominant product Crystal or design Photovoltaic LED
Thin Film Photovoltaic
Process innovation Horizontal Vertical cooperation Product cooperation A-type SME innovation J-type SME L-type SME
Fluid phase Transitional phase Specific phase
Source: prepared by the author based on the use of the Utterback and Abernathy model
Green industry development model for joint growth between large enterprises and SMEs
Economies of scale Interface Green technology standardization Development of Basic science dominant product BT Finished Parts/ product Original materials technology product
Green product, core Producers base technology, specialized in green IT module-type product industry related parts, product architecture design materials and Related (large enterprises) equipment (SME) industries such as NT semiconductors Tailored core Finished product and chemistry technology Green technology product Creative idea/ convergence intellectual property Development of new product
In addition, the development of new products based on the convergence of green technologies can be activated via the A Study on the Development of Green Industry in Korea through the Analysis of Corporate Innovation Systems (CIS) 217 combination of strong SMEs, planning to develop new, creative products through the convergence of various green technologies and patent technology and large enterprises’ provision of tailored core technologies required by the SMEs. The basic direction of green industry development should be that of strengthening the large enterprise-SME joint growth strategy included in the feedback sector of the green CIS model. The ideal green industry development model should be one that ultimately emphasizes win-win cooperation between large enterprises and SMEs, fosters the formation of networks, promotes the development of strong SMES (J-type SME) based on the activation of new product development through the convergence of green technologies, facilitates the expansion of market size, creates green industry linkages between industry, academia, and research, and fosters linkages between upstream and downstream industries.
3. SWOT analysis of green industry and development strategy
The strengths (S) of the Korean green industry consist of the government’s strong will to develop the green industry and the existence of a concrete industrial basis for linkages with large enterprises. Meanwhile, the main weakness (W) is the limited ability to achieve market creation based solely on the government’s will. The high possibility of expanding the market for green industry from a long-term standpoint can be regarded as the opportunity factor (O). The global competition within the green industry, especially the possibility of an intensification of the competition with Chinese firms, can be identified as the threat 218 factor (T). Based on the results of SWOT analysis and development model, this study suggested a four-stage development strategy for the green industry that consisted of an activation strategy (SO), supplemental strategy (WO), subjugation strategy (WT), and differentiation strategy (ST).
Activation strategy (SO): strengthening the weak factor conditions The effective use of the strengths of green industry and opportunity factors requires an immediate enhancement of the weak factor conditions. First, cooperation with SMEs should be pursued to reduce production costs and ensure economic efficiency over the short term. This should be achieved through the adoption of a diversification strategy and vertical integration based on the smile curve by large enterprises. Second, it is necessary to expand early investment in the development of next- generation green industry technology and related programs that make use of domestic semiconductor and display technology. Third, various policy support measures designed to heighten the competitiveness of SMEs should be implemented in order to establish a desirable cooperation system for large enterprises and SMEs that focuses on the development of dominant products.
Complementary strategy (WO): strengthening the demand conditions Special efforts should be made to overcome the weaknesses of green industry and make use of opportunity factors by focusing on market creation. The government’s limited ability to directly A Study on the Development of Green Industry in Korea through the Analysis of Corporate Innovation Systems (CIS) 219 create the market renders it necessary to provide support designed to induce the participation of firms. It is also essential to make efforts to create markets based on cooperation between large enterprises and SMEs and to increase government-led demand. In addition to the expansion of the domestic markets, steps should be taken to enter foreign markets. Thus, green industry must, like other industries, make the decision to compete at the global level and develop as an export industry that is based on international competitiveness.
Subjugation strategy (WT): Development of green industry clusters The weaknesses and threats faced by green industry can be overcome by focusing on expanding investment and developing technology so as to surpass the green industry of other countries and related enterprises in production size and technology. In particular, the competencies needed to connect large enterprises and SMEs should be developed by heightening the capabilities of universities. The effective implementation of this strategy requires the development of green industry clusters, the specialization of upstream and downstream industries and the value chain centering on a dominant product, and a focus on the establishment of an open innovation infrastructure and industrial ecosystem.
Differentiation strategy (ST): Establishment of super-regional green industrial belts The ability to use the strengths of green industry to respond to threats is predicated on the securing of price competitiveness 220 within the global market. Currently ay the early stages of the technology life cycle, green industry can only preemptively occupy the market once economic efficiency and the related technologies have been secured. As such, efforts must be made to support such objectives. Such efforts should include the establishment of super-regional green industrial belts at the national level. The establishment of super-regional green industrial belts at the national level represents an important element of the securing of global competitiveness via the mutual supplementation of the limitations of dominant product-based green industry clusters.
Chapter 4. The use of CIS by green SMEs and joint growth
1. The innovation activities of green SMEs
The survey of SMEs engaged in green industry with experience interacting with large enterprises (hereinafter referred to as ‘green SMEs’) revealed that these firms’ innovation activities and innovation capability were less than satisfactory. The accessibility to and possibility of learning the innovation resources possessed by external firms was greatly limited by the fact that the survey participants tended to focus on independent innovation activities rather than cooperative innovation ventures. A general lack of professional manpower, funds, and resources resulted in green SMEs failing to establish a clear direction for their A Study on the Development of Green Industry in Korea through the Analysis of Corporate Innovation Systems (CIS) 221 innovation strategy and detailed strategic measures. However, the green SMEs that smoothly implemented their innovation activities based on linkages with large enterprises had a more significant likelihood of delivering higher-quality products to large enterprises. As such, the CIS can contribute to joint development between large enterprises and SMEs.
2. The uses and effects of CIS
Large enterprises constituting the major partner of green SMEs have managed the CIS in a manner designed to support the innovation activities of SMEs. However, the survey revealed that overall satisfaction was low. Large enterprises cooperation with SMEs in conjunction with three sectors of the CIS was measured using a 5-point scale. In this regard, low scores were recorded as far as the cooperation of large enterprises in the establishment of innovation conditions for SMEs (2.64), strengthening of the innovation capacity of SMEs (1.40), and the establishment of mutual trust between large enterprises and SMEs (1.51), were concerned. Particularly observed was a lack of support for innovation capability building through which actual help could be provided to SMEs, and trust building exercises which constitute the foundation of joint cooperation projects. Green SMEs identified one-off support (56.3%) and the lack of effective support (15.8%) as the key problems of the CIS operated by large enterprises. In some cases, green SMEs could not use the CIS of large enterprise due to the fact that they had failed to meet the CIS’ rigid participation conditions. 222
Analysis of the role of CIS in the innovation activities of green SMEs
Standardized beta Significance probability Independent variable coefficient level Innovation activity 0.76*** 0.001 < CIS management (control variable) 0.11*** 0.001 < Model fit (F-value) 34.3*** 0.001 <
Note: dependent variable = green SME s innovation ability
Nevertheless, the CIS was found to help improve the innovation ability of green SMEs. In terms of the three CIS innovation feedback factors, a statistically significant relationship was uncovered between the formation of innovation conditions and trust building and the innovation ability of green SMEs. Meanwhile, the enforcement of innovation capacity was not explained in a statistical manner. This means that large enterprise CIS-based cooperation has been insufficient to actually help strengthen the innovation capacity of SMEs. This can be attributed to the failure to transfer useful resources to green SMEs. The empirical analysis also showed that none of the three fields in the CIS innovation feedback sector impacted the management performance of green SMEs.
3. The dynamic effects of CIS
Given the necessity of identifying the fit between the CIS and the sustainable growth of green industry, the dynamic effects of the CIS were analyzed. CIS change can be connected to the improvement of innovation A Study on the Development of Green Industry in Korea through the Analysis of Corporate Innovation Systems (CIS) 223
Summary of the effect of CIS support on the innovation of green SMEs
Analytical focus Analytical model Hypothesis Adoption
Positive effect of CIS on the Innovation ability= a innovation innovation activity + b CIS a> 0, b> 0 Complete capacity of management (regression adoption green SMEs analysis) Formation of Innovation Difference in condition: Partial adoption degree L type= a, A type= b, J type = c (in the case of of cooperation Enforcement of innovation a b c trust building, the across fields based capacity: d e f difference on CIS for various h i j between SME green SME types L type= d, A type= e, J type = f types is not (L, A, and J types) Trust building: supported) L type= h, A type= i, J type = j Innovation ability = a Effect of CIS formation of innovation Partial adoption support on the conditions + b enforcement a>0, b>0, (adopt in the case innovation ability of innovation capacity + c c>0 of a>0, c>0) of green SMEs trust building Management performance= g Effect of CIS innovation ability + a support on the formation of innovation management conditions + b enforcement a>0, b>0, Complete performance of of innovation capacity + c c>0 dismissal green SMEs trust building + d number of employees
Innovation ability= a change Effect of support in formation of innovation for innovation conditions + b change in a>0, b>0, Partial adoption ability based on enforcement of innovation c>0 (adopted in case changes in the CIS capacity + c change in trust of a>0, c>0) (dynamic effect) building
Difference in the Change in formation of change in the innovation conditions: degree of L type= a, A type= b, J type = c cooperation by Change in enforcement of a b c Complete field based on the innovation capacity: d e f adoption CIS for various L type= d, A type= e, J type = f h i j green SME types (L, A, and J types) Change in trust building: (dynamic effect) L type= h, A type= i, J type = j 224 ability of green SMEs. The promotion of effective cooperation between large enterprise and SME based on the CIS makes it possible to not only achieve the joint growth of large enterprise and SME but also the sustainable growth of green industry. Meanwhile, innovative SMEs classified as J-type green SME types were able to effectively distinguish themselves. J-type green SMEs exhibited higher innovation activity levels and innovation ability, and also boasted improved levels of cooperation with large enterprises via the CIS.
4. CIS and the joint growth of large enterprises and SMEs
The following policy implications can be derived from these results. First of all, the clear identification of the usefulness of the CIS of large enterprises makes it necessary to now highlight joint growth between large enterprise and SMEs from the standpoint of CIS. Because joint growth between large enterprises and SMEs should be implemented by firms rather than pushed by government policy, strategic and policy measures designed to bring about a CIS framework that approaches innovation and cooperation from the standpoint of firms should be implemented. The effective operation of the CIS becomes much more complicated when the transfer and sharing of core resources is not smoothly carried out between large enterprises and SMEs. The transfer and sharing of resources can be compared to the ‘blood (innovation feedback)’ that makes the smooth circulation of joint development possible. Such a failure inevitably weakens the trust building (output factor) that facilitates mutual A Study on the Development of Green Industry in Korea through the Analysis of Corporate Innovation Systems (CIS) 225 cooperation between the two sides. This kind of situation makes it difficult to not only anticipate the emergence of a virtuous cycle of shared growth between large enterprises and SMEs, but also the sustainable growth of green industry. Consequently, policies that help promote the sharing and transfer of resources between large enterprises and SMEs in fields where a clear circular flow between the formation of innovation conditions and trust building exists must be implemented. The individual pursuit by large enterprises and SMEs of a competition strategy within a green industry in which markets, technology and industry have yet to mature represents an unwanted development. It is difficult to overcome the competitive pressure emanating from the global competition and the sheer size of the advanced countries and China based solely on individual enterprises’ strategies; and this regardless of whether they are SMEs or large enterprises. A more effective global competition strategy is one based on the CIS in which specialized SMEs play an integral part in large enterprises gaining of a foothold in foreign markets. In this regard, the government needs to eliminate large enterprises’ engaging in one-off and discriminative innovation CIS-based cooperation, and to strengthen policy incentives designed to lure large enterprises into pursuing sustainable and cooperative innovation activities with green SMEs. In particular, the emphasis should be on supporting the innovation based (J-type) SMEs with innovation ability, or a high possibility of cooperating with large enterprises based on the CIS. J-type SMEs’ active participation in the CIS of large enterprises can facilitate a virtuous cycle of green industry growth. 226
Chapter 5. Conclusions and policy measures
1. Summary and basic direction
A new industry at the generation and introduction stage of the technology life cycle, Korean green industry is currently in the early phases of technology development and commercialization. A good industrial ecosystem may yet be established depending on the manner in which such efforts are directed. Here, a good industrial ecosystem refers to the establishment of the foundation for win-win development between large enterprises and SMEs by strengthening the capacity of innovative SMEs. The establishment of a good ecosystem within the industry is predicated on the founding of an innovation system that revolves around the firms that make up the industry. The desired CIS is one that is established at the juncture where the industrial ecosystem continues on to become a virtuous cycle of industrial development. The most urgent and essential task facing green industry at the early stage of technology and industry is that of securing technology innovation and market creation. Consequently, the ideal CIS should be one that operates from the stage in which this issue can be promptly addressed. Technology innovation represents an important task that must be addressed in order to develop dominant products and improve effectiveness. The development of dominant products and an effective innovation system also requires the establishment of win-win cooperation measures between large enterprises and SMEs in the innovation A Study on the Development of Green Industry in Korea through the Analysis of Corporate Innovation Systems (CIS) 227 feedback sectors. For green industry, market creation is as important as the development of innovative technology. In this regard, cooperative systems linking together large enterprises and SMEs should be established during the expansion process of the domestic and overseas markets. Viewed from this standpoint, it becomes imperative to select a basic direction for policy that deal with large enterprises and SMEs separately. In the case of large enterprises, new CIS that mark a departure from the existing viewpoint must be established. A CIS solely based on the internal innovation capacity of large enterprises makes it necessary for such firms to pursue win-win cooperation with SMEs. This is the reason why large enterprises should seek to heighten the innovation capacity of SMEs. Large enterprises’ support for the innovation capacity of SMEs will help heighten the technological wherewithal and quality of manpower, which in turn will lead to an improvement in the productivity of SMEs. This will eventually contribute to the heightening of the competitiveness of large enterprises. The desirable CIS should be one that moves toward a smile curve value chain based on intellectual property rights and brand and customer management. As such, the time has come to abandon the vertical value chain in which product development-assembly/production-supply represents the basis of competitiveness. Meanwhile, SMEs must overcome the limitations of CIS occasioned by their poor fundraising capacity and lack of technical manpower. There is also an urgent need to prepare a supply system through which high-quality parts can be provided by heightening the innovation capacity and diversification of 228
SMEs. Demand and sales windows should be secured to ensure the sustainable growth of SMEs. However, the most urgent task with regards to the heightening of the innovation capacity of SMEs is that of establishing cooperative networks with large enterprises.
2. Green industry development policy measures based on the CIS
Based on the basic direction presented above, a detailed action plan divided into innovation actors, innovation process, innovation clusters, and innovation feedback sectors is introduced.
Innovation actors In terms of innovation actors, the focus should be on the development of effective measures pertaining to R&D investment and related research institutes linked to SMEs. Korean SMEs prefer to engage with R&D with public research institutions, thus implying that universities have played a relatively inefficient role. In this respect, public research institutions should be brought to play an active role in the joint R&D processes between universities and SMEs. While universities of note include the Korea Polytechnic University (KPU) where industry-academia cooperation has been relatively well implemented, the Korea Institute of Industrial Technology can be singled out as a public research institution that has helped facilitate the expansion into green industry through basic industry and technology convergence. For example, support for the photovoltaic industry A Study on the Development of Green Industry in Korea through the Analysis of Corporate Innovation Systems (CIS) 229 should be concentrated on industry-academy cooperation designed to heighten the innovation capacity of SMEs engaged in equipment and parts development in the field of thin film photovoltaic technology.
Innovation process In terms of the innovation process, the emphasis should be on technology selection and the concentration of R&D (‘core technology support center’). The CIS for large enterprises should include economies of scale based on selection and concentration as well as an R&D diversification strategy that accounts for vertical integration. In addition, strong mid-sized enterprises should be developed based on an effective and fair M&A strategy. Meanwhile, SMEs should focus on R&D that allows them to takeoff as strong SMEs based on selection and concentration. In particular, the focus should be on the development of J-type SMEs that occupy niche markets in which large enterprises have a hard time investing such as those of equipment, materials and parts (SME-type ‘convergence product development support center’).
Innovation clusters Measures for the innovation cluster sector consist of the activation of demand and markets, establishment of a desirable ecosystem and improvement of the industrial structure, the expansion of infrastructure, support for related industries, and the establishment of clusters. Above all, the development of an industry that is still in the early stages requires an approach in which demand creation through market expansion is identified as 230 the priority. Detailed measures might include the joint market entry of large enterprises and SMEs related to the renewable energy industry based on international aid and support for the construction of a renewable energy plant in North Korea. From the standpoint of market-friendly systems, the emphasis should be on the installation of renewable energy facilities in public or large- scale buildings, the creation of a demand for the renewable energy industry, and the introduction of the leasing of small-scale photovoltaic power plants. The improvement of the infrastructure representing one of the factor conditions is predicated on the strengthening of the financing system through such means as the expansion of venture capital. One of the biggest difficulties that green SMEs face is raising the funds needed to establish proper measures at each stage of development. In the case of long-term projects, the establishment of a ‘win-win green financing committee’ through which promissory notes could be provided during the early periods as guarantees and cash settlements could be induced for short-term payments can be considered. The first measure that should be considered when it comes to educating human resources and expanding the industrial manpower of SMEs is that of fostering linkages between SMEs and universities. More specifically, while SMEs provide scholarships to university students through ‘industry-academy scholarship’ programs, the students benefiting from this system can in turn work for the SMEs for a certain predetermined period of time. The granting of tax benefits to high-skilled manpower within the SMEs and the use of alternative military service measures can also be A Study on the Development of Green Industry in Korea through the Analysis of Corporate Innovation Systems (CIS) 231 considered. As far as support for related industries and clusters is concerned, consideration should above all be given to the transfer of technology to SMEs based on the establishment of linkage between SME industrial clusters related to large enterprises and regional techno parks. SMEs should also establish links with large enterprise by making use of the technology transferred from universities and public research institutions within the cluster (‘establishment of green industrial cluster’). Second, support should be granted for the development of strong global SMEs. The kind of World Class project that was carried out in conjunction with major industries should also be introduced in the renewable industry sector. Third, policies that have heretofore been implemented in a wide range of manners should be coordinated from an integrated standpoint. Organic linkages and mutual consistency between the policies related to the promotion of development programs and manufacturing related policies should be ensured. Fourth, as has been the case in Germany, an indigenous green market should be established through citizens’ active participation. The endogenous market is much more concrete and sustainable than the policy-oriented one. To this end, support for the promotion of green consumption should be enhanced.
Innovation feedback Lastly, as far as innovation feedback is concerned, measures that can guarantee cooperation between large enterprises and SMEs should be implemented so as to effectively heighten the 232 innovation ability and management performance of SMEs. First of all, large enterprises positioned at both ends of the value added chain, namely the supply of raw materials and the establishment of development systems, should develop a consensus based on their need to play a leading role in the smooth supply of raw materials to SMEs and the establishment of long-term fair trade through the purchasing of parts. Moreover, they must be made to understand that such a system constitutes a shortcut to ensuring the long-term survival of firms involved in the competition with overseas global enterprises. For example, it is necessary to actively provide support for heightening SMEs technology development ability and expanding the number of new global businesses by allowing SMEs to participate in the special technology and production-related programs operated by large enterprises, to jointly participate in support for technology development within the public sector, and to jointly participate in overseas exhibitions. The public sector (public corporation, public science base etc) should supplement the shortcomings of the CIS’ feedback process. The financial support provided by large enterprises for technology development funds and the education of highly- skilled manpower sought by SMEs have by and large failed to reach an acceptable level of satisfaction. In this regard, the establishment of related policy support measures will contribute to the activation of large enterprise-SME cooperation based on the CIS. To this end, possible measures include support for ‘convergence and domestic technology development’ based on public science technology based- large enterprise-SME A Study on the Development of Green Industry in Korea through the Analysis of Corporate Innovation Systems (CIS) 233 consortiums, support for funds for the procurement of the raw materials supplied by large enterprises & SMEs, an increase in KOSBIR’s budget for green technology development, the expansion of preliminary notification of the price of raw materials in green industry, and the activation of cross licensing between large enterprises and SMEs. M&A support should also be provided to green enterprises seeking to actualize economies of scale. The ability to survive the ongoing competition for size in overseas markets such as China is predicated on the up-scaling of Korean green enterprises. To this
Summary of action programs
Remarks Action program (priority) - Concentrate support on strengthening industry- - short term academy cooperation in order to heighten the innovation capacity of SMEs in conjunction with the development of equipment and parts for the thin Innovation film photovoltaic field actors - Increase the ratio of support for SMEs in the R&D of - short term (Input) industries related to renewable energy - Mandatory participation of SMEs in large enterprise- - short term led R&D tasks - Public research institutions should play a mediating - short term role in the process of joint R&D between universities and SMEs - The CIS for large enterprises should include - long term economies of scale based on selection and concentration, and also an R&D diversification strategy that accounts for vertical integration - Development of strong medium-sized enterprises - short term Innovation through effective and fair M&As enhance - Implementation of R&D to achieve takeoff as strong - short term ment SMEs based on selection and concentration (Process) - Focus should be on the development of the J-type - long term SMEs that occupy niche markets in which large enterprises have a hard time investing such as those of equipment, materials and parts (development of convergence products etc) 234
- Joint market entry of large enterprises and SMEs - long term related to the renewable energy industry based on international aid (ODA and EDCF etc) or support for the construction of a renewable energy plant in North Korea * Participate in consortium types where large enterprises are in charge of systems while SME are in charge of parts and materials. - Introduction of a ‘small-scale photovoltaic power - long term plant lease’ system and granting of priority to the products jointly developed by large enterprises and SMEs - Establishment of an atmosphere within large - short term enterprises in which an ‘open innovation system culture’ is stabilized and SMEs are invited to participate * Development of various cooperation models such as joint technology development between large enterprises and SMEs, technology guidance by large enterprises, dispatches and exchanges of Innovation manpower, joint marketing, and joint ventures clusters (Process) - Increase ‘venture investment’, strengthen elements - long term of the financing system such as PF - The biggest difficulty for SMEs is raising the funds - short term needed at each stage of development. In this regard, optimized policy measure should be established at each stage. - In the case of long-term projects, the establishment - long term of a ‘win-win green financing committee’ through which promissory notes could be provided during the early periods as a guarantee and cash settlements could be induced for short-term payments can be considered. - Search for linkages between universities and SMEs. - short term While SMEs provide scholarships to university students through ‘industry-academy scholarship’programs, the students benefiting from this system can in turn work for the SMEs for a certain predetermined period of time - Search for measures to provide tax benefits to - long term SME’s highly-skilled manpower and make use of the alternative military service system. A Study on the Development of Green Industry in Korea through the Analysis of Corporate Innovation Systems (CIS) 235
- Transfer technology to SMEs by linking SME - long term industrial clusters and regional techno parks to large enterprises. * Provide certification to SMEs cooperating with large enterprises and facilitate the exchange of technology and human resources by introducing a brand and certification system for large enterprise. * Create linkages with large enterprises by allowing SMEs to use the technology transferred from universities or public research institutions within the cluster * Support the certification of SME products and horizontal integration by establishing a horizontal cooperation system between SMEs. - Support the development of strong global SMEs by - long term actively implementing the same type of World Class project that has been implemented in major industries in the renewable industry sector. - Coordinate various policies from an integrated - long term standpoint. * Establish organic linkages and consistency between the policies to promote development programs and manufacturing related policies * Coordinate policy programs designed to develop manufacturing products such as parts, equipment and materials in a balanced manner. - Expand the R&D support system by establishing a - short term voluntary research atmosphere in universities and research institutes. * Heighten the desire for voluntary research by providing information related to technology trends as well as incentives to researchers. - Urgent need to establish an atmosphere in which - short term open innovation can be smoothly executed. * Expand government support and continuous monitoring of international R&D cooperation and joint research so that they can be implemented in a substantial manner. - Establish actual cooperation conditions through the - short term management of cooperation programs management that reflect the capacity of SMEs. Innovation * Heighten CIS management performance through the feedback advent of a shared development vision between (Feedback) large enterprises and SMEs. * Allow SMEs to participate in the technology and production-related special education programs operated by large enterprises. 236
* Share global innovation technology and product related information. - Heighten the innovation capacity of SMEs. - long term * Increase the KOSBIR budget for green technology development. * Strengthen support for guaranteed insurance policies designed to help green industry gain a foothold in overseas markets using ODA and minimize the risks of global projects. * Support the entire process from the development to the commercialization of convergence technology based on the establishment of a green industrial convergence support center. * Activate support for technological development through public science base- large enterprise-SME consortiums. * Concentrate on the development and provision of support for green enterprises with global growth potential * Strengthen consultations and legal support for the activation of global M&As * Promote the preferential purchase and separate contracting of green products during the procurement process. - Strengthen trust building based on the - long term implementation of joint projects. * Joint participation in overseas exhibitions. * Strengthen the preliminary notification of raw material prices in green industry * Provide funds for the procurement of raw materials between large enterprises and SMEs. * Support global purchase-linked global projects between large enterprises and SMEs.
Strategic - 4S strategy: core technology support center (S1) -> convergence measure technology support center (S2) -> establishment of green industry clusters (S3) -> establishment of global green ISP (S4)
end, measures should be taken to strengthen the monitoring of global green enterprises that have encountered a management crisis and provide consultation and legal support for M&As and M&A funds. Support designed to ensure that the globalization of green A Study on the Development of Green Industry in Korea through the Analysis of Corporate Innovation Systems (CIS) 237 industry can become a window for domestic innovation feedback regarding the advanced technologies that serve as the sources of sustainable growth should also be enhanced. To this end, the engineering firms attached to large enterprises that possess the capacity to establish a development system during the implementation of ODA programs targeting developing countries should establish a cooperation system with numerous SMEs actively involved in the implementation of green projects in developing countries. The excellence of Korean green technology can also be enhanced by establishing a sphere in which high- ranking officials from developing countries and Korean green enterprises can interact as part of ODA programs. Steps that should be taken to help nurture the human resources required by green industry include the provision of support for the educational expenses incurred by human resources from developing countries responsible for managing global green facilities, support for education expenses of technical manpower responsible for the management of domestic and international green facilities, the management of a joint industry-academy educational credit system designed to educate the technical manpower required by green enterprises, and the education of green youth traders. These global programs will eventually contribute to the introduction and use of advanced technologies by spreading global green projects by advancing the track records of Korean enterprises. One useful alternative may be to install a ‘Global Green Inno Sys Park (ISP)’ (provisional) akin to the Techno Park (IP) program in Korea in core hub countries. Based on linkages with ODA, 238
KSP, and EDCF, this program could result in the establishment of ISPs in the core hub areas. In addition to facilitating the sharing of green industry technology centering on core hub areas, such a program would also help Korean enterprises gain access to overseas markets. The demand for green industry can be created via the establishment of convergence with related industries. The development of convergence products based on the combination of IT and green industry will contribute to the activation of the demand for green products in the private sector. Nevertheless, the support system designed to foster convergence technology development based on green industry has proven to be largely inefficient. In this regard, the present study suggests the establishment of a convergence technology support center for green industry that would center on the main regions of Korea. The convergence technology support center for green industry should serve as a one-stop agency in charge of the provision of support for the entire process, that is, from consultation on the development of green related convergence technology, to actual convergence technology development and commercialization. The policy measures discussed so far can be summed up by the ‘4S strategy’: core technology support center (S1) convergence technology support center (S2) establishment of green industry cluster (S3) establishment of global green ISP (S4). A Study on the Development of Green Industry in Korea through the Analysis of Corporate Innovation Systems (CIS) 239
3. Policy tasks related to the joint growth of large enterprises and SMEs via CIS
One of the objectives of this study is to promote the joint growth of large enterprise and SME based on CIS. The policy tasks that must be addressed to attain this end can be summarized as follows. First, support for the effective operation of CIS should be strengthened. Large enterprises should operate CIS that make it possible for core resources and technology to be transferred to SMEs, and for the government to strengthen its support for programs that allow public institutions to participate in CIS. Second, it is necessary for large enterprises to voluntarily establish CIS and for SME to cooperate with large enterprises in this process. Although CIS requires voluntary management on the part of large enterprises, CIS management systems that facilitate the participation of SMEs should be promoted. At this point, reasonable and objective criteria should be established with regards to the qualifications required by SMEs to participate in CIS. Third, the preliminary notification of green prices should be carried out in order to ensure the smooth implementation of the raw materials and parts supply system. The price of the raw materials supplied by large enterprises within the green industry can greatly influence the competitiveness of all green products. In this regard, it is necessary to stabilize a culture of win-win cooperation by establishing an information sharing system that can influence the price of goods that pass between large 240 enterprises and SMEs. Fourth, there is an urgent need to focus support on innovative green enterprises with a potential for global growth. The ecosystemic development strategy for green industry should be linked to support for enterprises with global potential. To this end, based on support for the development of globally tailored technology, the demands of global customers should be reflected from the technology development stage. Fifth, it is necessary to develop technology based on joint ventures between large enterprises-SMEs that can be linked to global customers’ purchases. Government support should be geared towards mitigating the difficulties faced by SMEs with regards to technology development by using the innovation information obtained by large enterprises with overseas information networks and implementing the development by partner enterprises of technology that reflects the needs of foreign clients. Lastly, demand for green industry can be created by institutionalizing the concept of preferential purchase in the procurement process which governs renewable energy products and facilities. The use of SME products should be enhanced through the facilitation of competition among SMEs as well as the mandatory signing of separate contracts for major parts when purchasing and constructing renewable energy facilities. Research Report 2011-600
Analysis of Trade Effects of the Korea-Chile FTA and Implications Focusing on Trade Diversion Effects
Hyeok Ki Min, Do-Hoon Kim, Soo-Dong Kim, Geun-ju Jung and Jae Hwa Jung
The Efficiency of Investment in Regional Manufacturing Industries and Analysis of its Effectiveness 243
Chapter 1. Introduction
1. The objectives and anticipated effects of the study
Bilateral and multilateral FTAs have rapidly increased in the aftermath of the inauguration of the WTO in 1995. While 91 regional trade agreements (RTAs) including FTAs, were concluded from 1947 to 1994, 206 FTA agreements have been signed since 1995. The ongoing competition amongst the major powers to seize global leadership under international circumstances characterized by difficulties related to the implementation of the multilateral negotiation mechanism known as the Doha Development Agenda (DDA) and the changing international trade order is expected to result in the further strengthening of this trend. Korea has responded to this trend by concluding FTAs and regional cooperation agreements with key partners such as ASEAN, the EU, and the United States. One of the effects of an FTA is to increase trade with FTA 244 partners. The Korea-Chile FTA, which marks the first FTA concluded by Korea, clearly exhibited such trade effects. The effect of FTAs on the trade between partners has been analyzed in many studies. However, the analysis of the effects of FTAs on the expansion of trade has proven to be a more difficult topic to address. As various factors influence the expansion of trade between countries, the task of solely analyzing the effect of FTAs on the expansion of trade while eliminating all other factors constitutes a complex one. Despite these difficulties, the analysis of FTAs effect on Korea’s trade should be conducted as part of the process of continuously and strategically implementing FTAs. Based on the Korea-Chile FTA, this study examines the effects of FTAs on trade. In addition to the characteristics of the Korea- Chile FTA, the change in the two countries’ trade structure following the conclusion of this agreement is also analyzed. The trade-related changes that have occurred following the conclusion of the FTA are divided into trade creation and trade diversion effects. Based on this, the characteristics of the Korea-Chile FTA and the changes in the trade structure will be assessed. This makes it possible to predict the changes in the trade structure which Korea can expect with regards to the FTAs it signs in the future. Separating trade effects into trade creation and trade diversion effects makes it possible to ascertain what effects are generated by specific elements of an FTA. Analysis of Trade Effects of the Korea-Chile FTA and Implications 245
2. The characteristics of the Korea-Chile FTA
1) Chile’s industrial structure and the characteristics of the bilateral trade structure
Current state of the Chilean economy Boasting a population of 17 million, a GDP of 203.3 billion dollars, and a GDP per capita of 12,000 dollars, Chile is perceived as a nation that enjoys a relatively higher economic level than other Central and South American countries and as one with high growth potential. A look at Chile’s major economic indicators reveals that favorable trends have continued after the conclusion of FTAs with major countries such as the United States and Korea in 2004. Moreover, while the Chilean economy experienced a slight downturn attributable to the financial crisis of the previous year in 2009, it has subsequently recovered. The financial crisis in Asia of the late 1990s had the effect of keeping Chilean economic growth to the 2-3% level during this period. However, growth leaped from 3.9% in 2003 to 6.04% in 2004 following the conclusion of FTAs with the United States and Korea. Although negative growth of -1.67% was recorded in 2008, a denouement attributable to the impact of the financial crisis that broke out that year, Chile’s significant growth potential was evidenced by its ability to post growth of 5.19% in 2010.
Chile’s industrial structure While Chile is a country traditionally focused on mining, 246 agriculture, and the services industry, its manufacturing base is rather weak. From the standpoint of production value, the services industry accounted for 50% of Chile’s industrial structure in 2010; meanwhile, the manufacturing/construction industry and the agriculture/mining industry made up 35% and 15%, respectively. In terms of technology, Chile’s manufacturing sector boasts a high ratio of mid-tech industries and few high-tech industries. While an increase in mid-tech industries has been observed, low- tech industries have recently decreased. More specifically, while the ratio of low-tech industries decreased by 11.8% from 2003 to 2010, mid-tech industries enjoyed a 13.7% increase and high-tech industries a 1.9% decrease over this same period. In the Korean case, high-tech industries account for the most significant ratio when viewed from the standpoint of production value. This is followed by mid-tech industries, with low-tech industries accounting for the smallest ratio. The ratio of Korea’s high-tech industry did not undergo any marked changes during the period spanning from 2003-2010. Alternately, Korea’s mid-tech industries have experienced a gradual increase while its low-tech industries have been on the decline. A comparison of technological levels based on production value as such shows that Korea enjoys a comparative advantage over Chile in high- tech industry. From the standpoint of value added, Chile’s industrial structure can be seen as boasting a structure that is similar to the one associated with production value. However, a clear change in the industry type ratio and advancement centering on mid-tech Analysis of Trade Effects of the Korea-Chile FTA and Implications 247 industries is evident in the former case. A decrease in low-tech industries and concurrent increase in mid-tech industries became evident in 2004. More specifically, while low-tech industries decreased from 42.4% in 2003 to 26.3% in 2005, mid-tech industries increased from 37.4% to 56.3% during the same period. A look at the changes in the structure of Korea’s manufacturing industry reveals patterns similar to those observed in conjunction with production value. However, a clear change has been observable where high-tech industries are concerned. Contrary to the production value, the ratio of high-tech industries has further increased in recent days when viewed from the standpoint of value added, accounting for 54% of the overall manufacturing industry. A look at trends at the sub-industry level shows that Chile’s metal industry has enjoyed significant growth since 2003. This can be attributed to the widespread use of Chile’s mineral resources in the industrial development process and the increase in the international price of mineral resources. During this same period, the production of food and beverage goods decreased by 6.78%. This result can be explained by the concentration of foreign investment in Chile in the mining and services industries, a denouement that has ensured that the increase in the food and beverage industry’s output has been relatively limited when compared to that of the other industries. In the Korean case, the ratio of low-tech industries has decreased as many have relocated abroad. Moreover, while mid-tech industries expanded during the period under analysis, the production ratio of the high-tech ICT manufacturing industry decreased. Although the production ratio 248 of the automobile transport equipment industry decreased, its ratio of value added in fact grew, a development that hints at the introduction of a high value-added strategy.
Current state of foreign investment in Chile Chile’s outward-looking economic policy has resulted in the steady expansion of foreign investment. Foreign investment in Chile grew from 4.3 billion dollars in 2003 to 15.0 billion dollars in 2010. Having averaged 7% of Chile’s GDP since the mid-2000s, foreign investment has played an important role in the Chilean economy. Chile has been positively evaluated as a host country. Furthermore, Chile joined the OECD in 2010, a move that further heightened its reliability as an investment destination. Let us now analyze the current state of investment in Chile at the industry and country levels. At the industry level, the highest ratio of cumulative foreign investment in Chile from 1974 to 2010 was recorded by the key mining industry, which accounted for 32.9% of all foreign investment. This was followed by the services industry (20.9%) and the electricity, gas, and water supply industry (19.2%).The continued increase in the demand for mineral resources from the major industrial countries is expected to also result in a steady rise in foreign investment in Chile, a country that possesses an abundance of natural resources. The United States accounted for the biggest ratio (25.9%) of accumulative investment in Chile. Spain (18.7%) and Canada (17.7%) ranked second and third respectively. Japan was the only Asian nation to place among the top ten largest investors in Chile, ranking 6th (3.9%) overall. Analysis of Trade Effects of the Korea-Chile FTA and Implications 249
While Korea constitutes the 33rd largest investor in Chile from the standpoint of the ratio of cumulative investment, it has yet to implement any large-scale investment. However, in the aftermath of the Korea-Chile FTA there has been a clear departure from the solitary focus on agriculture as investment has begun to flow into various other industries. For instance, there has been a marked increase in investment in the manufacturing and services industries. Investment in the manufacturing industry has recently been accompanied by a concurrent rise in investment in infrastructure-related services. Full-scale investment in metal and mineral resources has taken place. Moreover, there has also been an increase in the investment amounts.
2)The main contents of the Korea-Chile FTA
While the decision to implement an FTA was reached in 1998, the actual negotiations for the Korea-Chile FTA, which marked Korea’s first such agreement, began in December 1999. The agreement officially went into effect on April 1, 2004 after both countries signed the agreement in February 2003. The agreement consists of 22 chapters, including a preamble. While the preamble lays out the goals and implications of a Korea-Chile FTA, Chapter 1 and 2 revolve around the initial provisions and a clarification of the general definitions designed to clarify the meaning of the agreement. While drawing inspiration from NAFTA and the EU-Chile FTA, the rules of origin were nevertheless prepared with the domestic industrial structure and trade with Chile in mind. Specific rules of origin operating as 250 safeguard measures designed to protect domestic agricultural products from the perceived threat emanating from Chile were also put in place. The measures to protect intellectual property rights were designed to ensure that they did not function as barriers to fair trade. The two sides also agreed that the protection of geographical indications would improve both parties’ competitiveness. In this regard, while the Korean list of protected geographical indications included Ginseng, Kimchi and Boseong tea, Chile’s list featured items such as Pisco, Pajarete, and Vino Asoleado. Government procurement was based on the principle of National Treatment and Non-Discrimination. However, based on Korea’s policy of protecting small and medium-sized businesses, Korea has shielded such businesses from the tendering process.
3) Comparison of the Korea-Chile FTA and other Korean FTAs
The utilization of tariff preferences has been regarded as a salient tool with which to analyze the effects of FTAs. A study on the utilization of FTA tariff preferences in conjunction with items imported by Korea conducted by Kim Han-seong (2009) showed that this rate reached 77.7% during the first year that followed the implementation of the Korea-Chile FTA. This figure is very high when compared with the Korea-Singapore FTA (28.2%), Korea- ASEAN FTA (27.0%), and Korea-EFTA FTA (43.2%). The low utilization of tariff preferences rate recorded in the case of Singapore can be attributed to the fact that its FTA agreement with Analysis of Trade Effects of the Korea-Chile FTA and Implications 251
Korea includes many items excluded from the rules of origin, a situation that can be explained by Singapore’s status as a transit trading country. In the case of ASEAN, the assessment that the utilization rate of tariff preferences is low overall is based on the fact that such a low ratio comes amid a concurrent high ratio of imports of primary processed minerals.
Utilization of FTA tariff preferences in conjunction with imports from Korea Unit : % Korea-Chile Korea-Singapore Korea-EFTA Korea-ASEAN Period FTA FTA FTA FTA Year 1 77.7 28.2 43.2 27.0 Year 2 93.8 31.4 41.9 - Year 3 93.6 - - - Year 4 93.3 - - - Cumulative 90.5 29.8 42.5 27.0 Source : Kim Han-seong (2009), “The current state of Korea’s use of FTA tariff preferences and the implications thereof”, Korea Institute for International Economic Policy (KIEP).
Kim Han-seong (2009) also measured the utilization rate of tariff preferences in conjunction with the items exported by Korea to Chile and the ASEAN countries. In the case of the Korea-Chile FTA, the utilization rate of tariff preferences continuously increased, going from 93.1% during the first year to 93.3% in the 4th year that followed the FTA taking effect. Meanwhile, the utilization rate of tariff preferences could only be investigated in the first year since the Korea-ASEAN FTA took effect, with a very low recorded level of 14.1%. The tariff concessions included in the Korea-Chile FTA called 252 for Korea to apply concessions to 99.8% of goods, with 87.2% of such concessions to be immediately enforced. In terms of imported items, the Korea-EFTA FTA, Korea-Peru FTA and Korea- EU FTA all exhibited high concession rates of over 99.0%. The notable exception in this regard was the Korea-Singapore FTA. The concession rate for the Korea-Singapore FTA was 91.6%, a development that mirrors the conservative nature of the concession negotiations. The concluded FTAs have included a high ratio of concessions and opening as pertains to industrial goods and the overall manufacturing industry. Meanwhile, agricultural products such as rice have been excluded from the items subject to trade liberalization. Various protection measures, such as continued adherence to existing tariffs, tariff concession exceptions, and safeguards, were put in place in conjunction with sensitive products such as pears, apples and ginseng. The concession rate for agricultural products was a mere 66.6% in the Korea-Singapore FTA. The relatively low nature of this rate is further highlighted by the fact that the agricultural product concession rate in other FTA negotiations has generally varied between 80-90%. The ratio of tariffs on agricultural products that were immediately eliminated as a result of the Korea-EU FTA was 42.1%, a result that belies a relatively higher concession rate than in the case of the other FTAs. The Korea-Chile FTA shares certain similarities with the Korea- EU FTA where the structure of the concession schedule is concerned. However, in terms of complementariness, it is most akin to the Korea-Peru FTA. In the case of sensitive items such as agricultural and fishery products, Korea has either implemented a Analysis of Trade Effects of the Korea-Chile FTA and Implications 253 limited immediate elimination of tariffs or postponed the concession schedule to the fullest extent possible. Ultra-sensitive items such as rice, apples, pears, and garlic were excluded altogether from the list of items with markets that should be opened. Alternately, it improved the competitiveness of industrial products by immediately eliminating tariffs on the majority of such items.
3. Changes in the trade structure
1) Trade volume
The bilateral trade volume between Korea and Chile stood at 7.17 billion dollars in 2010. This was 4.6 times larger than the trade volume recorded in 2003 shortly before the Korea-Chile FTA went into effect. Meanwhile, exports increased 5.7-fold and imports 4.0-fold during the same period. Moreover, while Korea s trade deficit with Chile increased from 540 million dollars to 1.27 billion dollars, the share of overall trade made up by this amount actually decreased. The increased trade volume between the two countries has also been evidenced by the increase in the share of the partner s import market. Thus, while the ratio of products imported from Chile within the Korean market increased from 0.59% to 0.99%, the share of Korean goods in the Chilean market rose from 2.98% in 2003 to 6.41% in 2010. In keeping with this trend, the two countries IOT (index of trade) has also increased. While Korea s IOT vis-a-vis｀ Chile 254 increased from 1.08 to 1.66, Chile s IOT with regards to Korea grew from 2.22 to 2.32.
2) Export and import of individual items
Export-import structure for individual items Machinery and mineral products account for 77% of Korea s overall exports to Chile when the MTI 1 unit standard was employed. This marks a rapid increased from the 55.7% recorded before the conclusion of the Korea-Chile FTA in 2003. Meanwhile automobile and petrochemical products account for an overwhelming ratio of Korea s exports to Chile when using the MTI 3 unit standard. The products emanating from these industries accounted for 69.8% of overall items in 2010. The intensity of Korea s imports from Chile has also increased. While the steel & metal and mineral products accounted for 81.4% of overall imported items based on the MTI 1 unit standard in 2010, the share made up by copper ore and copper products exceeded 70% when the analysis was based on the MTI 3 unit standard. As such, the bilateral trade structure between Korea and Chile is one in which Korean exports to Chile have been concentrated in the manufacturing industry while Chilean exports to Korea have revolved around natural resources. This complementary trade structure is also supported by a look at the TSI (trade specification index). The TSI of the two countries, in fact, approaches a situation of complete import or export specialization. In the case of Korea, the TSI for manufacturing industry products is closer to 1 and the TSI for raw Analysis of Trade Effects of the Korea-Chile FTA and Implications 255 materials to -1. The reverse situation is on display in the Chilean case.
Trends in the export of core items The share of the Chilean market made up by Korean diesel fuel, automobile, and steel plate increased by 11.9%, 16.8%, and 13.6% respectively. However, the market share of freight cars and ethylene polymer has in fact decreased in comparison to 2003. The factors leading to an increase in the items Korea exports to Chile were analyzed based on the complex interactions between volume and price.
Changes in the price and volume of the items exported by Korea
Source: Statistics found on KITA.net were used to calculate export prices and volume. Note: This index for 2010 was based on parameters where the year 2003 was assigned a value of 100.
Trends in the import of core items Korea has experienced a significant increase in the import of raw materials such as copper ingots, copper ore and zinc ore when compared to the period prior to the Korea-Chile FTA going into effect. More specifically, the amount of copper ingots and copper ore imported was 3-4 times greater in 2010 than it had 256 been in 2003. Meanwhile, a marked increase in the amount of crude copper ingot and zinc ore imported was also observed. An examination of the contribution rate of core items to overall import volume revealed that while mineral products accounted for a significant ratio, the contribution rate of agricultural products was rather insignificant. Nevertheless, the increase in the ratio of wine and pork products was greater than that of other agricultural products.
3) The current state of competition within import markets
Chilean market The share of Korean items in Chile’s import market has increased in the aftermath of the conclusion of the Korea-Chile FTA. Although Korea’s market share increased from 2.98% in 2003 to 7.23% in 2007, it has recently declined following Chile’s conclusion of FTAs with competitors Japan(2007) and China(2006). Korea’s exports to Chile have increased by an annual average of 31.3% since the conclusion of the Korea-Chile FTA. This annual average was higher than the 26.6% and 26.2% recorded by Chin and Japan in the aftermath of their conclusion of FTAs with Chile. These results can be attributed to the fact that although the first mover effect may have been decreased as a result of Chile’s conclusion of FTAs with Korea’s competitors, this first mover effect can still be observed within the Chilean market.
Korean market Chile’s share of the Korean market has increased from 0.59% Analysis of Trade Effects of the Korea-Chile FTA and Implications 257 to 0.99% since the conclusion of the Korea-Chile FTA. This can be attributed to the increased price competitiveness enjoyed by the products imported from Chile. Items whose share of the Korean market increased included steel & metal, agricultural & fishery, and mineral products. Grapes, fruit juice, copper ingots, wine, lumber and copper ore, were identified as items to which high tariffs had previously been applied that had managed to increase their share of the Korean import market following the ratification of the Korea-Chile FTA. These items can be regarded as having benefited from the tariff reduction effect caused by the drop in tariffs imposed on products originating from Chile.
4. Analysis of the trade creation and trade diversion effect of the Korea-Chile FTA
1) Previous studies
By and large, two kinds of analysis of the effects of FTAs have been conducted. One is a preliminary analysis of the anticipated effects of an FTA prior to its conclusion, and the other a post- analysis based on actual trade data compiled following the conclusion of the FTA. While preliminary analyses are usually conducted using a CGE (Computable General Equilibrium) model, post-analyses employ various methodologies. The majority of the methodologies employed in conjunction with the latter type of analysis have tended to separately examine the trade creation effect and trade diversion effect, and to conclude that the 258 trade diversion effect has been insignificant.
2) Basic model and data
This study also analyzed the trade creation effect and trade diversion effect using the methodology developed by Clausing (2001). Clausing’s method revolves around the derivation of equation estimation that is based on the import demand and export supply functions. This study made direct use of factors impacting imports that had been introduced by Clausing as year dummy variables, such as GDP, price, and exchange rates. In this study, 100 items imported from Chile were analyzed using data for the period 2003-2010. The data employed and sources of such data can be found in
.
Data and sources
Variables Contents Source Korea International Trade Imports from Chile Volume Association Volume of imports from Imports from all other all other countries - Korea International Trade countries volume of imports from Association Chile Real GDP The Bank of Korea Exchange rates Based on 100 in 2005 OECD Price of items imported Sum of imports from Korea International Trade from Chile Chile/weight Association Prices of items imported Sum of imports from all Korea International Trade from all other countries other countries/weight Association Weight of imports from Share of the import Chile/ weight of imports Korea International Trade market from all other countries Association Tariff rates applied to Chile FTA concessions Korea Customs Service Tariff rates applied to all MFN (most-favoured- other countries nation) tariff rates Korea Customs Service Analysis of Trade Effects of the Korea-Chile FTA and Implications 259
3) Analysis of trade creation effect
The results of the analysis of the trade creation effect using the Clausing’s model can be summarized as follows. First, the analysis revealed that every 1% drop in the tariff rate applied by Korea to Chile resulted in a 3.43% rise in imports from Chile. As far as the competitiveness of the imported goods from Chile within the Korean market is concerned, the results revealed that the higher the ratio of imported products from Chile to overall imported products occasioned by tariff reduction, the wider the scope of the increase in imports.
Trade creation effect
Coefficient Std. Error t-Statistic Prob. GDP 2.0692** 0.9859 2.0987 0.0363 P -1.7254*** 0.1943 -8.8790 0 PW 0.7708*** 0.2056 3.7480 0.0002 EXCH -0.9203 0.9013 -1.0210 0.3076 Tariff -3.4306*** 1.0942 -3.1352 0.0018 Note : *, **, *** are respectively statistically significant at 10%, 5%, and 1%.
Trade creation effect taking competitiveness into consideration
Coefficient Std. Error t-Statistic Prob. GDP 1.1049 0.9091 1.2153 0.2248 P -0.9846*** 0.1946 -5.0598 0 PW 0.0066 0.2065 0.0321 0.9744 EXCH -0.0386 0.8192 -0.0472 0.9624 RATIO (t-1) 0.4729*** 0.0383 12.3393 0 Tariff -1.6403 1.0112 -1.6220 0.1054 Note : *, **, *** are respectively statistically significant at 10%, 5%, and 1%. 260
4) Trade diversion effect
This study introduced imports from all other countries as a dependent variable with which to analyze the trade diversion effect. The use of imports from all countries as a dependent variable was intended to analyze the relationship between the tariffs imposed on the products imported from Chile and those imported from all other countries. The presence of a positive relationship between these two variables means that a trade diversion effect in the form of a reduction in imported products from all countries could emerge when the tariffs on the products imported from Chile were decreased. In this regard, a positive relationship between the relevant variables was in fact uncovered. However, as the statistical significance of this relationship was limited, doubts can be cast as to whether a trade diversion effect actually emerged in the first place. Much as was the case with the trade creation effect, the analysis of the trade diversion effect that took into consideration the competitiveness of the imported products from Chile revealed that a reduction of tariffs on the products imported from Chile resulted
Trade diversion effect
Coefficient Std. Error t-Statistic Prob. GDP 1.9133** 0.8817 2.1698 0.0304 P -1.3719*** 0.1883 -7.2828 0 PW 0.3256* 0.1779 1.8305 0.0677 EXCH -0.5854 0.8034 -0.7287 0.4665 WTariff-Tariff -0.0902 0.7783 -0.1159 0.9077 Analysis of Trade Effects of the Korea-Chile FTA and Implications 261
Trade diversion effect taking competitiveness into consideration
Coefficient Std. Error t-Statistic Prob. GDP 1.9407** 0.9102 2.1320 0.0335 PW -0.7016*** 0.2108 -3.3284 0.0009 P -0.3198 0.1985 -1.6110 0.1078 EXCH -0.2508 0.8180 -0.3066 0.7593 RATIO (t-1) -0.3122*** 0.0391 -7.9821 0 WTariff-Tariff -0.1944 0.7982 -0.2436 0.8076 in a decrease in the imports from all other countries. However, the limited statistical significance of this relationship makes it difficult to conclude that there actually was a trade diversion effect. Meanwhile, the analysis also showed that the greater the market share enjoyed by an imported product from Chile in Korea, the larger the decrease in imports from all other countries became when the relevant tariffs were reduced.
5. Policy implications
1) The Korea-Chile FTA’s impact on trade
Intensified trade concentration The Korea-Chile FTA has resulted in export specialization and more specifically, an increase in the two countries’ concentration on export items where they enjoy a comparative advantage. This phenomenon can be attributed to the complementary characteristics of the two countries’ industrial structures. The intensification of trade concentration can cause problems when 262 one country goes through economic fluctuations. This is because such fluctuations can seriously impact the exports of the other trading partner. As such, the diversification of export items is needed in order to ensure a continuous increase in exports.
Decrease of the first mover effect Korea’s share of the Chilean market rapidly increased after the conclusion of the FTA. However, Chile’s conclusion of FTAs with Korea’s competitors Japan and China has resulted in a weakened first mover effect. The adoption of FTA and RTA policies by individual countries as part of the DDA (Doha Development Agenda) and the anticipated reorganization of the world trade order will make it necessary to promptly conclude FTAs with partner countries and establish policies designed to preserve the first mover effect.
While the damage caused to industry by the Korea-Chile FTA has been insignificant, steps should be taken to prepare for the potential damage of other FTAs in the future The anticipated damage to the agricultural and fishery industry that was to be caused by the conclusion of the Korea-Chile FTA has failed to materialize. Although the import of agricultural and fishery products has increased, the damage to the agricultural and fishery has been limited. This situation has been due in large part to the fact that the import volume prior to the conclusion of the Korea-Chile FTA was limited to begin with. In addition to this structural aspect, the damage has also been mitigated by measures such as the safeguards and seasonal tariffs put in place Analysis of Trade Effects of the Korea-Chile FTA and Implications 263 during the negotiations by the Korean government to protect domestic industries. However, it would be an unwarranted stretch to conclude that the fact that the damage to industry caused by the Korea-Chile FTA has been minimal means that similar results can be expected from all FTAs. As the Korea-EU FTA and Korea- US FTA both apply to trade in all industries, the potential damage to industry could very well be on a scale incomparable with the Korea-Chile FTA. As such, there is an urgent need to establish countermeasures that are tailor-made for individual FTAs.
Uncertainty surrounding the trade creation and trade diversion effects The empirical analysis revealed a clear trade creation effect. In particular, the Chilean products which had been already competitive in Korea prior to the conclusion of the Korea-Chile FTA were found to have enjoyed an increase in imports because of the reduction of tariffs. As far as the trade diversion effect is concerned, the imports from all other countries were found to have decreased when the tariffs imposed on Chile were reduced. However, the actual existence of a trade diversion effect cannot be confirmed due to a lack of statistical significance. Therefore, the analysis of the trade diversion effect found that the greater the competiveness of a particular Chilean product in Korea was, the more imports from all other countries decreased. 264
2) Implications
The need for a strategy related to the preemptive implementation of FTAs and the maintenance of the first mover advantage As seen in the analysis of the Korea-Chile FTA, there is an urgent need to maximize Korea’s first mover advantage through the preemptive implementation of FTAs, and to establish policies designed to maintain this first mover advantage. Korea needs to implement activities designed to heighten the image of Korea within FTA partner nations. When concluding FTAs with emerging countries, the emphasis should be on strengthening bilateral economic cooperation through the conveyance of Korea’s strengths, namely its expertise in economic development. Furthermore, it is necessary to uncover tools with which to heighten the utilization rate of tariff preferences so as to maximize the first mover advantage. Currently, Korea has employed various measures such as the simplification of trade documents, the training of professional human resources, and advance rulings of origin. In addition to these measures, the general perception of export & import enterprises should be further developed through continuous promotion.
Countermeasures for negatively impacted industries It is only natural that the conclusion of an FTA will have a negative impact on certain domestic industries. The ability to minimize the damage to domestic industries is predicated on the drawing up of ex-ante measures designed to facilitate Korea’s ability to have its demands met during the negotiation process Analysis of Trade Effects of the Korea-Chile FTA and Implications 265 and the provision of ex post facto support for negatively impacted industries in the form of the effective use of trade remedy systems such as TAA (Trade Adjustment Assistance). Furthermore, there is a need, as suggested in the analyses of the trade creation and trade diversion effects, to establish countermeasures to deal with anticipated damage to domestic industries.
Active promotion of the trade effects of FTAs The social conflicts occasioned by the conclusion of an FTA can greatly reduce the social benefits earned from such an agreement. In this regard, there is an urgent need to establish measures to minimize social conflicts. To this end, there is an urgent need to actively promote FTAs. The promotion of FTAs needs to be rooted in a clear assessment of stakeholders’ potential gains and losses occasioned by the conclusion of an FTA, and the preparation of compensation for the sectors damaged by such an agreement. Second, it is also necessary to suggest a clear direction for the distribution of the profits garnered as a result of the conclusion of an FTA. Although the establishment of such a distribution structure, or so-called design mechanism, is an arduous task, such work should be started at once with an eye towards decreasing the social disutility that can be generated by social conflicts. For example, it is crucial that changes in regional budgets be realized and a redistribution of wealth within society be achieved through the reorganization of the tax system. Moreover, countermeasures such as general compensation for the damage caused to society by such situations should also be instituted.
Research Report 2011-601
Policy Tasks for Enhancing Innovation Activities in Korea’s Service Industries
Jung Soo Park, Bonghyun Choi and Sang Ho Lee
The Efficiency of Investment in Regional Manufacturing Industries and Analysis of its Effectiveness 269
1. The necessity and objectives of the study
The enhancement of the productivity of the service industry is regarded as the first priority that must be addressed for the development of the Korean economy, which is dependent on industrial innovation. Innovation activity is a fundamental means and tool to improve the productivity of the service industry. Moreover, innovation activity helps to achieve a starting point for sustainable growth strategies through the growth engines of the service industry. In this regard, a new approach is needed to derive a strategy for the service industry that is designed to have the industry be at the forefront of economic growth and job creation and emerge as a growth engine based on the introduction of a new concept of innovation. This means that it is necessary to engage in the implementation of industrial policies that can improve the growth and productivity of firms through the innovation activities arising from the value chain during the process of providing services to consumers, thereby moving 270 beyond the various types of service industry development policies implemented over the past 10 years. This study has the following objectives. First, an attempt is made to develop an understanding of the significance of innovation activity in the service industry. Implications for the Korean service industry and firms are also derived based on the theoretical and empirical analyses of the correlation between innovation activity and the service industry. Second, a review of the innovation results and difficulties accrued by the service industry in Korea is undertaken. Third, the future direction of innovation support policy is identified by analyzing the policy support systems of advanced countries such as Finland and Germany, as well as the industrial policies put in place by Korea. Fourth, the determinants influencing industrial development are clearly identified based on the analyses of innovation activity and government support, as well as the management performance of corporations through a survey of service corporations. Lastly, based on the implications derived from the results of the analysis above this study introduces the strategic tasks that must be addressed in order to heighten the innovation activities of the Korean service industry.
2. Theoretical discussions on the innovation activities of the service industry
(1) The nature and innovation of services
Discussions on innovation within the service industry have Policy Tasks for Enhancing Innovation Activities in Korea's Service Industries 271 revolved around the definition of the concept of the service industry and the unique characteristics of its services. The perception of the characteristics distinguishing the manufacturing from the service industry has been one of the core themes of such discussions. While some scholars like Gallouj & Weinstein (1997) have asserted that the differences between the two industries could be ignored, the majority of researchers have concluded that the nature of services is different from that of products. Vermeulen (2001) has identified four different features of services: intangibility, simultaneity, heterogeneity, and perishability. Then, what does innovation mean in the service industry? Much as has been the case with innovation, innovation in the service industry has been defined differently by different researchers. Innovation in the service industry has been defined as follows: the development of new services provided to suppliers; new ideas, implementation, and targeting of an environment that fits the organization; a concept of service that is new or greatly changed and interface with clients; service delivery system; and inducement of one or more service functions when a technological ideal is conducted in an individual or complex manner. Thus, from a comprehensive standpoint, innovation of service industry indicates the provision of new services or ideas by developing new service products, and changing existing services or adding others to existing services. Consequently, it can be taken to refer to a series of innovation measures related to the organization of a new structure. 272
(2) Existing studies related to innovation within the service industry
Early studies on industrial innovation revolved around the manufacturing industry. However, as the importance of the service industry within the overall economy increased and the perception of the industrial importance of the service industry itself rose in the 1990s, the number of studies related to innovation in service corporations or service industry also increased. However, studies on innovation within the service industry have encountered various problems that have not arisen in the manufacturing industry. For example, as the definition of innovation of service products and industry has been unclear, there have been difficulties securing the statistics needed for the estimations. As a result, studies on service industry innovation have focused on analyzing the impact of innovation activity on the management or innovation performance of service corporations based on survey results, and employed the classification of the types of service innovation as a starting point. Existing innovation studies, and in particular the results of innovation studies on the service industry, were the sources of several considerations when conducting this study. First, it is necessary to consider the features of the service industry. In the case of the manufacturing industry, although different products may be manufactured, all companies share the commonalities of producing tangible products made in the physical spaces known as factories, as well as the input of raw materials, the manufacturing process, and final output. However, in the case of Policy Tasks for Enhancing Innovation Activities in Korea's Service Industries 273 the service industry, there are clear differences in the industrial characteristics during the processes of the production and consumption of service products. In this regard, the impact of innovation activity, as well as the influence of innovation activity itself, will differ depending on the type of service industry. Second, special attention should be paid to the policy standpoint. The main actors in innovation in service corporations and industry are the management and employees of firms, not external economic actors or governments. This means that government policy should be focused on establishing an environment conducive to implementing innovation by supporting the innovation of service corporations and industry, rather than providing motivation for innovation. As such, this study maintains that the active role of the government should not be based on the analyses of innovation factors, innovation performance, and management performance.
3. The current state of the Korean service industry and innovation activity
(1) The current state of the service industry
The importance of the Korean service industry has increased both in terms of production and employment. The service industry has exhibited a value added ratio of 60%, which is higher than the average ratio of overall industries and the ratio of the manufacturing industry. The service industry s share of overall GDP increased from 57.3% in 2000 to 58.2% in 2010. 274
However, a look at the level of development of the service economy level reveals that Korea has exhibited a 14%p difference with advanced countries. The difference in the service industry ratio of Korea and five advanced countries stood at 14.3%p in 2000. Thus, although eight years have passed, this ratio has decreased by only 0.5%p. Meanwhile, Korea s productivity is only half that of the United States. Although the Korean service industry has continuously grown since 2000, its productivity level in 2008 was the same as Germany eight years before and the gap in productivity with the United States has not been mitigated either.
(2) Innovation activity in the service industry
1) Innovation performance and innovation activity
In addition to process improvement, organization management, and marketing innovation, Korean firms have also made efforts to develop new services in order to heighten their competitiveness. However, the difficulties associated with measuring innovation performance in the service industry greatly complicate the task of assessing the extent to which the service industry has achieved innovation. The Korean Innovation Survey (service industry) investigating the innovation performance of domestic enterprises that was conducted by the Science Technology Policy Institute showed an improvement in the ratio of innovation performance of Korean firms in 2009 over 2006. In particular, firms fared rather well in terms of service and organizational innovation. Service innovation was carried out through the improvement of existing Policy Tasks for Enhancing Innovation Activities in Korea's Service Industries 275 products rather than the release of new ones. Meanwhile, organizational innovation was for the most part achieved by adopting different work methods and better organized work performance. This implies that Korean firms have focused on heightening productivity and efficiency through the improvement of existing products or organizations, rather than implementing innovation from the standpoint of the client. On the other hand, service corporations have implemented various innovation activities designed to enhance innovation performance. The outcomes of innovation can basically be determined by the manpower, funds, and technology possessed by a firm. However, there are also many cases in which innovation activity plays a pivotal role. The 2006 Korean Innovation Survey found that the expansion of activities related to factor conditions (28.6%) and corporate strategy/competition conditions (25.6%) was more strongly emphasized than the expansion of demand conditions (17.2%). However, the ratio of innovation activities engaged in by service corporations was much lower in the 2009 Korean Innovation Survey, a turn of events that can be attributed to the construction of a survey questionnaire that, unlike 2006, distinguished R&D activities from four innovation activities. In this respect, the survey conducted herein was based on the items found in the 2006 survey questionnaire, with innovation activity found to be carried out in a similar manner as what was uncovered in the 2006 survey. While the expansion of factor conditions (28.6%) increased, activities related to the expansion of demand conditions (9.6%) and improvement of corporate strategy/competition conditions (18.2%) decreased. 276
2) The difficulties associated with innovation activity
Although the service industry has exhibited a rapid growth trend, its ability to emerge as an actual growth engine that can replace the major industries is limited because of low labor productivity, insufficient specialization, low R&D costs, and discriminatory regulations. First, the service industry s labor productivity level and increase rates have been lower than those of the manufacturing industry. In this regard, while the labor productivity level of knowledge service has been higher than overall labor productivity, the increase in labor productivity within the service industry has by and large been slow. This can be explained by the relative absence of mass production based on standardization and limited technology development occasioned by fundamental characteristics such as the presence of a labor input-oriented production structure, and a production and sales structure in which production and consumption simultaneously emerge. In addition, the Korean service industry has been marked by a lack of upscaling and specialization amongst service corporations. This is because they have been managed as individual proprietorships centering on professional manpower. The size issue has resulted in reduced capacity to provide specialized services because of the shortage of the R&D investment needed to develop methodologies and solutions unique to service corporations. In particular, the weakness of knowledge-based business services has meant that Korean firms are limited to development through management innovation, and that the degree of expertise and quality of service Policy Tasks for Enhancing Innovation Activities in Korea's Service Industries 277 has also been low. Taking a look at the ratio of R&D costs to sales, we find that the ratio of R&D costs in overall industries increased from 0.95% in 2002 to 1.21% in 2007. The ratio of R&D costs in the manufacturing industry also increased from 1.41% to 1.80%. However, the R&D costs in the service industry remained at the 0.3-0.5% level in the 2000s. Another factor impeding the growth of the service industry is the disadvantageous institutions and illogical regulations that govern the industry. This situation can be attributed to the fact that a regulations-led policy was implemented based on the perception of the service industry as the consumption of luxury goods or public goods. Consequently, there has been no social consensus regarding the role and importance of the service industry. This can be compared to the development-led policy implemented in conjunction with the manufacturing industry. As a result, more discriminatory regulations have existed in the service industry. For example, medical, broadcasting, and legal services have been plagued by a plethora of regulations, including entry regulations and sales regulations, limiting competition in the name of the public good. The emphasis on publicness has also resulted in the introduction of competition and efficiency principles being viewed in a negative light in the fields of education and medical services. In addition, innovation activity was shown to partially contribute to industrial productivity and the sales growth rate. Nevertheless, innovation activities conducted by Korean firms remain inadequate. In this regard, Korean firms perceived the lack of internal funds, hesitation to invest occasioned by risk, lack of high-quality manpower, and the uncertainty of market demand as 278 obstacles to innovation activity.
4. Innovation support policy for the service industry
(1) Korea’s service industry policy
Korea s service industry policy began to be implemented in a full-scale manner from 2011 onwards when the Ministry of Finance and Economy suggested strategies for strengthening the competitiveness of the service industry that included taxation and financial support through the . However, the emergence of problems such as employment insecurity, slowdown of growth engine, and polarization paved the way for the fostering of a strategic approach to the development of the service industry as a new growth engine. In 2004, the Enforcement Decree of the Restriction of Tax Reduction and Exemption Act was amended to further concretize tax support system. Measures to strengthen the competitiveness of 17 industrial fields, including business services, design, and culture, were also established and implemented. In 2005, the were discussed, with the goal being the achievement of sustainable growth and job creation. As such, the government s service industry policies during the early 2000s were focused on strengthening competitiveness, and included boosting domestic demand and job creation in various industrial fields. However, the direction of policy started to change when a long-term based and integrated consideration of Policy Tasks for Enhancing Innovation Activities in Korea's Service Industries 279 the service industry was required. The three stages of the were established in 2006 and 2007. The five-stage program was established and implemented in 2008 and 2009, with the goal being that of creating good jobs in the service industry and achieving shared growth between the manufacturing and service industries. Especially, the program established different goals at each stage as follows: improvement of service balance (Service PROGRESS-I); job creation via the activation of corporate investment (Service PROGRESS-II); job creation and expansion of the growth basis (Service PROGRESS-III); mitigation of discrimination toward the service industry (Service PROGRESS- IV); and expansion of the basis for domestic demand (Service PROGRESS-V). In addition, the project was established in 2010 to foster the expansion of service markets based on the forging of an overseas market entry support system, and the expansion of the basis for overseas market entry by specialized manpower engaged in the service industry. Government policies in the 2000s, such as the activation of the service industry, enhancement of competitiveness, and advancement of the service industry, were not implemented based on the objectives of service industry innovation. Yet, some measures, such as R&D investment, education & training, taxation and financial support, can be considered to partially support service industry innovation. 280
(2) Support policy for service industry innovation in advanced countries
Although the service industry has played an important role in the economy of each country, existing policies have focused on the manufacturing industry, while there has been a lack of support for service innovation policies such as non-technology R&D. These circumstances have necessitated a big change in service innovation policy. In this regard, advanced countries such as Finland, Germany, England and Australia have already implemented relevant policies. Some of these countries have even planned and implemented high-level service innovation policies.
1) Finland
The innovation policy in Finland has been implemented through the development of knowledge and knowhow. Especially, the focal points of the innovation system have included education & training, R&D, and the development of knowledge intensive businesses. The major tasks of innovation policy have been to guarantee balanced development within the innovation system and to increase balanced development-related cooperation. Based on a consideration of the various aspects of innovation, Finland has implemented diverse innovation policies. It has implemented the FinnSight 2015 project that seeks to predict the major fields within Finnish society of the future, a list that includes service innovation, and programs such as Serve-Innovative Policy Tasks for Enhancing Innovation Activities in Korea's Service Industries 281
Services Technology Programme 2006-2010, Tourism and Leisure Services 2006-2012 and Finnwell-Healthcare Programme 2004- 2009 that are focused on facilitating service innovation. The Serve-Innovative Services Technology Programme 2006- 2010, which is emblematic of Finland s innovation support policy is aimed at increasing academic research in service related sectors and expanding the development of Finnish service industries. The Finnish government provides funds to attractive service industry projects such as those designed to enhance service product development capacity in specialized service fields, improve SMEs structural development of client-oriented service processes, and induce the development of new business models based on service innovation. The proposed projects are evaluated based on the originality of service innovation rather than the originality of the applied technology.
2) Germany
The federal government, State or Lander government, and policy makers at the local level are all involved in Germany s innovation system. This system is supported through detailed policy tools such as education, research, and innovation implemented at various levels of government. The main actors involved in service research include the German Federal Ministry of Education and Research (BMBF) and the project agency, Arbeitsgestaltung und Dienstleistungen. These two organizations started their support activities during the mid-1990s under the banner of the Service for the 21 Century program. At that time, 282 there was no institutional support for service research in Germany, and service research projects were carried out from the standpoint of human resources and quality management. Germany s service innovation policy is characterized by the implementation of future demand-forecasting research in an organized manner, and the development and actualization of policy demands based on forecasted demands. While the representative support program in this regard is the Service for the 21st Century implemented by the BMBF and Fraunhofer- Gesellschaft (FhG), the four-stage Innovation with Service program is currently being implemented.
3) Japan
Based on the establishment of a system that places the management of the service industry under the leadership of the Ministry of Economy, Trade and Industry, Japan has implemented various policies. However, service industry policy has been established from the standpoint of the enhancement of industrial competitiveness rather than the development of the service industry through innovation policy. Programs implemented have included the New Industry Creation (2003), which specified the selection of five strategic industries and an action plan, and the Policy of Service Industry Development (2006) concretized the previous program. The release of the report to heighten the innovation and productivity of the service industry in 2007 was followed by the implementation of related policies. Japan s policy to heighten the innovation and productivity of Policy Tasks for Enhancing Innovation Activities in Korea's Service Industries 283 the service industry has since 2007 been implemented in the following four directions. First, creativity in the private sector should be activated through the creation of a cross-sectional framework. Second, the focus should move from services dependent on experience and intuitions to those based on the scientific and engineering approach. To this end, Japan has prepared a service research/technology roadmap, established a service research center, and promoted the enhancement of industry-academy cooperation. Third, efforts have been made to find a structure that can link service providers and consumers. Japan has sought to improve its information provision system so as to heighten reliability, and to establish standards for quality assessment akin to the consumer satisfaction index. Lastly, because services are provided by people, Japan has sought to link its efforts in this regards to human resources development.
(3) Comparison and implications
The advanced countries and Korea have adopted different approaches. Advanced countries such as Finland and Germany have selected the theme of innovation as their policy goal, and then suggested support tasks, based on the identification of the industries requiring prioritized development and stage-based approaches. For example, Finland has, based on scientific analysis, established the status and roles of the service sector in the Finnish society of the future. It has implemented comprehensive innovation support programs and sector specific programs designed to complement the service innovation related 284 market or to overcome system failure. Meanwhile, Korea has maintained a service industry development policy framework that focuses on the policy goals of growth and employment. Rather than an innovation support policy for the service industry that is based on the roles and functions of innovation activity in the Korean economy and industry of the future, Korea s approach has been based on the development of policies for specific industries as a part of its macroeconomic growth strategy. These policies can hardly be regarded as being part of any service innovation-specific strategy. This is because the policy tasks have been implemented from the standpoint of the activation of the service industry and the improvement of its competitiveness.
5. Analysis of innovation activity and the management performance of service industry
(1) Analytical model
This study focuses on the analysis of the relationship between innovation factors and innovation performance. In particular, the researchers separated the types of service industries based on the classification of innovation types. As a result, a service concept directly and indirectly related to consumer demand and the differences in the characteristics of various service industries could be reflected in the analysis. The innovation activity of firms was considered to be a factor influencing innovation. In this respect, the researchers established and verified the following three hypotheses. Policy Tasks for Enhancing Innovation Activities in Korea's Service Industries 285
H1: Process innovation, organizational innovation, marketing innovation, and service innovation can all to some extent influence the management performance of a service firm.
Yi,t = 0 + 1 IPi,t-1 + 2 Zi,t-1 + i,t
Yi,t indicates the management performance of i firm at t time point;
IPi,t-1 indicates the innovation performance of i firm at t-1 time point;
Zi,t-1 indicates the size or client of i firm at t-1 time point; and
i,t indicates the variance of error term
H2: Due to the characteristics of service industries, which have various industrial components, the determinants influencing innovation performance differ based on the type of industry involved.
IPi = 0 + 1 Fi, + 2 Dji Fi + 3 Dji + i
IPi,t-1 indicates the innovation performance of i firm;
Fi indicates the determinant vector of the innovation activity by i firm; Dji indicates the dummy variable of j type of industry; and
i,t indicates the variance of error term
H3: The innovation performance of service corporations is, to some extent, influenced by the use of government support designed to make innovation activity easier. 286
IPi = 0 + 1 Si, + 2 Zi + i
IPi,t-1 indicates the innovation performance of i firm;
Si indicates the importance of government support used by i firm;
Zi indicates the size or client of i firm; and
i,t indicates the variance of error term
(2) Definition of variables
The dependent variables of product innovation, process innovation, organizational innovation, and marketing innovation were reestablished based on the contents of the innovation survey. In the case of the independent variables, a definition of variable in which the determinants of innovation were divided into internal and external factors, was established. The classification of service industries by type was added as the dummy variable. The internal factors consisted of direct factors such as R&D and marketing activity; infrastructure factors such as the expansion of infrastructure facilities, jab task training, and IT usage levels; and system factors such as the department in charge. The external factors consisted of the use of external knowledge such as technology purchase and external cooperation such as joint R&D and the implementation of innovation projects.
(3) Estimation method
Using a simple regression model and Probit model rooted in Policy Tasks for Enhancing Innovation Activities in Korea's Service Industries 287 the Ordinary Least Squared Method (OLS), an analysis of service innovation activity was conducted. The following standardized Probit model was employed.
y*i = Xi ‚ + i , i =1,2,3, , n
yi = {1 if y*i >0
0 if y*i 0 i = N(0, 2)
In the above equation, ‚ indicates the parameter vector, i indicates the error term, yi and y*I indicate the observed value and potential value. When estimating the Probit model, the Maximum Likelihood Estimation was applied based on the assumption that the term error, i follows the normal distribution, N(0, 2). The likelihood function is as follows.
In the above estimation model, X indicates the innovation activity factors that determine the innovation performance or the innovation activities, while ( ) indicates the standard-normal cumulative density function (cdf).
(4) Empirical analysis
The analysis of the correlation between management performance and innovation performance, and among innovation performance, innovation activity, and government support, 288 showed that innovation performance did not directly influence management performance in a significant manner. However, process innovation and organizational innovation were found to influence management performance. In addition, the estimation results showed that the innovation activity factors and government support influencing innovation performance differed based on the type of industry; and that only a few government support programs actually impacted innovation performance.
1) Analysis of the effect of innovation performance on business performance
This study analyzed how innovation performance influenced business performance (H1). To this end, the researchers divided innovation performance into four types of innovation performance (service, process, organizational and marketing innovation). Meanwhile, the sales growth rate during 2007-2009 was used to represent the business performance selected as the dependent variable. The four innovation activities did not significantly influence the sales growth rate in the simple regression model. Rather than indicating that innovation performance did not influence the sales growth rate representing business performance, this result points to the failure to control the determinants of the change in the sales growth rate. In this regard, process innovation significantly influenced the sales growth rate in the simple regression model once these variables were transferred into binary variables for control purposes. Furthermore, as far as the Probit model was Policy Tasks for Enhancing Innovation Activities in Korea's Service Industries 289 concerned, the bigger the outcome of the process and organization innovation, the more the sales growth rate was impacted.
2) Analysis of the impact of innovation activity on innovation performance
Based on the results of the survey regarding the types of innovation activity (H2), the types of innovation activity influencing innovation performance, or the determinants of innovation performance, were examined. The analysis of the determinants influencing innovation performance included three factors related to the types of innovation activity and the analysis of ten determinants. Innovation activity was divided into factor conditions, demand conditions, and corporate strategy/ competition conditions. The factor conditions refer to cases in which innovation activity is carried out as a type of input factor. The demand conditions consist of the marketing activities designed to directly create service demand. The corporate strategy/competition conditions include the activities that can be linked to the strategy to enhance the internal competitiveness of organizations and corporations. Innovation activity related to factor conditions commonly influenced the innovation performance of service industries, with the notable exception being specialized services. Viewed from the standpoint of sub-items, the training of internal and external human resources and not-IT equipment purchases were found to greatly contribute to innovation performance. However, while 290
R&D activity, which can be regarded as the core factor of innovation, did not have any significant influence when viewed by type of industry, it nevertheless influenced organizational innovation and marketing innovation in all service industries. This result differs from previous study results, a denouement that stems from the difference in the survey questionnaire selected and the characteristics of the targeted industry. The demand conditions were also found to influence marketing innovation. However, while demand conditions influenced service innovation and organizational innovation where the communication industry is concerned, they did not significantly influence its marketing innovation. While corporation strategy/competition conditions influenced organizational innovation, the study could not identify any sub-items that were significantly influenced.
3) Analysis of the effect of the government innovation system on performance
Lastly, the study examined whether the government’s innovation support influenced innovation performance and what innovation support programs significantly induced innovation performance (H3). Very few innovation programs were found to contribute to innovation performance from the standpoint of the service industry as a whole. However, programs related to factor conditions influenced organizational innovation, a denouement that can be attributed to the effect of education/training support and tax/financing support. Factor conditions only played a minor Policy Tasks for Enhancing Innovation Activities in Korea's Service Industries 291 role in the case of the support for R&D and commercialization and the support for human resources development. Although support programs related to demand conditions did not have a significant impact when viewed from the standpoint of the service industry as a whole, support for overseas market entry influenced innovation performance in the transportation industry and market support influenced innovation performance in the communication and specialized services. Government support for corporation strategy/competition conditions significantly influenced some aspects of innovation performance in the transportation and communication industries. In this regard, management consulting/ support was found to influence the outcomes of service innovation and process innovation.
(5) Policy implications
The following policy implications were derived based on the empirical analysis of innovation activity, innovation performance, and management performance. First, innovation performance can partially influence the enhancement of the management performance of service corporations. However, seemingly contrary to the characteristics of a service industry that is focused on clients, process and organizational innovation were found to significantly influence management performance, rather than service and marketing innovation. This result can be attributed to the current circumstances in Korea, where it is more advantageous to enhance management performance by employing process 292 innovation and organizational innovation that influences the internal management efficiency of a corporation than an innovation strategy that increases sales based on the client satisfaction. Second, although differences based on the type of industry emerged with regard to the factors impacting innovation performance, factor conditions (human resources training costs and non-IT equipment) and corporation strategy/competition conditions (corporation’s internal activities related to organizational innovation) commonly influenced innovation performance. Third, the contribution of the government’s innovation support system to the enhancement of innovation performance was rather limited. The innovation support programs related to factor conditions influenced the outcomes of service innovation and organizational innovation. Meanwhile, the support programs such as the marketing support related to demand conditions contributed to the outcomes of organizational innovation. Viewed from the standpoint of the type of industry, support programs related to factor conditions were found to be to some degree effective where the transportation industry was concerned. Meanwhile, some of the support programs influenced the improvement of the organizational innovation performance of the communication and specialized service industries. Policy Tasks for Enhancing Innovation Activities in Korea's Service Industries 293
6. The policy tasks to enhance innovation activity
(1) The direction of policy implementation
The innovation policy for the service industry introduced in this study has a different starting point from existing policies related to service industry development. While existing policies were led by a government desiring to change the management environment of corporations, the innovation policy introduced herein is designed to induce corporations to enhance their internal motivation. Existing service industry policies were designed in a manner that allowed to government to directly influence the cost conditions of corporations so as to strengthen competitiveness from the standpoint of supply. This could be achieved by providing tax exemptions to a specific industry or activity and easing regulations. Meanwhile, innovation policy should be organized and implemented based on the voluntary will of the members of a corporation, namely management and employees, rather than the external actor known as the government. Of course, some of the policy tools employed, such as the activation of service R&D, are similar to existing policies for service industry development. The policy tasks related to innovation within the service industry should be clearly differentiated from the government’s service industry development policy and its enhancement of competitiveness policy. The innovation activation policy should be focused on establishing an innovation ecosystem in which innovation activity can begin within the corporations themselves. 294
In order to heighten the interest of management in innovation and the perceptions of innovation activity, the emphasis should be placed on the industrial environment for innovation. Specifically, the innovation ecosystem consists of the various explanatory variables related to innovation that are defined in this study, as well as the factors influencing these explanatory variables. Viewed from a wider standpoint, the various factors that influence the management activity of a corporation within its specific industry or market can also be included. The majority of government policies have impacted the innovation environment, whether positive or negative. This study identifies the establishment and activation of an innovation ecosystem in a narrow sense as the target of government policy. Based on this fact, the policy tools with the potential to result in government failure because of active market intervention are excluded as subjects of analysis. On the other hand, entry barriers causing the distortion of the cost structure and the reform of regulations impeding industrial innovation can be regarded as very desirable policy tools to activate innovation. The desirable basic direction of the policy to bring about service innovation activities that is derived from the survey on the actual state of innovation activity, innovation performance, and management performance, as well as the results of the various analyses conducted herein, can be summarized as follows. First, it is necessary to more vigorously implement policies to activate innovation in the service industry. With the exception of a few factors, the level of the innovation activities implemented by the majority of service corporations was found to be rather limited. Policy Tasks for Enhancing Innovation Activities in Korea's Service Industries 295
The contribution of innovation activity to the enhancement of innovation performance is also less than outstanding. Therefore, the activation of innovation activity represents an important task. This means that a quantitative increase in support policy for innovation activity should be brought about. Second, there is a need to heighten the quality level of service innovation activity. Innovation activities that do not actually influence innovation performance can hardly be evaluated as successful. As such, because an innovation activity should positively influence innovation performance to be considered successful, support policies that activate innovation in a manner that makes it possible for innovation activities to actually influence innovation performance should be implemented. Third, it is essential that innovation support policy that considers the characteristics of the various types of industry be prepared. Policies to support innovation activity should consider horizontal measures that can be applied to all service industries and the characteristics of each type of industry. For example, although all innovation factors can influence innovation performance, the factor input innovation or the results of R&D activity may be regarded as more important depending on the characteristics of the industry. 296
Policy tasks and alternatives based on the analysis of innovation in the service industry
Lack of innovation activities by service corporations Current - Unsatisfactory levels of R&D investment, technology purchases, and state of responsible departments innovation - Investment and fundraising difficulties, lack of core manpower, lack as assessed of technology/market information, and the uncertainty of market based on demand perceived as obstacles to innovation activity the survey Inefficient innovation support system - Improper support scale and exclusive support, characteristics of the service industry not reflected Lack of linkages between innovation performance, innovation activity and the innovation support system Innovation - Derive an innovation performance centering on service innovation analysis Results of and organizational innovation quantitative - Effective activities such as those related to human resources training and analysis marketing but lacking in terms of the impact of R&D, technology learning, and the responsible department on innovation performance - Influence of education/training and tax/financing support on innovation performance; in the case of R&D, and human resources development, effect of support is limited Case study Establishment of an innovation implementation system of policy Management of stage-based program aimed at innovation support in - “Serve-Innovative Services Technology Programme” (Finland) advanced “Service for the 21st Century” (Germany), “Improvement of countries innovation and productivity in the service industry” (Japan). Selection and support for industries whose development should be prioritized ⇒
Enhancement of policy to activate innovation within the service industry Policy Heighten the quality level of service innovation activities tasks Derive an innovation support policy that considers the characteristics of the various types of industry ⇒
Strengthen innovation capacity - Development of human resources specialized in service R&D, expansion of IT use at the actual service site, and activation of service R&D Establishment of innovation support system Policy - Heighten the protection level of intellectual property rights, develop innovation altern system diagnosis, innovation voucher support atives Establishment of innovation networks - Establishment of a knowledge service use support network, foundation of research institutions specializing in service innovation Enhancement of innovation framework - Government innovation leadership, development of intellectual property services ⇒
Activation of service industry based on the enhancement of innovation activity Policy Tasks for Enhancing Innovation Activities in Korea's Service Industries 297
(2) Detailed policy measures
1) Enforcement of innovation capacity
Development of human resources specializing in service R&D
Although the quantity of human resources may represent a variable in terms of leading innovation, more importantly, enterprises must possess creative human resources armed with the knowledge needed to lead innovation. Viewed from the standpoint of the government, the most important point of departure in terms of the innovation policy for service industry should be development of human resources capable of leading innovation. In particular, the quality of human resources is as important as the CEO’s innovation leadership in leading innovation. Innovation activity can only be connected to innovation performance, and furthermore management performance, when the CEO is innovative and he or she has a human resources pool capable of playing a supplemental role in leading innovation at his disposal. In this regard, the securing of the service science pool required by society is predicated on the establishment of an education infrastructure that includes the granting of certification in related fields and efforts to heighten the social perception of human resources development. The policy for developing a service science pool designed to foster the future innovation of the service industry should be 298 implemented in the following direction. First, it is necessary to establish a long-term service science pool development plan. In particular, it is necessary to produce manpower that possesses multidisciplinary knowledge. This should include knowledge of the social sciences as well as management and engineering. Such manpower is difficult to produce solely based on the combination of existing majors. In this regard, human resources development efforts should be systematically designed. Second, there is a need at the university level to develop hub universities related to the service science pool. The activation of service science education based on an organized education program requires the development of related programs at universities and organizations, the training of lecturing methods, and the establishment of related majors. The government should focus its support on the hub universities during the early stages. It is also necessary to develop service science hub universities that can be linked to regional strategic industry (specific industry) and to connect them to the project to develop R&D-oriented universities currently undertaken by the Ministry of Education, Science and Technology (The Korea Research Foundation).
Expansion of IT use at the actual service site
The impact of informatization on the improvement of productivity has already been confirmed in various studies. OCED has applied three standards such as the input of highly-skilled human resources, investment in informatization, and R&D input, to separate the knowledge service industry from the general Policy Tasks for Enhancing Innovation Activities in Korea's Service Industries 299 service industry. IT investment has been regarded as an important aspect of the innovative environment as well as an input factor for corporate innovation that helps to divide existing and new industries and transforms existing industries into new ones. Therefore, strategic use of IT should be employed in innovation activity so as to heighten the innovation performance of the service industry; moreover, the government needs to introduce relevant policies. The existing IT strategy has been focused on ‘strengthening the infrastructure’ and ‘developing the IT supply sector (technology, production and service); however, the time has come to create additional synergy by balancing supply and usage sector policies. The focus should not be on the expansion of IT input in the service industry, but rather on the heightening of IT use as a strategic tool for innovation activity.
Activation of service R&D
Investment in service R&D has been implemented in all industries, including the service industry. However, service corporations have emerged as the main R&D investment actor actually responsible for service R&D investment in the private sector. OECD statistics showed that R&D investment in the Korean service industry accounted for 7.1% of total R&D investment in 2006, a level much lower than the advanced countries. The limited nature of R&D activity in the service industry compared with the manufacturing industry has been influenced by the government’s manufacturing-friendly support programs. 300
Korea has managed support programs such as those related to tax exemption, financing of R&D investment funds, and venture capital, in a manner designed to facilitate R&D in the private sector. The majority of these support programs have revolved around the manufacturing industry. These support programs have been selectively implemented in some service industries, including knowledge services. In this regard, it becomes necessary to expand the scope of the technology laws related to the future development of service industry and R&D. Service innovation should be included along with scientific technology performance in the concept of R&D associated with fields closely related to the support for innovation activities within the service industry. The amendment made to the Enforcement Decree of Restriction of Tax Reduction and Exemption Act in 2011 makes it possible to expand the definition and scope of R&D.
2) Establishment of an innovation support system
Government protection of intellectual property rights
Many countries have established legal systems to protect the intellectual property rights pertaining to service development and process innovation. However, the use of such legal systems as an actual protection mechanism is complicated by the continuously changing markets. The government should heighten corporate innovation activities by strengthening efforts to improve the protection of Policy Tasks for Enhancing Innovation Activities in Korea's Service Industries 301 intellectual property rights. This should include non-technology innovation such as the process improvement and marketing methods. As is the case with patents, not everything can be protected under the guise of industrial property rights. Corporate investment in fields where the results of R&D are not protected can from the economic standpoint create an external economy. The failure to internalize such investment will have a downward effect on innovation investment and result in a decrease in overall social welfare.
Development of an innovation system diagnosis model
The expansion of the use of knowledge services in the service industry requires the development of a service model which can strategically suggest a direction for innovation based on the analysis and evaluation of the potential of a corporation’s innovation activities. The demand for knowledge service use for innovation should be based on a diagnosis of knowledge services that examines the possibility of knowledge services being used in the various processes and innovation that make up the value chain. This diagnosis model should be developed in a gradual manner, and separated into a common model that can be commonly applied to all industries, and an industrial diagnosis model that while based on the common model, considers industry-specific factors. 302
Innovation voucher support
The government should support the innovation support vouchers to help the Small & Medium Business Administration and local autonomies’ efforts to facilitate demand creation and knowledge service transfers by SMEs. Expansion of the scope of innovation voucher use to government-funded organizations, private research institutes, and universities can heighten policy satisfaction by moving beyond the existing limited consultations and widening the right to choose recipient corporations. This can be explained by the need for cooperation with the public science sector and knowledge transfers from the public science sector to knowledge service corporations in order to strengthen innovation in the knowledge service industry.
1) Establishment of innovation networks
Establishment of networks to support the use of knowledge services
The intensification of competition in the global market has led to the emergence of a trend towards the securing of innovation resources from the outside, with the exception of core competition factors. This shift from dependence on internal capacity has been motivated by the desire to preemptively secure markets before competitors. However, small and medium sized enterprises (SMEs) have a hard time internalizing specific knowledge services as well as securing innovation resources from Policy Tasks for Enhancing Innovation Activities in Korea's Service Industries 303 the outside. This is closely related to the need to burden delivery costs and the difficulties knowing what knowledge services should be secured and from what sources. In this regard, it is necessary to establish a policy platform and network that can support knowledge service use as a concrete alternative means of innovation support for SMEs. The focus in this network should be on the development of working-level windows in which service corporations can obtain information and receive policy support. In other words, One-Stop Contact Points designed to mitigate the inconveniences faced by corporations by handling all steps from the analysis of the type of service needed to the provision of actual support. Thus, the related goals can be achieved by activating a policy platform that is connected to the hub organizations of regional governments in a manner that revolves around the policy program agency of the Ministry of Knowledge Economy.
Establishment of research institutes specializing in service innovation
In addition to the enhanced activation of the overall economy, the widespread acceptance of service innovation and corporations’ achievement of various forms of innovation can be linked to macroeconomic outcomes such as economic growth and job creation. One of the government’s policy programs that can be implemented in a relatively simple manner is that of establishing a research institute specializing in service innovation. The “service research center (provisional)” can carry out the 304 functions of studying service innovation from various perspectives, including policy research on service innovation, research on innovation systems, and research on innovation processes, and create links between industry-academy-research. This entity can serve as the center of networks designed to heighten social interest in service innovation and become the sphere for interdisciplinary integration. The “service research center” can carry out the following three overarching functions. First, the center can strengthen the service innovation capacity of corporations and the public sector. The results of service innovation studies can be used to develop and distribute the programs to support the improvement of service productivity and innovation. The center can play a central role in conducting studies on various themes, such as the service concept and product, service delivery processes, and service business model development, as well as industry-academy-research linkage activities. Moreover, it can be at the forefront of the social diffusion of research results. Second, the center can support service policy. It can investigate research subjects such as the development of the service industry, development of strategies to enhance the competitiveness of other industries through servitization, the monitoring of policy performance, the improvement of service regulations, service R&D, and the development of service human resources. In addition, the center can undertake the consigned management of the government’s service industry policy support programs, the development of evaluation models for service innovation and the evaluation of the management performance of public service corporations. The Policy Tasks for Enhancing Innovation Activities in Korea's Service Industries 305 center can also conduct hub functions for service research such as the accumulation of service research data and information, diffusion of research results, and support for research activities by industry and academia. Consequently, it can become an elite research institution in Korea by strengthening the research capacity in conjunction with the various types of service industries and functions.
2) Enhancement of innovation framework
Government’s innovation leadership
The government’s leadership in facilitating the innovation activities of service corporations is closely related to its ability to create conditions conducive to the activation of actual innovation activities rooted in a corporate-friendly innovation infrastructure. For example, the introduction of a private for-profit medical corporation system can directly influence public health depending on how the system is established. An innovative business model can be created by influencing large-sized private hospitals. However, the introduction of a private for-profit medical corporation system can also affect the structure of the National Health Service system. In addition, the government can induce domestic corporations to ensure their competitiveness by developing related markets at an early stage based on the establishment of a legal system governing convergence services such as e-Health, as well as the development of policies related to the formation of private markets. 306
In conclusion, the characteristics of innovation within the service industry make it possible for the government to play a more active and comprehensive role than in the manufacturing industry. Of course, the goal of government intervention should not be to strengthen regulations but rather to activate the market and establish an innovative environment for related corporations by improving the regulations. In addition, the government’s leadership should be expressed in a manner that helps to activate the innovation framework by providing various types of incentives to the dynamic market.
Development of intellectual property service industry
The intellectual property service industry is considered a part of the infrastructure of the industrial innovation framework. Although the intellectual property service industry is not an essential condition of service industry innovation, the existence of a market-oriented intellectual property service industry as part of the wider infrastructure becomes an important variable in the creation of high-quality knowledge and its social distribution, use, and diffusion. The ability of the distributed knowledge to function as a production factor and become a source of national competitiveness is predicated on it being knowledge with high value added in both a creative and economic sense. The base of Korea’s intellectual property service industry is very weak. This is the result of corporations and industries’ dependent on knowledge’s inability to activate innovation activities. Conversely, the failure to actively engage in innovation Policy Tasks for Enhancing Innovation Activities in Korea's Service Industries 307 activities results in rather limited functions of the intellectual property service industry. Therefore, it is very important to activate the intellectual property service industry as part of the innovation infrastructure of the service industry. The government’s intellectual property policy has been motivated by the legal and institutional desire to protect patent rights and copyright. However, the intellectual property right system should be made to reflect the changes in the industry and technological environment. Furthermore, in addition to the activation of intellectual property based startups and the introduction of an intellectual property financing system, it is also necessary to introduce various policy alternatives to heighten the industrial use of intellectual property rights. There is a need to implement a market formation policy through which the intellectual property rights to be actively traded can be commercialized. At the same time, it is necessary to establish an environment in which creative human resources can be created over the long term, heighten social interest in intellectual property, and develop various social incentives for creative activities.
Research Report 2011-602
Structural Change Analysis and Policy Suggestions for Strengthening Competitiveness of Korean Retail Industry
Suk-Kyung Kim, Chun-Kon Kim and Ki-Hwan Kim
The Efficiency of Investment in Regional Manufacturing Industries and Analysis of its Effectiveness 311
Chapter 1. Introduction
Korea’s retail industry experienced a large extensive structural change following a rapid development of the corporate retail industry in the aftermath of the opening of the domestic distribution market in 1996. The modernization of the retail industry contributed to increasing the efficiency and productivity of the industry, and provided benefits to customers. However, it also caused a decline in small and medium-sized retailers. The productivity of the retail industry must be further increased in order to strengthen the competiveness of Korea’s retail industry. To this end, it is necessary to manage retailers in a more organized and effective manner. However, the positive functions of small and medium-sized retailers in terms of employment absorption and the activation of the regional economy make it difficult to unilaterally pursue the up-scaling of a large firm-oriented retail industry. The overcoming of the inherent contradictions between the 312 improvement of the productivity of the retail industry and the protection of small and medium-sized retailers constitutes the most difficult task to address when it comes to establishing distribution policy. However, measures must be sought to mitigate these contradictions and strengthen the retail industry. The search for these measures is predicated on the development of a clear understanding of the current state of the Korean retail industry based on an analysis of the effect of the structural change that has taken place in this industry, and the drawing up of policies that can strengthen the retail industry. Despite the formation of a consensus on the necessity for such studies, there has been a marked absence of detailed discussions on the topic. Based on the analyses of the effects of structural change on the Korean retail industry and the efficiency of retailers, this study discusses policy measures capable of strengthening the competitiveness of the retail industry. To this end, Chapter 2 analyzes the structural change in the retail industry, including the degree thereof, and the effects of this change on employment and productivity. In Chapter 3, a comparative analysis of the efficiency of retailers is conducted in order to see the relative efficiency level of Korean retailers that has resulted from the structural change of the retail industry. Chapter 4 reviews the distribution policies put in place by Korea and advanced countries, and then suggests policy improvements to strengthen the Korean retail industry. Structural Change Analysis and Policy Suggestions for Strengthening Competitiveness of Korean Retail Industry 313
Chapter 2. Structural change and productivity of the retail industry
1. The structural change of the retail industry
The structural change in the retail industry can be analyzed from various standpoints, including the change in the status of the retail industry in the national economy, and the up-scaling and corporatization of the retail industry demonstrating the level of modernization of the retail industry. The status of retail industry in the national economy can be ascertained through the retail industry s ratio of overall GDP and the retail industry s ratio of overall employment, and the productivity of the retail industry versus the productivity of overall industry. While the retail industry s ratio of GDP increased after the opening up of the distribution market, the ratio of overall employment decreased, thus showing that the gap between the two aspects has somewhat decreased. However, when compared with the manufacturing and service industries, the retail industry has been characterized by a low ratio of GDP and a high ratio of employment. The productivity of the retail industry versus the productivity of overall industry can be defined as the concept of relative productivity . The assignment of a relative productivity value of 1 indicates that the labor productivity of a particular industry is equal to that of the entire economy. The relative productivity of the Korean retail industry has increased from 0.42 in 1998 to 0.57 in 2010. Nevertheless, it has remained at approximately half the 314 productivity of the overall economy. This is much lower than the manufacturing industry (1.81) and service industry (0.85). Meanwhile, in the case of the United States and Japan, the retail industry s ratios of GDP and employment were higher than in the Korean case. In terms of the relative productivity of the retail industry in these two countries in 2010, the United States and Japan scored 0.75 and 0.73, respectively. Although the two countries exhibited lower levels than their respective manufacturing industries (United States 1.31 and Japan 1.03) and service industry (United States 0.99 and Japan 1.03), this gap has been much smaller than in Korea. The status of the Korean retail industry in the national economy has gradually increased since the opening of the distribution market. However, it still lags behind other industries such as the manufacturing and service industries and the retail industries in advanced countries. This would seem to indicate that there exists more room for development in the future once the Korean retail industry is supported by private sector innovation and appropriate government policy. Next, with regards to the level of up-scaling, despite the restructuring of the retail industry that has seen a rapid increase in large retailers after the opening of the distribution market, the Korean retail industry still exhibits a much higher ratio of small- scale retailers than the United States and Japan. While small-scale retailers account for most of the businesses and employees engaged in the retail industry, the revenues of these small-scale retailers amounted to only one-third of the entire retail industry revenues. This clearly exposes the fact that the structure of the Structural Change Analysis and Policy Suggestions for Strengthening Competitiveness of Korean Retail Industry 315
Korean retail industry remains weak. The Korean retail industry also lags behind the United States and Japan in terms of degree of corporatization. A survey of the ratio of corporate retailers within the entire distribution market conducted by Bain & Company found that such retailers accounted for 48% of the market in Korea. This can be contrasted with totals of 78% in the United States, 75% in Japan and 73% in England. Although corporatization has been rapidly carried out centering on general retailers in Korea, a great gap still exists with the advanced countries.
2. The effects of structural change in the retail industry on employment and productivity
Much like the other services industry, the measurement of productivity has proven to be a complex task in the retail industry. The biggest obstacle, and one not faced by the manufacturing industry, has been the difficulty defining and measuring the concept of products occasioned by the production of intangible services. In addition, the lack of exactness and extensibility has resulted in a dearth of data. Although it is difficult to measure the productivity of the retail industry, as there are currently no exact alternatives, the majority of the studies on aggregate productivity have focused on gross margin or sales as products. This study used gross margin as products. The retail industry has been characterized by a high ratio of self-employed retailers and unpaid family workers. In this regard, labor productivity has been measured, based on a 316 definition of employees that includes the self-employed and unpaid family workers, as the constant gross margin per employee. The retail margin as measured in the was used because no measurements of the gross margin of the retail industry were included in the national accounts. The retail margin was calculated as a constant value, with a consumer price index employed. The number of employment was obtained from the pertinent statistics in the . The labor productivity of the retail industry increased by an annual average of 3.5% from 1997 to 2009; meanwhile, employment decreased by an annual average of 0.5% over the same period. Separating this period into the one right after the financial crisis (1997-2002), mid-2000s (2002-2006), and late-2000s (2006-2009), we find that the labor productivity of the retail industry increased in all of these three periods, with the biggest increase recorded during the mid-2000s. On the other hand, employment increased by the widest margin immediately after the financial crisis, greatly decreased during the mid-2000s, and slightly recovered during the late-2000s. Taking a look at these results, we see that employment in the retail industry greatly increased due to the spike in small-sized retailer startups caused by growing unemployment in the immediate aftermath of the financial crisis. However, the weakness of these startups can be interpreted as a sign that the creation of gross margin per employee remained limited. Structural Change Analysis and Policy Suggestions for Strengthening Competitiveness of Korean Retail Industry 317
Nevertheless, this interpretation is not appropriate when analyzing the increase rate of employment and productivity by size of retailer. Employment by small-scale retailers with less than four employees decreased during all three of these periods. As such, it would be more appropriate to interpret this to mean that although those who found themselves unemployed due to the restructuring of the labor market after the financial crisis became self-employed retailers based on startups, numerous small-scale retailers exited the market amid aftershocks of the economic crisis and the expansion of large-scale retailers. Let us review the impact of the structural change in the retail industry on the increase of labor productivity based on the decomposition of change in labor productivity. Using the shift- share decomposition method, the change in labor productivity can be decomposed into shift, share, and intersection effects. The shift effect indicates the effect of the change in the labor productivity of individual industries on the labor productivity of overall industry when the composition of the industrial gross margin is assumed to be constant. Share effect indicates the effect of change in the employment ratio on the change in labor productivity of overall industries in situations where the composition of industrial gross margin is constant. The intersection effect refers to the effect of the interaction of these two changes on the change in overall labor productivity. Let us take a look at the results of the decomposition of the change in the labor productivity of the Korean retail industry during the period 1997-2002. Overall, labor productivity increased by 7.2% during this period. The shift effects (8.0%) were found to 318 be bigger than the change in total productivity. While the intersection effects (1.1%) exhibited a positive (+) value, the share effects (-1.9%) exhibited a more pronounced negative (-) value. As such, the structural change in the retail industry during this period had a rather negative impact on the increase of productivity. During the period 2002-2004, labor productivity increased by 3.2%; meanwhile, the shift effect was 1.5% and share effect 1.6%. While the intersection effect (0.1%) was rather small, a positive (+) value was nevertheless recorded. As such, the structural change in the retail industry helped increase productivity during this period. During the period 2006-2009, labor productivity increased by 10.6%. Here, the shift effect (8.0%) explains a great part of the increase in total labor productivity. While the share effect (2.3%) and intersection effect (0.3%) were smaller than the shift effect, positive (+) values were nevertheless exhibited, thus proving that the structural change in the retail industry during this period emerged in an advantageous direction in terms of the improvement of productivity. These analysis results show that the structural change in the Korean retail industry has facilitated the development of industrial fields with high gross margin and high productivity since the 2000s. However, the effect of the structural change on the increase in total labor productivity was found to be limited. An analysis of the contribution of the Korean retail industry to employment and productivity by sub-field revealed that non-store retailers most greatly influenced the increase in employment within the overall retail industry during the period 1997-2004, Structural Change Analysis and Policy Suggestions for Strengthening Competitiveness of Korean Retail Industry 319 followed by general retailers. These two sub-fields were also found to have the greatest influence on the increase in the productivity of the retail industry. In this regard, the contribution of general retailers to the increase in productivity was particularly high. This period was characterized by sub-fields contributing to employment and productivity increase in an identical fashion. In other words, the sub-fields that contributed to the increase of productivity also contributed to the increase in employment. Conversely, those sub-fields that contributed to the negative (-) increase of productivity also contributed to the negative (-) increase in employment. The most significant contributors to the increase in productivity and employment within the overall retail industry during contributed the period 2006-2009 were the general retailers. However, non-store retailers impeded the increase in productivity and employment within the overall retail industry. Contrary to the previous period, textile, apparels, footwear and leather product retailers helped increase the productivity and employment of the overall retail industry. A comprehensive look at the contributions of employment and productivity increase to the retail industry by sub-field reveals that general retailers, which make up a significant ratio of large-sized retailers such as department stores and large-sized marts, have greatly contributed to the increase in employment and productivity in the retail industry. Meanwhile, sub-fields where the ratio of small and medium-sized retailers was high only contributed slightly to the increase in employment and productivity or even impeded any such increase. 320
3. The characteristics of the structural change in the retail industry and related problems
The Korean retail industry has exhibited various characteristics since the opening of the distribution market. These have included up-scaling, corporatization, concentration, and the stagnation of small and medium-sized retailers. These characteristics are inherently related to one another. The fundamental characteristics of the structural change in the retail industry consist of up-scaling and corporatization. In this regard, phenomena such as the concentration of the retail industry, improvement of productivity, expansion of the gap in productivity by size, bipolarization, and the stagnation of small and medium-sized retailers, can be viewed as stemming from these two characteristics. The intensification of the competition amongst retailers after the opening of the distribution market saw large retailers pursue a strategy of securing a competitive advantage over the global retailers that entered the Korean market. This strategy paved the way for a competition to up-scale as retailers scrambled to preempt the market and strengthen their buying power vis-‡-vis suppliers. The up-scaling of the retail industry has been led by large- scale retailers. This has resulted in the emergence of a concentration phenomenon that has seen the ratio of large retailers in the retail industry increase. As mentioned above, up- scaling had an effect on the improvement of the productivity and efficiency of the retail industry. However, viewed from the standpoint of the overall retail industry, although the structural Structural Change Analysis and Policy Suggestions for Strengthening Competitiveness of Korean Retail Industry 321 change in the retail industry positively influenced productivity, it also expanded the gap in productivity by size of retailer. The sales of large-sized retailers with more than 20 employees increased 1.4 fold over those of small-sized retailers with less than four employees in 1997 and by 3-fold in 2009. In addition, the strengthening of the market power of large retailers has resulted in expanding the bipolarization of retailers. Sub-fields dominated by corporate retailers, such as large marts, convenience stores, and home shopping, have experienced a sharp increase in sales and store numbers; meanwhile, the ratio of small and medium-sized retailers in the overall retail industry decreased amid a general weakening of their competitiveness brought on by the absence of any response to the rapid environmental changes that took place within the market. As such, the main problems faced by the Korean retail industry stem from the low competitiveness occasioned by the weakness of small and medium-sized retailers that account for a significant ratio of the domestic retail industry.
Chapter 3. Analysis of the efficiency of retailers
1. International comparison of the efficiency of large retailers
A comparative analysis of global retailers based on data envelopment analysis (DEA) and Malmquist productivity analysis was conducted in this section. These nonparametric analytical methods were selected because they do not require the 322 establishment of production functions and weight values. The DEA is an analysis tool that gauges efficiency based on the use of the measured value of DMU (decision making unit) input and output factors. The Malmquist productivity analysis examines changes in productivity based on temporal changes when time- series data for input and output factors is provided. In terms of input factors, this study identified the number of employees as the labor variable and current and fixed assets as the capital variables. As far as the characteristics of retailers are concerned, inventory assets and sales management expenses were retained as the input factors. Sales and operating profit were selected as the output variables. All in all, 20 global retailers were examined. Data from the financial statements included in the annual reports of retailers released from 2006 to 2010 was employed. The results of the DEA at the corporation level shows that along with Wal-Mart and Costco of the United States the Shinsegae Group and Lotte Group ranked first in terms of efficiency over the past five years with a score of 1. Meanwhile, the efficiency of France’s Carrefour and Germany’s Metro AG, which constitute the number 2 and 3 top global retailers, was relatively lower over the past five years, with a score of less than 1. The time-series based MPI (Malmquist productivity index) revealed that the year-on-year productivity of the Shinsegae Group decreased in 2007 and 2008 before increasing in 2009 and 2010. Moreover, the productivity of the Shinsegae Group decreased by an annual average of 6.6% during the period 2006- 2010. The year-on-year productivity of the Lotte Group increased Structural Change Analysis and Policy Suggestions for Strengthening Competitiveness of Korean Retail Industry 323 in 2007, 2009, and 2010, with 2008 proving to be the exception to this trend. For its part, the productivity of the Lotte Group during the period 2006-2010 increased by an annual average of 1.8%. The rate of increase in the annual productivity of the Shinsegae Group exhibited a negative (-) value, a denouement that was greatly influenced by the decrease of productivity that occurred in 2008. As 2008 was an exceptional period in which the impact of the global financial crisis was being felt, the productivity of Shinsegae and Lotte can be regarded as having overall increased.
2. Comparison of the efficiency of Korean retailers
The comparison of the efficiency of Korean retailers was measured using 111 general retailers and non-store retailers subject to external audits during the period 2006-2010, with retailers based on the industrial groups stipulated in the Korean Standard Industrial Classification (KSIC-9). The financial statements of the targeted retailers were collected via Kisvalue. Input variables consisted of labor costs, sales expenses, and general management expenses, current assets, and fixed assets. Meanwhile, revenues and operating profits were used as output variables. The data envelopment analysis (DEA) revealed an average of 0.5942 for the overall retailers, a total that was slightly higher than the standard value of efficiency (0.5). Thus, Korean retailers can hardly be regarded as efficient. While the efficiency of the most effective DMU (decision making unit) was estimated to be 1, the efficiency of the most ineffective DMU was measured at 0.0378. 324
As such, a clear gap in the efficiency of retailers was exposed. A look at the targeted retailers by sub-field reveals that other communication sales (including home shopping) exhibit the highest ratio of retailers whose efficiency received a score of 1. This was followed by other large general retailers (excluding department stores with an area of more than 3,000 m2 but including large-scale discount marts), department stores (with an area of more than 3,000 m2), and convenience stores. Meanwhile, supermarkets (165-3,000 m2) and other food & beverage general retailers (less than 165 m2) exhibited low efficiency. For its part, the Malmquist productivity analysis revealed that the year-on-year productivity of all retailers decreased in 2007, 2008 and 2009. It however increased by 1.9% in 2010. The productivity increase in 2010 has been attributed to the advent of technological changes advantageous to the improvement of productivity. From the standpoint of sub-fields, other communication sales (15.2%) and other large-sized general retailers (3.8%) were found to have experienced an increase in productivity during the period 2006-2010. All sub-field retailers exhibited a slight decrease in productivity in 2010 when compared with 2006.
3. Summary and implications
The comparative analysis of the efficiency of 20 global retailers resulted in an efficiency score of 1 being assigned to Shinsegae and Lotte for the five years under analysis. The productivity of both retailers also increased in 2009 and 2010 when viewed from Structural Change Analysis and Policy Suggestions for Strengthening Competitiveness of Korean Retail Industry 325 the standpoint of time-series. Thus, the efficiency of large-scale retailers in Korea was higher than that of other global retailers. Special attention should be paid to the characteristics of data envelopment analysis (DEA). The DEA has the advantage of analyzing the efficiency of a firm (or industry) by calculating an efficiency index that is based on the use of various input and output factors. On the other hand, the characteristics of DEA make it such that the discernment of efficiency can be influenced by the number of DMU (decision making units) used as targets of the efficiency assessment and the number of input and output variables. In addition, the efficiency obtained based on this analysis is regarded as relative efficiency; as such, any comparison with absolute efficiency is essentially meaningless. Thus, any unit deemed to be effective as a result of the DEA still has room for improvement as far as efficiency is concerned. Meanwhile, the comparison of the efficiency of domestic retailers uncovered a low level of efficiency in conjunction with supermarkets, where the ratio of small and medium-sized retailers is high, and other food and beverage-centered general retailers. Conversely, other communication sales, other large-sized general retailers, and department stores exhibited high levels of efficiency. Considering from the standpoint of time-series, productivity in 2010 was found to be higher than in 2006 in the other communication sales and other large general retailers mainly composed of home shopping and large discount marts. These results highlight the need to improve the efficiency of small and medium-sized retailers in order to heighten the efficiency of the overall Korean retail industry. This conclusion is 326 supported by the results of the analysis conducted in Chapter 2.
Chapter 4. Enforcement of the competitiveness of the retail industry
1. Korea’s distribution policy
Based on the overall direction of policy, Korea’s distribution policy can be divided into several distinct periods. In this regard, the legal structure of the retail industry was first established during the 1980s. The enactment of the Act on Promotion of Wholesale and Retail Trade imposed rigid regulations on the entry of large- scale retail stores. The 1990s was characterized by the pursuit of deregulation as part of the opening up of the distribution market. The Distribution Industry Development Act was enacted to transform the existing distribution policy implemented based on regulation in a more liberalized direction. Deregulation was designed to facilitate competition within the retail industry through such means as the transfer of the permit system for large-scale retail stores into a registration system, in order to effectively cope with the entry of global retailers in the domestic market made possible by the opening of the distribution market. With the competitiveness of large-sized retailers having to some degree been established in the 2000s, the focus switched to the promotion and support of increasingly struggling small-sized retailers. A support system for the activation and modernization of Structural Change Analysis and Policy Suggestions for Strengthening Competitiveness of Korean Retail Industry 327 traditional markets was prepared through the Special Act on the Promotion of Traditional Marketplaces and Shopping Districts. In addition, measures such as the development of smart shops and establishment of a supermarket POS system were implemented to help small and medium-sized retailers whose numbers had contracted in the aftermath of the opening of the distribution market. The 2010s have seen the adjustment of policies designed to protect small and medium-sized retailers as part of the ongoing support provided to such retailers. The entry of large firms in the super supermarket (SSM) sector greatly impacted the management of small and medium-sized retailers and became a source of social and political conflicts. In this regard, measures to regulate the entry of large-sized stores and commercial activities were implemented to remedy this situation. The support policies implemented to improve the competitiveness of small and medium-sized retailers have contributed to the modernization of such retailers’ facilities and the improvement of their management capability by facilitating the introduction of various support programs such as support for traditional markets, stores, and small-scale merchants. However, the government’s support for small and medium-sized retailers has, as seen in Chapters 2 and 3, failed to change the fact that the competitiveness of small and medium-sized retailers remains weak. This in turn has impeded the competitiveness of the overall Korean retail industry. The concrete limitations associated with this small and medium-sized retail industrial policy can be summarized as 328 follows. First, the strong tendency to implement issue-driven policies such as those related to the redevelopment of traditional markets and the regulations of large-scale stores rather than addressing the problems affecting the overall distribution structure has made it impossible to resolve the structural problems faced by the retail industry as a whole. In addition, the distribution infrastructure has been limited by the concentration on direct support for traditional markets and small-scale merchants. Although emphasis was placed on establishing a distribution infrastructure, the logistics infrastructure characterized by the establishment of a Joint Wholesale Logistics Center for Small-And- Medium-Sized Stores and an information network has remained relatively underdeveloped.
2. Advanced countries’ distribution policy
Japan’s distribution policy can be divided into the promotion of small and medium-sized retailers and the coordination of commercial activities. Japan responded to the worsening of the management environment for small and medium-sized retailers brought on by the rapid growth of large-scale retailers such as general merchandise stores (GMS) from the 1960s onwards by establishing the aimed at promoting small and medium-sized retailers and the that regulated the entry of large-scale retail stores in 1973. These two laws can be regarded as mutually complementary policies designed to strengthen the capacity of small and medium-sized retailers. Structural Change Analysis and Policy Suggestions for Strengthening Competitiveness of Korean Retail Industry 329
However, the failure of these two policies to stem the decline of small and medium-sized retailers resulted in a shift in the direction of promotion policy in the 1980s, with the main focus becoming the development of regional commerce through linkages with urban policy. In addition, the was abolished as part of the easing of the direct regulation of the retail industry. The establishment of the in 1998 saw the focus of the regulation of large-scale retail stores shift to the linking of coordination policy to urban policy. As such, Japan has since the 1990s focused on the linking of promotion and coordination policies to urban policy amid the Japanese economy’s entering of the era of deregulation. England responded to the decline in urban commercial zones and the crisis of small and medium-sized retailers caused by the emergence of large-scale retailers and the advent of automobile culture by implementing policies designed to restrain the establishment of large scale retail stores and activate regional commercial zones. England introduced government directives called the PPS4 (Planning Policy Statement 4) to restrain large-scale retail stores. The contents of the PPS4 are as follows. When building new retail store facilities in a suburban area, consideration should be given to whether the facility will greatly impact the vitality and existence of the downtown area and to the cumulative past and future effects of the development of large-scale retail stores development and the impact they will have on local consumers’ right of choice and convenience. In addition, the government has also 330 recommended that competition tests designed to limit the expansion of large-scale retailer’s commercial power in one area be implemented. Meanwhile, the decrease in commercial functions characterized by the advent of an increasing number of empty stores in the downtown area was countered by a rise in voluntary collaborative organizations within the private sector designed to cope with this phenomenon. This was the start of the Town Center Management (TCM) system. The English government has supported such endeavors which it sees as being characterized by a high degree of effectiveness.
3. Improvement of distribution policy
The inherent structural weakness of small and medium-sized retailers makes it difficult to introduce the economies of scale widely regarded as an important factor in secure the competitiveness of the retail industry. In this regard, future policy designed to strengthen the competiveness of small and medium- sized retailers should include alternatives through which the structural weakness of small and medium-sized retailers can be overcome. Given the difficulties associated with expanding the size of individual retailers, it becomes necessary to overcome the problems caused by the weakness of small and medium-sized retailers by making full use of the positive effects of size expansion created through the organization and collaboration of small and medium-sized retailers. Here, the focus should be on Structural Change Analysis and Policy Suggestions for Strengthening Competitiveness of Korean Retail Industry 331 the establishment of logistics and informatization infrastructures. The development of joint brands amongst small and medium- sized retailers will also contribute to strengthening these entities. To this end, it becomes necessary to review the establishment of an integrated joint logistics center widely regarded as an important step in ensuring the buying power of small and medium-sized retailers. Such a policy is deemed to be essential to the success of the ongoing development of SMART (nadle) shops. Furthermore, the rapid expansion of large-sized retailers private brand (PB) products that boast strong price competitiveness makes it necessary to support small and medium-sized retailers’ development of PB products. The development of PB products by small and medium-sized retailers can be more smoothly carried out when an integrated joint logistics center is established. Alternatively, it can be implemented through the establishment of regional supermarket cooperative associations and small and medium sized trade union logistics centers. However, the presence of supermarket cooperative associations should not take away the need to ensure that all retailers’ pursue the development of PB products. The establishment of an integrated joint logistics center and the development of PB products for small and medium-sized retailers can be regarded as a tool that heightens competitiveness by organizing small and medium-sized retailers. However, these are mainly focused on food retailers and they are not an effective means of responding to the establishment of regional commerce zones at the macroscopic level. It is necessary to review the activation of regional commercial zones as a tool through which 332 to strengthen the competitiveness of small and medium-sized retailers, including food retailers, and contribute to the vitalization of regional economy. As various stakeholders will be involved with this policy measure, short-term results may be hard to come by. However, the stagnation of the central commerce zone already experienced by advanced countries has begun to gradually emerge in Korea as well amid changes in the demographic structure. In this regard, other effects such as environmental improvement and economic vitalization in individual regions can be expected to be brought about as a result of this policy measure. As such, it is necessary to review the implementation of this policy measure from a long-term standpoint. Research Report 2011-603
Promoting Technology Commercialization in the Korean Private Sector
Jong-Bok Park, Yoonae Cho, Sang-Kyu Lee, Yeolyong Sung, and Youngkwan Kwon
The Efficiency of Investment in Regional Manufacturing Industries and Analysis of its Effectiveness 335
Chapter 1. Introduction
Although the private sector accounts for a large proportion of R&D investment and private firms play the role of industrializing technologies, the topic of firms’ technology commercialization has not been studied in sufficient depth. With this in mind, the present study sets out to examine the actual state of technology commercialization at the private firm level, and to derive the factors determining or influencing success in technology commercialization at the level of the projects conducted by firms. The study also searches for measures to improve technology commercialization-related support policies for private firms. This study can be distinguished from previous research by the fact that it can help further improve the support policies for technology commercialization. More importantly, this study constitutes the first detailed investigation and analysis of the basic statistics pertaining to the various stages of private firms’ technology commercialization activities. Contrary to existing 336 studies that have tended to focus their analysis on the firm unit, the present study specifically hones in on the project unit level. In addition, this study established the actual manufacture of new release products as the condition for the determination of the success of technology commercialization, and considered the variables related to policy support for private firms’ technology commercialization in a broadened manner. While Chapter 2 of this delves into the theoretical concepts of private firms’ technology commercialization, Chapter 3 deals with the support policies for enterprises’ technology commercialization in advanced countries. Chapter 4 reviews the actual state of Korean firms’ technology commercialization activities and of support policy. Chapter 5 analyzes the factors influencing the success of Korean firms’ technology commercialization at the project unit. Chapter 6 suggests the desired policy direction for promoting private firms’ technology commercialization, detailed support measures, and the future tasks that must be addressed in order to improve the related institutions. In Chapters 4 and 5, a survey of firms that have implemented technology commercialization projects within the past 5 years is conducted. In the end, 366 firms were retained. The survey consisted of the participant firms identifying each case of technology commercialization as either having been carried out or ended prematurely. The 366 firms were found to have engaged in 496 instances of technology commercialization. While 357 cases were deemed a success, 139 were not seen through to fruition. Promoting Technology Commercialization in the Korean Private Sector 337
Chapter 2. Theoretical review of private firms’ technology commercialization
Although various definitions of technology commercialization have been posited, the process consists of the development, production, and sale of a product that is based on a particular technology or the improvement of a related technology. The conditions established to determine the success of a technology commercialization project differ depending on the scope of technology commercialization applied. Various models of the technology commercialization process have been suggested. In this regard, Jolly (1997)’s technology commercialization model can be viewed as representative. Based on the five sub-processes and four bridges theory model, an investigation of the actual state of technology commercialization and an empirical analysis were conducted.1) Jolly’s model of technology commercialization maintains that the success of bridge activities exhibits the actual progression and success of each stage of technology commercialization. This study identified the scope of technology commercialization as spanning from the imagining stage (application idea) to the incubating (manufacturing of prototype) and demonstrating stages (manufacturing of new release product). The condition set for the determination of the success of technology commercialization was whether the process moved to
1) The five sub-processes to increase the value of technology consist of the imagining, incubating, demonstrating, promoting and sustaining stages. These detailed stages are connected by four bridge processes. 338 the promoting stage. More specifically, this involved, from the standpoint of technology development, the successful manufacture of new release products, and from a business development standpoint, the achievement of market entry or securing of a plan for market entry. The factors determining or influencing the success of a technology commercialization project can be divided into technology factors, the organizational strategy for technology commercialization, and the internal and external environments faced by the main actors in the development of the technology. Important factors related to the external environment include the market and policy environments. Meanwhile, the government’s policy plays a decisive role in establishing an environment conducive to the promotion technology commercialization. The government’s intervention in private firms’ technology commercialization activities can be justified in various cases, including market failure, system failure, and coordination failure. Technology commercialization policy should include all the sectors where these three kinds of failure can emerge. The technology acquisition and early commercialization stage can be regarded as the sphere in which technology commercialization by private firms runs a higher risk of failure.
Chapter 3. Analysis of enterprise support policy and case study
The United States, Japan, and England have led the way in Promoting Technology Commercialization in the Korean Private Sector 339 terms of policy development and financial investment in the sector of technology commercialization. In this regard, their support policies for technology commercialization in terms of the objectives of the related institutions and the role of the implementing agencies can be divided as follows: 1) R&D enforcement, 2) financial support, 3) business start-up support, 4) partnership extension, 5) support for firm infrastructure, and 6) management of technology (refer to
). In accordance with its Ohio Technology-Based Economic Development Programs, the state of Ohio has implemented a tailored enterprise support program that was designed based on the five sub-processes of technology commercialization framework suggested by Jolly. At the imaging stage, the state of Ohio has sought to establish regional R&D clusters, activate joint research, and attract the research centers needed to generate and develop ideas for technology commercialization. At the incubating stage, it has focused on the provision of support for applied research, the provision of financial support, including the funds needed to manufacture release products and establish a business plan, and provided broad infrastructure in support of firms at the early stage of startup or market entry. At the demonstrating stage, it has provided sources of funding that can mitigate the commercialization costs of new products derived from national R&D projects and investment capital from the private sector for the firms at the early development level. At the promoting stage, it has provided funds to promote the innovation activities of firms that have entered the market entry level. Lastly, at the sustaining stage, it has implemented policy support designed to 340
Outline of the support policies for enterprises technology commercialization in advanced countries
The contents of enterprise support policies Support for technology innovation and stage-based R&D support new technology development by small & medium sized enterprises The Support for selection of partnership organizations and United Partnership composition of associations States support Support for forums on technology uses by federal research institutes Support for Support for contract and negotiation related education firm Support for the use of public institutions’ facilities and infrastructure the establishment of small-scale pilot factories R&D support Support for new technology and the business activities of small & medium sized enterprises Management of risk-taking fund for technology Financial development support Fund brokerage, issue of private placement, and financial products for knowledge property rights Partnership Support for industry-academy-government support cooperation and establishment of an international knowledge property system Japan Support for technology investigation and evaluation, Support for establishment of a management strategy and firm commercialization model infrastructure Management of industrial technology fellowship program (education of human resources responsible for the management of technology) Strengthening the linkages with (international) Management technology standardization of technology Management of idle knowledge property rights and licensing brokerage knowledge property rights Support for joint R&D in the field of strategic R&D support technology Support for research on the assessment of technology feasibility and development of innovative products Establishment of policy and regulations based on social cooperation United Support for linkage between enterprises, research Kingd Partnership support institutes, and specialized human resources om Support for cooperation between enterprises such as technology development and cooperation, and establishment of marketing strategies Support for Single window for enterprise support such as the firm provision of information services, technology transfers, infrastructure and M&A brokerage Promoting Technology Commercialization in the Korean Private Sector 341 continuously promote technology innovation and attract new investment from the outside.
Chapter 4. Actual state of Korean firms’ technology commercialization and enterprise support policy
1. The actual state of Korean firms’ technology commercialization and related problems
The commercializing ratio of technology is influenced by the characteristics of the technology commercialization process, the attributes of targeted technology for commercialization, technology acquisition methods, enterprise’s technology commercialization implementation capacity and government support. In terms of the characteristics of Korean firms’ technology commercialization process, a high ratio (51.8%) of technology commercialization was found to start at the manufacturing stage of the release product, a stage where the emphasis is generally on improving an existing product. It was revealed that many cases of failed technology commercialization began at the basic research (62.6%) stage. In addition, the study also found that the later the stage at which technology commercialization began, the shorter the implementation period became and the more costs increased. Furthermore, the greatest difficulties were uncovered at the applied research (specific use) stage. 342
A look at the attributes of the technology targeted for commercialization by Korean firms reveals that the majority were in the growth period of the lifecycle (technology/product: 48.0%/ 45.2%). The majority of suspended cases occurred at the introductory stage (48.9%/ 45.3%). In most cases, the selection of the technology targeted for commercialization occurred when both complementary and alternative technology existed. As far as the method employed by Korean firms to acquire the commercialized technology was concerned, the study found that 67.9% of the technology commercialization related ideas had been obtained from firms’ own R&D departments. 80% of Korean firms were found to have acquired their technologies through self- development. Universities occupied a heavy ratio of domestic partnerships that involved joint or consigned development (approximately 50%). Meanwhile, a significant ratio of SMEs was also found to be involved in domestic partnerships. For their part, a large ratio of large enterprises was engaged in international partnerships. However, large firms tended to partner with research institutes rather than universities. The number of firms that established any kind of partnership at the technology commercialization stage continued to decrease. Leaving aside the success of technology commercialization, the study found a high overall usage ratio for the acquired technology, namely 81.0% for the technology acquired through self development and 64.1% for the technology acquired through joint development. Thus, a high usage rate was recorded in cases where firms directly or indirectly participated in technology development. Private firms’ implementation of technology commercialization Promoting Technology Commercialization in the Korean Private Sector 343 requires clear decision making on the part of top management, the necessary technologies, funds, specialized manpower, information related to the business and market, and cooperative relationships with external partners. The examination of Korean firms’ capacity to implement technology commercialization revealed that top management’s implementation desire was sufficient, with a score of 4.15 on a 5 point scale recorded. However, the score of other factors such as the level of employment of specialized manpower, and in particular the human resources responsible for the management of technology, was lower than that assigned to the other factors. Viewed from the standpoint of firm size, firms with less than 50 employees scored lower than the overall average in terms of needed funds, specialized manpower, and cooperative partnership. Meanwhile, firms with 50-300 employees scored lower than the overall average in all sectors except needed funds and human resources responsible for technology development. Finally, firms with more than 300 employees scored below the overall average in conjunction with the necessary technology factor.
2. The current state of the support system and policy for private firms’ technology commercialization
The government has implemented various support programs related to technology transfers and commercialization. These can be divided into support for technology transfer (trade), support for applied research, support for commercialization, procurement support, and support for fundraising. 344
Support for technology transfer (trade) is designed to smoothly transfer R&D outcomes from universities and government-funded research institutes to firms. Although this process does not directly influence technology commercialization, as it is related to the technology targeted for commercialization it nevertheless exercises an indirect influence over it. Support for applied research is designed to improve and supplement specific technologies deemed feasible for technology commercialization. The results of R&D, which generally becomes the targets of technology commercialization, are not developed for specific uses. Therefore, additional R&D support must be provided in order to commercialize the results of R&D. Support for commercialization is related to the manufacturing of prototypes or release products, and includes the engineering and manufacturing of the release product as well as the establishment of a production line. While support for technology commercialization is designed from the supply side, procurement support is a significantly beneficial demand-side policy that facilitates technology development and commercialization by decreasing uncertainty within the market. Procurement support influences technology commercialization by providing signals to buyers to trust the product based on its certification of new products and technology as well as communal purchase. Since the 2000s, the Korean government has established a fund-of-funds designed to expand investment support for venture capital and financial support for startups. However, in order to expand investment in new technology transfers and Promoting Technology Commercialization in the Korean Private Sector 345 commercialization at the early stage, where the securing of funds has remained difficult despite support for venture capital such as the fund-of-funds, the government has drawn up and implemented financial schemes for goal-oriented technology such as the establishment of investment funds for new growth engines. Although various technology commercialization support policies have been implemented, there has been a lack of linkages between the detailed stages of technology commercialization and the support programs. The effectiveness of support policy has also been decreased by the fact that similar programs have been implemented by different government departments. In addition, funds have been concentrated on the growth stage characterized by high profitability, in other words, on the post technology commercialization stage. Thus, inherent limitations have become evident when it comes to the response to the lack of funds during the technology commercialization process.
Chapter 5. Analysis of factors determining the success of private firms’ technology commercialization projects
Based on a survey of private firms and the supplementation of existing studies using a Probit regression model, the factors influencing the success of technology commercialization projects were explored in this chapter. In order to derive policy implications related to technology commercialization, the 346 researchers conducted an empirical analysis that was focused on the external environment factors surrounding the organization rather than the latter’s internal factors. In other words, the study focused on the lifecycle of the technology targeted for technology commercialization, starting point of the technological commercialization project, and the attributes of the market targeted by the technology commercialization project. Government policy has been regarded as an important environmental factor influencing the success of technology commercialization projects implemented by private firms. With this in mind, related government policies were also introduced, and their influence verified. The Probit regression revealed a clear relationship between the length of the project implementation period and the technology commercialization success rate. In addition, it was revealed that the human resources responsible for the management of technology played a more positive role in the success of technology commercialization than the human resources engaged in technology development. Furthermore, the closer the starting point of the project to the basic research stage, the lower the success rate became. In addition, government regulations (-) directly related to technology innovation activities in related industries such as those concerning the size of the targeted market (+) and environmental standards were found to be important factors. Lastly, among the government’s support policies related to technology commercialization, only the certification of new product and technology system and commercialization support program positively influenced the Promoting Technology Commercialization in the Korean Private Sector 347
Influential relationship between government support and the success of commercialization: Probit regression
Influential Support for technology commercialization success relationship Remarks
Preferred procurement support Policy system influencing demand Certification of new technology/product system Positive (+)
Exhibited a significant Policy related Slightly difference in to the Investment and financing support positive (+) the analysis of provision of variance funds (ANOVA)
Technology guarantee support Support for the commercialization of ideas
Support for Support for the linkage of technology commercialization commercializa tion activities policy Support for the development of commercialization Positive (+)
Support for technology assessment
success rate of the technology commercialization project. Thus, there is a strong need to establish a policy response (refer to
). 348
Chapter 6. Policy tasks to activate technology commercialization in the private sector2)
1. Direction of policy needed to activate technology commercialization by private firms
Strengthening the basis for the promotion of outcome- based technology commercialization The support policy for commercialization at the enterprise level in Korea was found to have an impact in terms of the provision of motivation for commercialization, the scope of implementation, and the speed of commercialization. However, enterprise support policies did not greatly influence outcomes, including the success of commercialization. These results can be explained by the fact that enterprise support policies have been focused on removing obstacles that emerge during the early stages of technology innovation, such as R&D. However, the scope and degree of enterprise support policies has decreased as technology commercialization progresses to the later stages. In addition, although the release of a product to the market through the technology commercialization process involves great time and money as well as high risk, the majority of enterprise support policies for technology commercialization have stringently insisted on visible outcomes, such as an increase in sales or job creation, within 2-3 years. As a result, there has
2. The policy response structure needed to activate technology commercialization in the private sector, detailed support policies and systems, as well as the implementation stage and improvement tasks at each stage can be found in and . Promoting Technology Commercialization in the Korean Private Sector 349 emerged a phenomenon that can be referred to as the picking of winners in which government funds have been granted to some firms not because need significant government support but because they could produce short term results. The enterprise support programs and policies implemented by the government in conjunction with R&D and technology commercialization have emphasized market principles and the maximization of outcomes creation. In this regard, there is a need to actualize a system that is capable of creating economic outcomes based on actual market principles.
Move towards an integrated support policy that takes into consideration the characteristics of each commercialization stage The government’s enterprise support policy has not greatly influenced the success of technology commercialization because the government has overlooked the fact that this process is composed of various detailed stages, each of which has its own characteristics such as survival rate, needed funds, required timeframe, and obstacles. The government has expanded its support for tailored packages designed to prevent the possibility of government support being lost between the stages of technology innovation due to market failure. In principle, this sounds ideal. However, the improper delivery of the necessary funds or incorrect establishment of the budget allocation structure can lead to the suspension of technology commercialization. In addition, suspension can also occur when the budget cannot be allocated 350 at a specific stage of technology commercialization. As such, an approach that takes into account the characteristics at each stage should be introduced in conjunction with enterprise support programs. This can be achieved by identifying a scope of support that is based on the detailed stages of technology commercialization and altering support methods. This heightens the success rate of commercialization by providing an appropriate amount of comprehensive support.
2. Detailed support policy and improvement tasks
(1) Enforcement of enterprises’ technology commercialization implementation capacity
Enterprises’ technology commercialization implementation capacity is determined by factors such as human resources, technology power, fundraising, and information power. Support should be provided for the strengthening of all these elements. There is a need to educate human resources responsible for the management of technology. Although they have greatly contributed to technology commercialization by Korean firms, the human resources responsible for the management of technology have been the most glaring weakness as far as technology commercialization capacity is concerned. In this regard, steady training should be designed to strengthen the competency of the human resources responsible for the management of technology in the actual field. Moreover, the related curriculums must also be strengthened in order to heighten onsite efficiency. A quantitative Promoting Technology Commercialization in the Korean Private Sector 351 increase in the mid-level human resources responsible for the management of technology must also be brought about. That being said, a heavy emphasis should also be placed on the training of top-level masters of technology commercialization (provisional name) possessing a global mindset. Additional R&D support is required to secure technology. Although various additional R&D support programs have been implemented in many departments, enterprises have pointed out that such support remains insufficient. The survey found that the applied research stage remained the most complex one. The causes of such difficulties included the risk of technology development failure and the lack of funds. In this regard, it is necessary to provide additional R&D support for the promotion of technology commercialization. It is particularly important to expand additional R&D support for technology transfers so as to ensure that the technologies developed by universities and public research institutes do not become extinct The risks associated with technology development decrease as technology commercialization unfolds; however, the related costs steadily increase. In this regard, it becomes necessary to activate technology financing. The majority of domestic technology financing consist of policy funds; meanwhile, the private sector technology finance market remains very weak due to a lack of venture capital and banks’ provision of asset-based loans. In addition, government-led technology commercialization funds have not invested enough in the early stages of technology commercialization. Therefore, it becomes incumbent on the government and other players to activate technology financing for 352 market participants in order to reduce their share of the risk and attract the participation of private capital. To this end, although government-led technology commercialization fund programs should be activated, these should be based on a thorough analysis of the flow of funds required at various stages of the technology commercialization process. For example, in the case of a new growth engine fund program, the focus should be on the expansion of investment in the early stages of technology commercialization. The heightening of the information power of enterprises will require the establishment of a technology-related information infrastructure. The NTB (Network for Tech-Biz) responsible for supporting technology commercialization both online and offline has already been established. However, this system has increased information registration and search costs and caused confusion as well as inconvenience amongst market participants due to the fact that it was established in a decentralized manner that approaches the technology trade information system from the standpoint of individual departments and organizations. The NTB should develop into an integrated information infrastructure capable of providing the various forms of support needed throughout the numerous technology commercialization stages.
(2) Establishment of cooperative networks and enhancement of cooperation strength
The establishment of cooperation networks and strengthening of such cooperation can be achieved based on the activation of Promoting Technology Commercialization in the Korean Private Sector 353 global open innovation and the promotion of industry-academy- research cooperation. The increased speed of the development of technology has resulted in technology innovation becoming more common, and in the spread of the convergence of technology. As a result, global open innovation that goes beyond national borders has become an important element of technology innovation strategies. However, the ratio of Korean enterprises engaged in cooperation related to innovation activities is one of the lowest amongst OECD members. In this regard, cooperation with other countries has been even rarer. Therefore, it is necessary to establish networks between innovation actors through the NTB and to strengthen problem-solving capabilities via the use of group intelligence. In addition, the functions and roles of the NTB should be expanded and strengthened so that global open innovation is effectively implemented through the K-GIN (Korea- Global Innovation Network) connected to technology cooperation hubs abroad. Contrary to technology development, technology commercialization is aimed at producing a specific good. As such, various types of industry-academy-research cooperation involving numerous cooperation partners are required to smoothly implement technology commercialization. The concept of joint R&D ventures centering on national R&D programs is currently being promoted. However, the IMD (2011) revealed that Korea ranked 25th in terms of knowledge transfers between enterprises and universities and 31st in terms of technology cooperation between enterprises. The promotion of technology commercialization 354 through industry-academy-research cooperation is predicated on the smooth implementation of knowledge transfers; this in turn can be achieved by providing support for the activities of the main actors engaged in innovation and the promotion of small- scale meetings between enterprises within the clusters.
(3) Improvement of related institutions and establishment of infrastructure
The improvement of related institutions and infrastructure requires the establishment of statistics pertaining to technology commercialization activities within the private sector, the strengthening of the role of service enterprises supporting technology commercialization and the expansion of the infrastructure needed to facilitate the certification of technology commercialization. First, the government’s ability to effectively support the private sector’s technology commercialization activities is predicated on the development of a precise and continuous analysis of the actual state and problems associated with such activities. To this end, organizations such as the Korea Chamber of Commerce & Industry (KCCI) and Korea Industrial Technology Association (KOITA) have implemented, albeit in a limited manner, an investigation of the actual state of the management of technology. The Korean government has also made efforts to analyze the current state of technology transfers and commercialization amongst private firms. However, such undertakings have rarely moved beyond the pilot program stage. In this regard, there is an Promoting Technology Commercialization in the Korean Private Sector 355 urgent need to establish an improved investigation and analysis system where the technological commercialization activities of private firms are concerned. Second, there is a need to strengthen the role of service enterprises that support technology commercialization. Technology commercialization requires bridging activities capable of connecting individual stages. Various technology commercialization capabilities are required to implement these bridging activities. Here, contracts should be provided to service enterprises capable of supporting technology commercialization. The Korean government has managed a technology trade agency designation system since 2000. However, small scale technology trade agencies have focused on providing simple services such as the introduction of technologies to sellers and buyers. The heightening of the quality of technology commercialization support services can be brought about via the nurturing of enterprises specialized in technology commercialization capable of, based on the concepts of enlargement and specialization, providing integrated business services that cover the entire technology commercialization process, including the business plan, management of technology, and investment. This should be brought about, in accordance with Article 18 of the Special Act on the Support of Science and Engineering Manpower for Strengthening National Science and Technology Competitiveness, through the creation of linkages with the development of and support for the R&D service industry. In addition, it is also necessary to expand the infrastructure in a manner that promotes the verification activities associated with 356 technology commercialization. In order to ascertain the market usage of the developed technology, a firm must conduct activities such as applied (specific use) research, product testing, and the manufacturing of new release products, prior to market entry. However, small & medium enterprises (SME) lacking in human resources, funds, and facility investment inevitably have a hard time smoothly carrying out these verification activities. Therefore, it is necessary to establish policy measures in support of SMEs to realize potential of technology commercialization. These can include help with the rental of highly-advanced equipment and facilities, and support for the establishment of a small-scale test factory. To this end, there is an urgent need to provide information related to the usage of equipment and facilities, to assess usage performance, and to establish a facility rental support system that includes various support services such as education programs related to the management of equipment and facilities.
(4) Creation of demand
Viewed from the standpoint of a firm developing or producing a technology, the ability to secure an early market can be regarded as a strong impetus facilitating technology commercialization. A preferred procurement system which supports procurement by government and public organizations is already in place. Moreover, a certification system capable of enabling purchase by providing buyers with signals that the product or technology can be trusted based on its certification as an NEP (new excellent product) or NET (new excellent Promoting Technology Commercialization in the Korean Private Sector 357 technology) also exists. However, the empirical analysis conducted in Chapter 5 revealed that while the preferred procurement system had a statistically insignificant impact on the success rate of technology commercialization, the certification system did in fact have a positive influence on the success rate. Therefore, the technological and functional completeness of technologies certified as having a bright future, namely those regarded as NET or green technology, can be brought about through the strengthening of support for the commercialization of certified technology. In addition, consideration should also be given to the enhancement of overall efficiency through the integration of certification-targeted products such as new products, new technology, green products, green technology, and the products and technology developed by SMEs.
(5) The efficient use of the government’s R&D support system
The successful heightening of the efficient use of the government’s R&D support system can be achieved through the strengthening of the R&D planning function directly linked to the market and the establishment of an integrated support system for technology commercialization. First, the efficiency of R&D investment is decreased when R&D outputs fail to be commercialized due to a lack of marketability. Thus, R&D pre-planning is important. R&D pre-planning is currently regarded as one of the long-term tasks of national R&D programs. Nevertheless, one finds many cases in which a technology that has been developed is unable to find a market 358 because of a lack of proper economic assessment. In addition, although government support for R&D planning has been forthcoming, such support has not been sufficient for SMEs with a lack of R&D planning capability. As such, it is necessary to ensure the internal stability required to reflect the opinions of the industrial sector in the national programs related to R&D planning, to expand R&D planning support for SMEs, and to effectively provide the market and technology information needed during the R&D planning stage. Lastly, there is a need to establish an integrated support system for technology commercialization. The successful implementation of the technology commercialization requires the conduct of bridging activities capable of connecting the various stages of this process. In this regard, the main actors involved in the implementation of technology commercialization should persuade the stakeholders such as the government, external investors, and the top decision-makers within enterprises to deliver the resources they require at the current stage of commercialization. The government support for technology commercialization has been carried out through various programs that cover wide range of industries from technology development to the manufacturing of a release product. However, no clear linkages have been established between these programs; moreover, cooperation between government departments has been limited in scope. The strengthening of the monitoring and performance analysis functions designed to heighten mutual linkages and synergy effects of enterprise support programs should be brought about in a manner that encompasses all government departments involved The Efficiency of Investment in Regional Manufacturing Industries and Analysis of its Effectiveness 359 with technology commercialization. Moreover, efforts should be made to increase the survival rate of technology commercialization from the basic research to the release product stages.
Research Report 2011-604
Industrialization Conditions of a New Growth Engine and It’s Policy Implications
Eun-Mi Jung, Suk-In Chang, Jong-Ki Kim, Kyung-You Kim and Im-Ja Rhee
The Efficiency of Investment in Regional Manufacturing Industries and Analysis of its Effectiveness 363
Chapter 1. Introduction
Research Purpose The purpose of this study is twofold. The first is to examine the definition and significance of new growth engines from an industrial economic perspective. To do this, the concept of new growth engines were defined and materialized, and the industrialization conditions for new growth engines were proposed. The second is that an evaluation index was applied to the range of industrialization conditions to examine the influence of the different factors on the industrialization of new growth engines in South Korea. Through this process, we attempted to deduce the policy implications and tasks that could increase the effectiveness of new-growth industrialization by development and type.
Expected Outcome and Limitations This research identified the conditions and major factors by the 364 level of industrial (technological) development to promote the industrial economic performance of new growth engines. It has significance as a policy research that will enable the efficient development of new growth engines. Especially, the industrialization evaluation index and the conditions for industrialization that will increase the performance of the new growth engines can be used for discovering and supporting new growth engines in the future as a part of an evaluation index development tool. In addition, the major concepts and indices used to determine the industrialization conditions and the components of industrialization can serve as basic research tools for understanding the performance and influences of the new growth engines from a long-term and macro perspective. Finally, by aligning the motives of new-growth-engine industrialization with policy, a policy paradigm for creating new growth engines in the South Korean economy was proposed. Furthermore, it is expected that this research will be used as a basic research for guaranteeing the dynamism and continuity of new growth engines in the development of new industries. On the other hand, this research is not an interim evaluation of the minor businesses within the new growth engines being pursued, and thus has the limitation of stopping at case analysis attempts of the industrialization conditions and smartphones. Despite such limitations, however, this research is expected to hold significance as a starting piece of basic research for pursuing effective new growth engines in the future. Industrialization Conditions of a New Growth Engine and It’s Policy Implications 365
Chapter 2. Theoretical Discussion on the Industrialization of New Growth Engines
Definition of New Growth Engines and the Motives and Types of Industrialization This research defines new growth engines as “new technology, new products, and new services that can overcome the growth limits of major industries at a certain point in time, and that can develop into the major industries of the future to contribute towards continuous economic growth and life quality enhancement through the generation of good quality jobs, growth of businesses, and domination of the world market.” Here, a “certain point in time” signifies that the creation and development of new growth engines may change according to the social conditions, among others, over time. New growth engines appear both continuously and discontinuously and may therefore appear on various development levels at a certain point in time. Thus, policies for new growth engines can have various spectra, ranging from within three years (short-term) to more than ten years (long-term). On the other hand, to create new growth engines and to industrialize them, it is important to consider the industries’ relevance to the foundations of the existing economy/industries. At the same time, one must aim towards strengthening and sophisticating the industries’ competitiveness in the mid-long term. Such processes of exploring and creating new growth engines hold significance as strategies for strengthening the current industrial structure and competitiveness. Simultaneously, 366 these processes emphasize that while discovering and strengthening new products and industries, the industrial structure must also be sophisticated as well. The motives that make the industrialization of new growth engines possible vary greatly, but they can largely be divided into the changes in the demand, the development of technology, and the changes in the social/political environments. With the first motive (changes in market conditions and demand), as the tastes of the society and the consumers change, new demands develop. Industries or businesses respond to such changes, thus leading to the emergence of new growth engines. As for the second motive, the rapid development of technology along with its fusion and convergence, the development of new fusion technology leads to the commercialization of new products and services along with innovative value creation and productivity enhancement.
Motives and policy directions for the industrialization of new growth engines
Demand Pull
Electric cars, Mobile, IPTV biopharmaceuticals (rapid response of (support governmental Demand - Demand development of regulations) Technology- Social-policy driven type -driven type technology)
Socal Needs, Technology Push Technology - Social-policy- Regulations driven type
Solar energy (support growth of the initial market) Industrialization Conditions of a New Growth Engine and It's Policy Implications 367
For the third motive, the changes in the social needs and policies, an example is in order. The demands for safety and health as well as the significance of energy efficiency and the environment are rising, resulting in the establishment of stronger environmental regulations. This has ultimately accelerated the growth in the demand for new/renewable energy, high-efficiency materials, etc., industrializing these industries into new growth engines. The motives of new-growth-engine industrialization may differ in terms of size or level of influence on the different subcategory business sectors of the new growth engine. Accordingly, this research holds that the industrialization of new growth engines has different influences on different industries, and thus also holds that policies must be differentiated accordingly.
Method of Analysis This research classifies the major factors that determine the industrialization of new growth engines as prerequisite, necessary, or sufficient conditions. The prerequisite condition of industrialization is demand, a basic condition for establishing a certain idea or technology. The necessary conditions for industrialization are the conditions that will enable a business to penetrate a market and to increase its competitiveness within that market, such as production. The sufficient conditions are the conditions that will enable the smooth and effective industrialization of new growth engines. In this regard, whether a cyclical industrial ecosystem exists or not is very important. In this research, to examine the industrialization conditions for 368
Major Indices of the Conditions Needed for the Industrialization of New Growth Engines
Major Indices Demand (prerequisite Demand size and growth patterns,level and condition) characteristics of Korean consumers, global demand Production Human, raw, knowledge, and financial- (necessary condition) resourcesinfrastructure Development of ecosystem Level and scope of development of related (sufficient condition) industries,possibility of building new business models
new growth engines, major indices were created. Among these indices, indices with high applicability were chosen. It is expected that the evaluation of the conditions needed for industrialization will help in the analysis of the strategies of major businesses in response to the industrialization of new growth engines, and will help deduce the important policy factors needed for the continuous growth of the related industries. This research used the survey results of businesses pursuing new growth businesses or preparing to enter new growth industries in South Korea. The data were used to examine the conditions for the industrialization of new growth engines, and the major factors influencing these. Parallel to this, various conditions were analyzed in depth in specific cases, such as electric cars and smartphones, in an attempt to classify the industrialization of new growth engines into different types. Industrialization Conditions of a New Growth Engine and It's Policy Implications 369
Chapter 3. Diagnosis of Major Conditions for the Industrialization of New Growth Engines
Detailed Analysis In an attempt to determine the roles and levels of influence of the major factors affecting the industrialization of new growth engines, this research carried out regression analysis of the surveys of major businesses pursuing new growth engines. The analysis results show that in South Korea of late, production conditions such as R&D, investment in equipment, and human resources in general have had a positive correlation with industrialization. Majority of the ecosystem conditions, however, such as the connection between the vertical industries and the government’s R&D support, do not have a significant relationship in most industries. There is a low correlation between ecosystem development and industrialization even in the green-technology industries in the early growth stages, such as the solar-energy market, and in the high-technology-converging industries based on IT, in which South Korea is strong. Looking at the major indices and industrialization level according to the development stage of the industries, all the production conditions have a significant positive correlation with industrialization on all the development stages. It was discovered, however, that the ecosystem development conditions do not have a significant relation. The analysis by business size showed that large, middle-sized, and small businesses all have statistically significant positive correlations with the production conditions, but most of them have weak negative correlations or low 370 statistical significance with the development stage of ecosystems. To conclude, of the conditions for industrialization, most of the production conditions (necessary conditions) have a significant positive correlation with industrialization. The new-growth-driving companies of South Korea have adequate levels of R&D, capital, human resources, and other factors that form the foundation of innovation used to increase revenues and performance. On the other hand, connection to the vertical industries, the government’s R&D support, and the other ecosystem conditions within South Korea were found not to have significant relations with industrialization, regardless of the characteristics of the business. This is most likely due to the fact that the development of the ecosystem is either insufficient or insufficient to serve as a basic infrastructure for accelerating the industrialization of new growth engines. Accordingly, the research results indicate that for the industrialization of new growth engines to take place, the sufficient conditions - development of ecosystems - need to be strengthened. Thus, the raw materials, components, buyers, and end consumers within and outside South Korea for each new- growth-driving industry must grow simultaneously. Also, strengthening of close connections, the innovative culture, and social networks among organizations related to regulations, insurance, etc. is expected to accelerate the industrialization of new growth engines.
Analysis of the Industrialization Conditions for Electric Cars Electric cars are being newly perceived as major eco-friendly Industrialization Conditions of a New Growth Engine and It's Policy Implications 371 vehicles, and with the recent development of the battery technology, the commercialization of electric cars is expected to occur faster than expected, making the market outlook very positive. The electric-car industry is currently in the introduction stage and is undergoing R&D to commercialize the components, materials, the final car, etc. In addition, due to the structural change in electric cars, which no longer need internal-combustion engines, it is expected that there will be a large change in the industry as a whole across R&D, purchases, production, sales, after-service, etc. The South Korean automobile industry’s shift towards electric cars is driven by policy factors such as environmental regulations and technology development, but the demand is not changing very actively. Accordingly, business strategies or government policies for the industrialization of the electric-car business must be carried out with focus on activating the demand. South Korea is expecting to launch its first domestic electric car in 2012. Although South Korea is highly industrialized in terms of the hardware of electric cars, such as car assembly, component parts, and materials, its development in charging services, infrastructure, ITS, and other industries is relatively slower than that in other developed countries. The growth potential or future outlook for electric cars is very bright. Production factors such as investment in R&D or human resources are becoming more robust in car assembly, component parts, and materials while the investment in smart grids, charging services, etc. remain weak. Even the government’s R&D support is concentrated on the hardware aspects. Furthermore, as R&D is 372 taking place with focus on businesses that produce complete cars, limited networks are being created around these business’s partner businesses. South Korea’s electric-car industry maintains the existing internal-combustion processes, preventing harmonious cooperation with businesses such as the venture businesses within the industry. Thus, there is a lack of penetration based on various business models or investment in this industry.
Analysis of the Industrialization Conditions for Smartphones The smartphone industry has substituted the existing feature phone industry, and the demand for smartphones is increasing rapidly. Thus, it is in the beginning stages of growth as a new industry, and with the rapid development of the converging technology and networks, the industrial structure is changing rapidly. The smartphone industry and the industries surrounding it experienced increased growth with the development of IT and the converging technology. It is expected that the growth of this market will become high while the competition between global- market-leading businesses is intensifying. The key success factor in the feature phone market was the ability to create high-technology cell phones, but the smartphone, being a converging technology product, requires not only high- technology hardware but also an industrial ecosystem that also produces high-technology software. Moreover, as smartphones, tablet PCs, and many other mobile devices are connected through one operating system, it is becoming more important to secure a future platform. South Korea’s software industry, however, is still in its Industrialization Conditions of a New Growth Engine and It's Policy Implications 373 beginning stages of industrialization, placing in the mid-low rankings among the OECD countries in terms of investment and efficiency in software R&D. Although South Korea has world-class core technologies in WiBro, LTE, and other fourth-generation mobile communication networks, thanks to the bold investments made by the government and businesses, it is far behind the U.S., Japan, and other major countries in the field of mobile application software patents. If the sufficient conditions of the South Korean smartphone industry will be evaluated, it can be said that it has some parts
Development Stage and Conditions for Industrialization: Electric-Car and Smartphone Industries
Short Term (~2015) Mid-Long Term (~2020) Stage of development Introduction Growth (beginning) - Precedence of hardware industrialization related to electric cars, such as - Expand penetration of Electric car assembly, electric cars through Cars Conditions for component parts, and close cooperation in industrialization materials car assembly, service, - Slow industrialization in control, infrastructure, related industries, such etc. as charging services, infrastructure, ITS, and other complementary industries Stage of development Growth (beginning) Maturity - Early activation of the Smart future mobile market- phones Conditions for - HW-SW imbalance Strengthen future SW industrialization industrial structure platform competency (lack of SW platform) and build a cooperative system within the ecosystem 374 that are yet insufficient for it to lead the global market. First, the industries that are vertically related to the smartphone industry, including memory semiconductors, display, etc., can be said to be highly developed. South Korea, however, lacks system semiconductor competencies - the core competition factor in the future smartphone industry. South Korea also needs to secure competitiveness in the field of new mobile services, such as future mobile communications and cloud-computing services. South Korea’s smartphone industry and related industries are developing based mainly on conglomerates, and as such, there is little opportunity for small and medium-sized businesses to participate, and there is a lack of encouragement to develop a mutual symbiotic or free cooperative system between conglomerates and small and medium-sized businesses.
Chapter 4. Industrialization of New Growth Engines: Worldwide Cases
Electric Cars Renault, Nissan, and other foreign businesses that commercialized electric cars more quickly than their competitors are actively entering into alliances with governments, local autonomous governments, electric-power companies, and large consumer groups to expand the distribution of their products. Furthermore, they have not limited their businesses to manufacturing and selling electric cars but have built business models related to the use of charging, electric cars, and secondary Industrialization Conditions of a New Growth Engine and It's Policy Implications 375 batteries. In addition, these global businesses are looking beyond developing and commercializing electric cars, to building infrastructure, to create an environment where the end users can actually use electric cars. A representative business in this regard is Better Place, which is currently developing and applying business models in connection to governments, car-manufacturing companies, electric-power companies, etc. These business models seek to provide charging and battery exchange stations and inner car systems for electric cars. Major global car-manufacturing companies and various governments are exerting considerable efforts to build differentiated strategies and support systems to obtain the first mover’s advantage in the electric-car market. The U.S., Japan, Germany, and other countries leading the global automobile industry have competencies in internal-combustion vehicles along with the Chinese government, and Chinese car-manufacturing companies are actively maneuvering to swiftly catch the opportunity to become the leader in commercializing electric cars. With the change in the technological paradigm of the global automobile industry, business investment and government support are needed to accelerate the building of a related substructure and the early commercialization of electric cars. The governments of developed countries are attempting to expand the innovation of the automobile industry not through one-sided support but through the formulation and implementation of various policies. In addition, they support ventures or small and medium-sized businesses that possess technologies related to electric cars and that have created consortiums with various car- 376 manufacturing companies in an attempt to create a substructure related to R&D. Accordingly, for the South Korean government to ensure that the South Korean automobile industry will be able to actively respond to the shifting paradigm in such industry, it must manage the relevant policies with a carrot-and-stick approach. Especially, as policies form the basis of the creation of fair market competition and cooperative industrial environments, governments must seek supporting policies that can accelerate these phenomena. The government must help discover and secure core/original technologies through R&D, so that South Korea will be on the same footing as the developed countries in terms of technological competencies. Furthermore, additional R&D support must be given so that sufficient technological competency in electric cars can be procured, to substitute for that in internal-combustion vehicles. Electric cars have enough industrialization motives, with the increasing environmental regulations and demand, and with the low maintenance costs, but they lack technological development to replace the existing products from the perspective of price or performance. The low-speed electric cars that have been launched in South Korea show limitations in terms of price and performance and therefore cannot replace the existing cars, ultimately hindering their growth. In addition, the South Korean component parts companies must be assisted in obtaining global supplying capacity by diversifying the international supply channels through strategic alliances with other component parts companies, foreign car companies, etc. As the electric-car- and IT-fusion-related industries Industrialization Conditions of a New Growth Engine and It's Policy Implications 377 have no clear leaders, the early development of core component parts will ensure that the South Korean component parts companies will gain technological leadership in the component parts industry.
Smartphones The world’s mobile phonemarket was led by Finland’s Nokia and by South Korea, with intense competition, until Apple and Google introduced a new innovative paradigm in the smartphone market, emerging as the new leading powers therein. Their pursuit of later-movers such as China and Taiwan is also very strong. Apple and Google are both moving away from the field of mobile communications, and although they do not have competencies in the field of hardware or components, their independent platforms and smartphone ecosystems, which have been growing in competitiveness, are enlarging the smartphone market. Apple is concentrating on securing the core technologies and patents that it needs to lead the future mobile phone market. To do this, it is actively pursuing business mergers and acquisitions and increasing its investment in strengthening its R&D for mid- to low-price diffusion products to strengthen their positions in the emerging markets. Google is also displaying strategies of strengthening the smartphone ecosystem with its open-source “Android OS” and “Android Market” platforms, which have provided opportunities for many hardware-manufacturing companies to participate in the smartphone market. Also, its acquisition of Motorola has enabled it to secure hardware- 378 manufacturing capacity and shows that it intends to continuously strengthen its core competencies through active mergers and acquisitions. For the development of the smartphone industry, governments worldwide are pursuing competitive policies that can foster the industry. Finland, despite Nokia’s slump, has consistently followed its IT cluster policy since the beginning of the 1990s to nurture its mobile software industry. The U.S., in general, has recognized the importance of the IT industry’s influence and ripple effect since the early 1990s, thus creating national informatization strategies on a pan-government level. China and Japan are also actively fostering their future mobile communications industries. The Chinese government is strongly pushing ahead with bold policies in the mobile communications and hardware industries on a governmental level while enthusiastically developing cooperative relationships with Taiwan and Japan. Japan’s smartphone industry has relatively lower competitiveness, but the country is attempting to shift the focus towards leading the world market, not only its domestic smartphone market. To do this, Japanese companies are strengthening their cooperation with one another to strengthen their global strategies. Sony is planning on building a mobile- industry ecosystem through its acquisition of the joint venture Sony Ericsson’s shares. South Korea is also executing various policies on a governmental level to secure competencies in the fields of future mobile communications, software, and contents, and to create a mutually growing cooperative foundation between businesses. It Industrialization Conditions of a New Growth Engine and It's Policy Implications 379 is worth noting, however, that other major countries, such as the U.S. and Finland, have created related strategies a long time ago, and have consistently executed related measures. The South Korean policies are being carried out on a pan-government level, but there seems to be a lack of interaction between departments and policies, and a lack of continuity among the previous and current policies. Accordingly, for the development of the smartphone industry’s ecosystem as a South Korean new growth engine, strategies to systematically strengthen the ecosystem from a mid-long-term perspective are more important than the short- term outcomes.
Chapter 5. Current Status and Evaluation of the New- Growth-Engine Policies
Introduction of New-Growth-Engine Policies Since the nurturing of the heavy-chemicals industry in the 1970s and 1980s, the South Korean government has continuously executed strategies and policies to create new businesses or new growth engines. In January 2009, with the announcement of “The Vision and Development Strategies of New Growth Engines,” the South Korean government started the execution of various strategies, policies, improvement measures, and others on a pan- governmental level. The government’s plan to create new growth engines includes the development of commercialization technologies, increasing the investment in plants and equipment, creating new jobs, and 380 other technological and equipment investments by private businesses. On the other hand, the government will focus on developing high-risk original technologies, improving the related laws and policies, launching demonstration projects, etc., thus focusing on the investment environment in general. This plan clearly delineates the role of private businesses and that of the government. It is different from the previous new-industry development strategies in that it emphasizes the nurturing of a business environment that will reduce the risk and uncertainty of businesses entering industries with a high growth potential in the future to expand the penetration and investment into newly growing industries. Aside from this, the new-growth-engine creation strategies have the following differences from the existing new-business- nurturing strategies. First, the previous new-business-nurturing strategies were focused on IT, BT, and other specific technologies while the new plan proposes the encompassing of everything from manufacturing to services by new growth engines. In addition, the new plan was divided into short-and mid-long-term plans depending on the characteristics of new growth engines, market maturity, businesses’ competencies, and level of business environment development. This shows that the plans have not been set as simple proposals for future visions or long-term plans but rather as phased and systematic plans. Finally, most of the discovered growth engines are considered based on the convergence between industries and technologies, thus embodying the overall developmental direction and trend of industries. Industrialization Conditions of a New Growth Engine and It's Policy Implications 381
Results and Evaluation The creation of growth engines is fundamentally a long-term task. Although it is too early to evaluate its results, if the new growth engines created by the government over the past three years will be evaluated, the evaluation will be as follows. First, creating new growth engines creates a new business environment where R&D financial support is concentrated rather than attracting the entry of private businesses, or their investment. Second, although active investment and increased employment of private businesses was expected through the emergence of a new industry where a large amount of government support was concentrated, the expectations were not met. Third, the reason behind the poor rate of entry and investment of the South Korean businesses in newly growing industries is that the efforts exerted by the government towards creating a business environment in the individual new-growth-engine fields are realistically limited. Fourth, it is not easy to manage the variety and complexity of the markets and industries created during the development of new growth engines and during industry convergence, or to set new frames for them, but it must be remembered that the new standards, standardization, and the first leader may determine the future competitiveness. Fifth, there is a need to provide legal and policy foundations to build infrastructure that will help develop the industry, such as securing original technologies for new- growth-engine products and services, training human resources, creating certification systems, and standardization. Finally, quick and smooth agreements between the stakeholders in the emergence of new fields, products, and services along with the 382 efforts from the society in general are needed throughout the processes that support the creation of new growth engines.
Chapter 6. Commercialization Strategies and Tasks of New Growth Engines
Basic Direction Strategies to accelerate the commercialization of new growth engines must be developed under the following direction. First, a clear definition of and approach towards new growth engines must be chosen. Thus, depending on the level of development of South Korea’s economic society, how, from what perspective, and with what contents new growth engines are defined are very important. As such, reaching an agreement and finding ways to nurture new growth engines must be focused on. In addition, two approaches to creating new growth engines - viewing new growth engines from an ordinary technological-development perspective, and viewing it from an innovative perspective or from a specific field’s or industry’s perspective - by discussing and reviewing which two perspectives combined are most effective. Next, a clear goal for creating and industrializing new growth engines must be set. South Korea’s goal for creating new growth engines is for businesses that can lead the market in the field of new growth engines to invest actively, contribute towards increased growth, expand employment, and show positive economic performance in five to ten years. Thus, it is important to review in great depth whether the goal or execution system of the Industrialization Conditions of a New Growth Engine and It's Policy Implications 383 current strategies and whether the strategies themselves are appropriately prepared for creating new growth engines. Finally, there must be differentiated strategies and support depending on the stage of development or characteristics of new growth engines. New growth engines pursue industrialization effectively and achieve targets by stage. Ultimately, by expanding new growth engines, the development of new industries can be expected, and therefore policies for the different fields and stages of the new growth engines must be formulated and carried out.
R&D Discovery and Support for New Growth Engines First, in the introduction stage of new growth engines - the stages where promising growth engines are discovered and selected for industrialization - periodic selection processes must be carried out to select and concentrate on promising industries. Throughout the process of discovering and selecting focal growth engines to support, the growth engines must be continuously inspected and reselected considering the external conditions, the rate of penetration of businesses, and the profitability of the industry. Second, R&D discovery and support for securing core original technologies and for building infrastructure and utilizing materials and components that enable the development of the core technology and the complementary good industry must occur simultaneously. This is because due to the characteristics of most new growth engines, even if the core technology is secured for a certain industry or product, the lack of development in component materials or complementary industries or a delay in 384 the construction of the core infrastructure may make it difficult to industrialize the new growth engine. Third, the link between R&D support and patent strategies must be strengthened for convergence or open innovation. Until now, R&D processes and selection have been carried out in closed boundaries, with focus on individual items. In the future, however, it is important for R&D to be carried out in an open and converged manner, which embodies the future trends of industrial and technological convergence rather than focusing on one technology. Especially, to secure core original technologies, policy support must be provided in the case of government-funded strategic technologies, in terms of management for future patent disputes, support, and application of foreign patents for small and medium-sized businesses.
Industrialization after R&D Support First, in the early stages of industrialization, the improvement of regulations or policies hindering the growth of a new market is urgent. Most of the major products of new growth engines are based on new technologies and services and have a tendency to substitute for the existing products and services. As a result, the existing regulations or policies may greatly hinder the creation of a new market for a new product. Accordingly, the regulations and policies restricting the formation of a new market must be found and improved as a first step. In addition, if new growth engines have difficulty creating a new market in South Korea, they must look for ways to strategically penetrate developed countries with higher levels of income and already active markets. Although the Industrialization Conditions of a New Growth Engine and It's Policy Implications 385 order of self-development, release in the South Korean market, and finding a foreign market is followed, if the technologies and products that have been aimed at the global developed market are successful in that regard, it may also be easy to create a market for them in South Korea. Second, polices are needed to activate the finance sector for new businesses, thus inducing large amounts of investment for new growth engines entering the stage of growth. To be specific, information must be provided to clarify which company or industry is in need of investment, experts that can evaluate technologies must be nurtured and supported, and improvement of investment-related polices is needed, among others. For the finance sector for new businesses to be activated, more detailed data collection and analysis must be carried out on new growth engines. In such analyses, the proposals must contain not only optimistic futures based on the technological potential but also objective evaluation and revision considering the compatibility of the technology to the specific business among the many technologies available, and the advantages of the specific technology and how it can develop into a new industry. Third, more emphasis should be placed upon the development and improvement of policies for activating a healthier and more competitive industrial environment. The emergence and development of a new industry starts from a new technology, but this does not signify that a new technology is actually substituting for an existing technology. Rather, it is most likely that a new system that makes the industrialization of the new technology possible substitutes for the existing system. 386
Furthermore, most of the new growth engines gaining attention of late emphasize that an industry environmental perspective is compulsory to secure core technologies, SW, components, materials, and core infrastructure. Research Report 2011-605
R&D Outsourcing and Firm Performance in Korea
Kyung Hee Lee, Moonsoo Park and Hyunseung Cho
Summary 389
Chapter 1. Introduction
Many studies have shown that R&D investment by enterprises has positively influenced elements of business performance such as operating profits and revenues (Science & Technology Policy Institute, 2009). Thus, the improvement of productivity through the expansion of R&D investment is an essential condition that must be met to secure the competitiveness of enterprises and ensure the sustainable growth of the economy. With this in mind, R&D activities have been quantitatively increased and R&D activity types diversified; the ratio of R&D outsourcing has also gradually increased. The decision on which R&D method that should be employed to achieve continuous technology innovation can be regarded as an important strategic choice that enterprises must make in order to ensure their competitiveness under a rapidly changing environment. In general, these R&D implementation methods can be divided into internal R&D and external R&D as well as R&D outsourcing. The 390 majority of Korean enterprises have actively pursued R&D outsourcing as a means to effectively cope with the changing environment marked by growing competition with global enterprises that have secured international competitiveness. As such, they have focused on the input of their human and physical materials in more competitive sectors or functions. In particular, enterprises have tried to strengthen their core competencies and to increase value added through the expansion of the outsourcing of production and R&D. While the importance of outsourcing in the R&D field has increased, few studies analyzing the factors that determine enterprises’ decisions to opt for R&D outsourcing and the impact of R&D outsourcing on business performance using data based on a comparative analysis by industry, business type, and firm characteristics at the enterprise unit. The majority of studies on R&D outsourcing have focused on the determinants of R&D outsourcing domestically or internationally. However, as there is a serious lack of micro-level data regarding R&D outsourcing by Korean enterprises as well as the characteristics of enterprises, technology, and markets, few domestic studies that have been published to date have addressed R&D outsourcing at the enterprise level. In addition, despite the negative aspects of R&D outsourcing, such as the delaying of R&D as well as quality and effectiveness problems, there has been a clear lack of empirical studies on the impact of R&D outsourcing on the profitability of enterprises and business performance. In this regard, no domestic studies have analyzed R&D outsourcing using firm-level data. The current study seeks to mitigate this serious shortage of R&D Outsourcing and Firm Performance in Korea 391 domestic empirical studies on R&D outsourcing by conducting a comprehensive empirical analysis of the determinants of R&D outsourcing by Korean enterprises and the impact of R&D outsourcing on business performance. Based on these results, the study introduces R&D outsourcing strategies and future government support measures. In particular, this study analyses the determinants of R&D outsourcing by enterprises and the effects of business performance based on firm-level panel data (Survey of Business Activities, Statistics Korea) and the endogeneity of R&D outsourcing. This study stands out from previous ones in that it suggests policy implications that are based on an analysis of specific firm characteristics, such as industry type and firm size.
Chapter 2. Theoretical background
Fundamentally a part of open innovation, R&D outsourcing can be regarded as a strategy through which individual enterprises can decrease the burden of competition associated with the development of new products or services through joint R&D with an external enterprise. Especially, the rapid development of ICT (information and communication technology) has created an environment in which the problems associated with the various transaction costs that surface during the innovation process can be remedied through cooperation with external markets or firms. In this regard, R&D outsourcing based on the use of external knowledge networks has been actively 392 implemented in conjunction with the development of new products. This phenomenon, which can be regarded as the theory used to explain the reasons why enterprises opt for R&D outsourcing, can be divided into the transaction cost theory and resource- based view. The transaction cost theory introduced by many researchers to explain R&D outsourcing perceives the enterprise and market as being characterized by a relationship of mutual substitution when it comes to implementing R&D. As such, the decision-making on the “making” or “buying” of a new technology is determined by the scope of the transaction cost. In other words, enterprises do not opt for R&D outsourcing when the costs associated with internal R&D activities are lower than the transaction costs linked to R&D outsourcing through the external market. However, enterprises actively use the external market for R&D when the transaction costs linked to the external market are lower than the costs of self-development. In short, enterprises prefer internalization to R&D outsourcing because of factors such as asset specificity, the market, technology, and higher behavioral uncertainty. The resource-based view focuses on the resource heterogeneity between partners and is interested in whether the resources needed to ensure the success of outsourcing between enterprises are relatively abundant or rare. In addition, this theory highlights the reactions of transaction partners to the opportunities and threats that emerge as a result of the changes in the environment. It also regards the market environment as an accumulation of resources (Dwyer & Oh, 1987). As such, in the resource-based R&D Outsourcing and Firm Performance in Korea 393 view, the assets, capabilities, processes, and knowledge possessed by an enterprise are regarded as valuable resources formed through prolonged learning and investment on the part of the enterprise. These become the basis through which enterprises ensure their present and future competiveness. This theory views enterprises as choosing a type of R&D that can maximize or complement the value of their existing resources. In addition, while enterprises engage in R&D outsourcing in conjunction with activities involving their non-core resources, they choose to protect their resources they deem decisive in ensuring their core capabilities and competitive advantage. Therefore, enterprises opt for internal R&D in cases where while transaction costs may be low, core capabilities are nevertheless impacted. Enterprises also prefer internalization in cases where the control and appropriateness of technology, possibility of using existing capabilities, and the possibility of developing new capabilities are low. As far as theoretical discussions regarding the choice between internal and external development through outsourcing in implementing R&D is concerned, there are good and bad points associated with each type of development. Thus, the decision on which R&D type to employ is based on the strategic decision making of individual enterprises in accordance with their particular situation. Meanwhile, the success of R&D outsourcing is dependent on the extent to which the contracting company possesses advanced information regarding R&D outsourcing, and how well the R&D outsourcing activities are harmonized with the management techniques of the enterprise. 394
Chapter 3. The current state of enterprise R&D outsourcing
An examination of the costs and ratio trend in terms of R&D outsourcing by enterprises in the United States and European (innovation) enterprises based on the materials provided by the National Science Foundation (NSF) in the United States and Community Innovation Survey (CIS) in Europe reveals that R&D outsourcing has by and large been on the rise. A similar trend is evident in the case of Korean enterprises. The total R&D outsourcing costs incurred by enterprises as measured in the Survey of Business Activities conducted by Statistics Korea has annually increased to reach 4.5 trillion won in 2008 (29% increase over the previous year). The ratio of R&D outsourcing has increased by an annual average of 1.5~2.0% since 2008 when it stood at 16.27%. In addition, the data (from the Survey of Business Activities) showed differences in R&D outsourcing activity depending on factors such as industry type, firm size and history, and the location of company headquarters. First, the data revealed that Korean enterprises spent 15% of total R&D investment on R&D outsourcing (12.82% in 2006, 14.36% in 2007, 16.27% in 2008), and that 9% of enterprises were found to have engaged in R&D outsourcing (8.92% in 2006, 8.59% in 2007, and 8.80% in 2008). At the industry and business type levels, the ratio of enterprises implementing R&D outsourcing was found to be two- fold higher in the manufacturing industry than in the service industry. The ratio of R&D outsourcing to total R&D costs was R&D Outsourcing and Firm Performance in Korea 395 also higher in the manufacturing industry than the service industry. Meanwhile, the analysis of business types within the service industry revealed that the ratio of R&D outsourcing was higher among publishing, imaging, communications and business service enterprises than the overall average for the service industry. For their part, transportation, finance and insurance, real estate and rental service enterprises exhibited the relatively higher R&D outsourcing expenditures. The firm size and history level examination revealed a positive (+) correlation between firm size and history based on the number of employees and R&D outsourcing. Meanwhile, the analysis at the head office location level revealed that the ratio of R&D outsourcing and R&D outsourcing costs was higher among enterprises whose head offices were located in Seoul.
Chapter 4. Analysis of enterprise R&D outsourcing determinants
1. Analytical model and methodology
The analysis of the determinants of enterprise R&D outsourcing is conducted based on the following equation (1):
(1)
The dependent variable yi,t , indicating i company’s R&D outsourcing in t year, is the log value (logit) of the odds of the i 396 company opting for R&D outsourcing in t year is the probability of choosing R&D outsourcing / the probability of not choosing
R&D outsourcing. TCi,t , which reflects the transaction costs related variable vector, is composed of fixed assets versus total revenues and a dummy variable related to the experience of R&D outsourcing. RBi,t , which represents the resources-based view related factor vector, includes variables such as the number of patents per employee, possession of company research center, and internal R&D costs versus total revenues. Xi,t indicates the firm characteristics variable vector, and includes the introduction of an e-business system, market share, firm age, firm size and location (whether it is located in Seoul), and the industrial dummy variable. Tt , indicating the year dummy variable vector, captures the annual general change effect. indicates the error term. The Logit and Panel Logit model was used to estimate the coefficients. The Panel Logit model was estimated by replacing the constantly given intercept ( ) to all enterprises in the equation (1) with the enterprise intercept ( ) . In addition to the analysis of overall industries, an industrial sector-specific analysis was also conducted to analyze whether the determinants of R&D outsourcing differed between the manufacturing and service industries.
2. Analysis results
The analysis of the Panel Logit of overall industries revealed a high possibility of R&D outsourcing in the following cases: in which behavioral uncertainty is low because of previous R&D R&D Outsourcing and Firm Performance in Korea 397 outsourcing experience; in which the number of patents per employee or technology development capabilities are high due to the presence of a company research center; in which the informatization level is high due to the possession of an e-business system; in which the market share is high, the firm is large-sized, and the enterprise is located in Seoul. The analysis of the effects of R&D outsourcing experience, technology development capabilities, firm size, and the location of enterprise (Seoul) wielded similar results when applied solely to the manufacturing and service industries. The effect of these variables was relatively bigger in the service industry than the manufacturing industry. Meanwhile, the effects of informationalization level and market share on the two industries tended to differ. In the case of the manufacturing industry, a proportionate (+) correlation was found to exist between the introduction of an e-business system, market share and R&D outsourcing. However, in the case of the service industry, a disproportionate (-) correlation between the introduction of an e-business system and R&D outsourcing was uncovered; meanwhile, no significant correlation between market share and R&D outsourcing was found.
Chapter 5. Analysis of the impact of R&D outsourcing on business performance
1. Analytical model and methodology
The analysis of the impact of enterprise R&D outsourcing on 398 business performance was conducted based on the following basic model.
(5)
In the above equation, the dependent variable Pi,t indicates the log value of the business performance of company i in t year. The business performance is measured based on the net profit in the current period per employee, revenues per employee, or the value added per employee, which is calculated by dividing net profit for the current period, total revenues, and value added by the total number of employees. Here, the value added is calculated by subtracting intermediate material costs and depreciation costs from total revenues. OSi,t indicates the dummy variable for R&D outsourcing, and was assigned a value of 1 when R&D outsourcing took place and 0 when it did not. Xi,t , the firm characteristic variable vector, includes the ratio of total R&D costs versus total revenues (R&D intensity), the log value of capital per employee and number of patents per employee, ratio of labor costs to total operating expenses, ratio of export versus total revenues, ratio of foreign capital, introduction of an e- business system (informatization level), firm age, firm size and location (located in Seoul), and industrial dummy variables. Tt is the year dummy variable vector and catches the fixed effects based on time. indicates the fixed effect by enterprise and indicates the error term. Based on this basic model, the impact ( ) of enterprise R&D outsourcing on the business performance was measured using net R&D Outsourcing and Firm Performance in Korea 399 profit for the current period per employee. Total revenues and value added were estimated using a two-stage estimation method called pooled OLS. A panel analysis of fixed effects and instrumental variables (IV) was also carried out. In addition to the analysis of the overall industries, the researchers also conducted an analysis of the manufacturing and service industries and one based on firm size, which was carried out in accordance with the number of full-time employees, in order to review whether the impact of R&D outsourcing on business performance differed depending on industrial and firm characteristics.
2. Analysis results
The analysis of overall industries revealed that, even after controlling the endogeneity problem for the R&D outsourcing variable (fixed effects, two-stage estimation method) as well as unobserved enterprises and the fixed effect of time, R&D outsourcing had an impact on improving business performance, which was measured based on revenues and value added per employee. This implies that business performance can be heightened in cases where a firm partially or fully engages in R&D outsourcing without depending solely on self-development through cost reduction and the improvement of effectiveness, even in cases where the ratio of total R&D costs is the same. The results of the pooled OLS, panel analysis of fixed effects, and two- stage estimation method showed that R&D outsourcing improved business performance, as measured based in revenues and value added per employee, in the service industry. Meanwhile, the 400 significance of the impact of R&D outsourcing on the improvement of business performance disappeared in the case of the manufacturing industry when the fixed effect by unobserved enterprise and the endogeneity problem of R&D outsourcing (fixed effects, two-stage estimation method) was considered. Therefore, R&D outsourcing is especially helpful in improving business performance in the service industry. On the other hand, the analysis by firm size revealed that enterprises which engaged in R&D outsourcing exhibited higher business performance levels than those that did not, regardless of firm size. However, the impact of R&D outsourcing on the improvement of business performance tended to differ depending on firm size. In other words, the impact of R&D outsourcing on the improvement of business performance, as measured based on revenues and value added per employee, tended to dropped by a wider margin as firm size decreased. As such, R&D outsourcing has not been very helpful in improving the business performance for small-sized firms.
Chapter 6. Conclusions and policy implications
1. R&D outsourcing and business performance
The speed of technological change has quickened and the convergence of technology has accelerated; as a result, the importance of R&D has been heightened and the types of R&D have also been diversified. As the types of R&D needed for a R&D Outsourcing and Firm Performance in Korea 401 product or service have become diversified, it has become increasingly difficult for a firm to conduct all the R&D projects associated with the production process. As such, the necessity and importance of R&D outsourcing have increased. R&D outsourcing will continuously increase not only in a quantitative sense, but also a qualitative one as more diverse types emerge. In addition, this will greatly influence the business performance of firms in general. The statistics and empirical results also support these assumptions. Above all, R&D outsourcing has continuously increased. Enterprises’ R&D outsourcing is influenced by various firm characteristics and positively influences business performance, in particular financial performance such as revenues and value added. Enterprises with previous R&D outsourcing experience, high technology development capabilities, significant market share, large firm size, and head offices located in Seoul were found to have a high likelihood of opting for R&D outsourcing. In this regard, enterprises that opt for R&D outsourcing tend to have a higher level of business performance than enterprises that do not. In addition, the impact of R&D outsourcing on business performance tends to differ depending on the type of industry and firm characteristics. The impact of R&D outsourcing on the improvement of business performance has been more significant in the service industry than the the manufacturing industry. The impact of R&D outsourcing on the improvement of business performance declines as the firm size, as measured based on the number of employees, decreases. 402
2. Problems with R&D outsourcing
(1) Information related problems
One of the main difficulties faced by R&D outsourcing demanders is the lack of information regarding R&D suppliers. The majority of R&D outsourcing contracts has been carried out through personal connections such as those of the CEO or employees of a firm. The reason why R&D outsourcing is carried out based on personal connections rather than open and organized procedures can be explained by the fact that R&D outsourcing demanders and suppliers are reluctant to open up R&D outsourcing contracts to the outside world because of business confidentiality. As such, even though firms have a desire to sign R&D outsourcing contracts, they nevertheless have a hard time finding the appropriate R&D suppliers. R&D outsourcing suppliers also have difficulties to secure demanders. Furthermore, even though a R&D supplier concludes a R&D outsourcing contract with a demander, they must nevertheless deal with various other demanders. In conclusion, the current situation can be regarded as an inefficient one marked by a lack of information and sufficient networks. This is in many ways akin to the prisoner’s dilemma.
(2) Contract standards
As discussed above, R&D outsourcing is carried out through contracts between individual enterprises rather than through an R&D Outsourcing and Firm Performance in Korea 403 open procedure. Therefore, there are only limited cases in which the contents of a contract are disclosed to the outside. In many instances, the existence of special relations between two enterprises means that contracts are based on accepted practices and do not include any clear specification of the contract conditions. As such, the unfairness and ambiguity of R&D outsourcing contract terms and conditions allow for potential problems to emerge. This has resulted in the emergence of complaints regarding costs and the contract terms between demanders and suppliers even in cases of successful R&D outsourcing. The lack of contract terms and conditions such as those governing R&D outsourcing costs increases the uncertainty of R&D outsourcing, and this in turn increases transaction costs. From the position of the R&D outsourcing demander, the transaction costs are increased because the uncertainty regarding potential losses caused by the inadequate technology provided by the supplier and the delay in technology development is increased. Meanwhile, from the standpoint of the R&D outsourcing supplier, uncertainty is increased by the issue of the ownership of intellectual property rights stemming from the vertical relationship as well as by the worsening of profitability. Uncertainty is a fundamental problem of the service transactions associated with a service product. However, R&D outsourcing is plagued by higher uncertainty, such as the difficulties linked to technology evaluation, than other service fields. R&D outsourcing boasts the characteristics of an exclusive service that is useful only to a specific demander rather than those 404 of a universal service product. In this regard, the existence of fair and precise contracts becomes very important. However, there are in fact no guidelines on R&D outsourcing contract terms and conditions. The existence of subordinate relationships between the demander and supplier has resulted in many unfair contracts.
(3) Difficulties associated with firm size
Large-scale enterprises, which generally record surpluses, have been known to implement R&D in various ways. However, small and medium sized enterprises (SMEs), which generally do not have surplus funds, have difficulties implementing both internal R&D and R&D outsourcing due to the fact that not only do they lack financial resources, but also information about new technology. This phenomenon is even more pronounced in industries where production technology and processes quickly change because of the rapid nature of technology development. The results of empirical analysis and case analysis of OECD members conducted in this study support these assertions. The empirical analysis found that large enterprises have more actively implemented R&D outsourcing than SMEs and venture companies. The outcome of R&D outsourcing by large enterprises was also more significant than that of SMEs. These results would seem to indicate that large enterprises have been able to more effectively seek out R&D outsourcing suppliers. As such, the general inactivity in terms of R&D outsourcing by SMEs should be regarded as stemming from the lack of financial R&D Outsourcing and Firm Performance in Korea 405 resources and human networks rather than a low necessity for R&D outsourcing. The majority of SMEs have less wiggle room when it comes to R&D investment and human networks than large enterprises. Thus, SMEs face two major difficulties in the form of the lack of investment and human networks.
3. Policy measures to activate R&D outsourcing
(1) Activation of R&D outsourcing enterprise networks
As previously mentioned, the lack of information regarding R&D outsourcing suppliers has been identified as the biggest difficulty faced by R&D outsourcing demanders; nevertheless, the sharing of information has been very limited. Suppliers have also encountered the same difficulties. In this regard, they have been hard-pressed to find demanders willing to buy their developed technology. In this regard, the government should highlight successful cases of R&D outsourcing, conduct performance analyses, and compile comprehensive supplier and demander lists. The provision of the basic information regarding the R&D outsourcing contract, let alone the detailed contents of a contract, will be greatly helpful in activating R&D outsourcing. In addition, the sharing of information through the formation and activation of such networks can also contribute to the export of Korean R&D outsourcing suppliers and the activation of global R&D outsourcing. 406
(2) Establishment of related laws and institutions to activate R&D outsourcing
The activation of R&D outsourcing is predicated on the expansion of the financial and tax support system and the flexible application of laws related to the dispatch of human resources such as the Employee Dispatch System. The quantitative analysis conducted in this study showed that although R&D outsourcing positively influences the business performance of a firm, various realistic difficulties have led to it not being properly activated. Furthermore, R&D outsourcing has also remained inactive because of the absence of any direct support and tax support system. In this regard, it is necessary to introduce direct support measures such as a coupon system for consulting support services and to expand tax benefits. These support measures should be accompanied by improvements to the laws and institutions that impede the activation of R&D outsourcing. Examples include the Employee Dispatch System. The current Employee Dispatch System only permits the dispatch of employees in conjunction with select work duty types and limits the dispatch period to two years. While the current regulations may be required in certain types of industries, the current system can be regarded as extremely fastidious when it comes to the activation of R&D outsourcing. The laws related to R&D outsourcing should be applied in a more flexible manner. In the particular case of R&D outsourcing in conjunction with very similar technologies, consideration should be given to the introduction of exceptional dispatch periods and R&D Outsourcing and Firm Performance in Korea 407 applications of the Employee Dispatch System.
(3) Investigation supplementation of the current state of R&D outsourcing
The Ministry of Knowledge and Economy and the National IT Industry Promotion Agency have made efforts to activate R&D outsourcing through the promotion of excellent R&D outsourcing cases via the provision of awards to enterprises that have excelled at R&D outsourcing and the publishing of successful cases. In addition, Statistics Korea’s Survey of Business Activities has provided statistical data related to the R&D outsourcing. Despite these efforts, few satisfactory studies related to R&D outsourcing have surfaced. The publication of a collection of examples of successful R&D outsourcing would help provide various forms of information, such as the reasons, contents, results, and difficulties associated with R&D outsourcing. However, because it is not a comprehensive investigation material, such a compilation could not be used for a statistics-based quantitative analysis. Statistics Korea’s Survey of Business Activities can be considered to represent comprehensive data because it encompasses a broad range of investigation targets. Many empirical analyses related to R&D outsourcing have been based on this data. However, the Survey of Business Activities provides only total amounts of R&D outsourcing by demanders, thus making it impossible to analyze the detailed contents of R&D outsourcing. A comprehensive and in-depth analysis of R&D outsourcing should be based on more 408 than just total amounts of R&D outsourcing; it should also involve information such as that related to technology levels and R&D outsourcing type. In addition, other information such as the reason for engaging in R&D outsourcing, R&D outsourcing contract terms, property rights associated with the technology developed through R&D outsourcing, and a comparison of the degree of satisfaction of R&D outsourcing demanders and suppliers, should also be included.
(4) Activation of the R&D service industry
The R&D service industry provides R&D and related support activities for enterprises. The majority of suppliers specializing in R&D outsourcing belong to the R&D service industry. Therefore, the activation of the R&D service industry is directly related to the activation of R&D outsourcing. The activation of the R&D service industry will help heighten the effectiveness of R&D investment and contribute to the creation of jobs for highly-skilled manpower. Large specialized global enterprises recording high growth have already emerged in the R&D service industries of the United States and Europe. Meanwhile, the R&D service market remains relatively nascent in Korea. The reasons for the general inactivation of the R&D service industry in Korea include the small scale of enterprises engaged in the industry, lack of information networks, and the absence of effective tax and financial support. Above all, strong consideration should be given to the organization of government-led industry- academy-research networks as the means to mitigate the lack of R&D Outsourcing and Firm Performance in Korea 409 information networks that constitutes the biggest obstacle to the development of the R&D service industry. The ensuring of the fairness of outsourcing contracts and lowering of the risks of technology drain based on the protection of intellectual property rights via the establishment of government-led networks is expected to heighten the use of R&D service enterprises. The presence of numerous enterprises specializing in R&D services will not help activate the R&D service industry as long as the technological power and competitiveness of suppliers remains weak. The most important point thus becomes that of producing human resources capable of strengthening the technological power and competitiveness of R&D service enterprises. The majority of R&D service enterprises are small-sized, feature working conditions that lag well behind those offered in government-funded research institutes, and have a hard time employing the necessary human resources. These circumstances render it difficult to significantly alleviate the dearth of human resources available to R&D service enterprises. However, more organized and effective human resources education & training programs can be introduced once public agencies analyze the demands for R&D manpower and technology trends based on an investigation of the current state of affairs, and provide the results of such investigations to the universities and vocational training centers that produce the necessary human resources. An even more effective supply of human resources can be ensured when these education & training institutes and employment service agencies are organically linked to one another. It is also necessary to conduct a follow-up where the tax and 410 financial support for private R&D service enterprises is concerned. To this end, the Value-Added Tax Act should be amended to allow private enterprises to apply for value-added taxation rates that are the same as those bestowed upon government-funded research institutes. Financial institutions must greatly strengthen the value of intellectual property. In addition, the activation of R&D service enterprises requires efforts at the policy level to bring about the creation of new demand, improvement of unfair transaction practices in R&D services, and the improvement of the statistical classification of the R&D service industry. The enhancement of the competitiveness of the R&D service industry through such measures will pave the way for the establishment of the base for the activation of R&D outsourcing by satisfying enterprises’ various demands for R&D outsourcing.
(5) Support for service R&D outsourcing
The statistical and quantitative analysis carried out in this study showed that the business performance improvement stemming from R&D outsourcing has been more pronounced in the service industry than the manufacturing industry. This can be construed as meaning that R&D outsourcing is more effective in the service industry. In this regard, priority should be given to the service industry over manufacturing when it comes to policy support for R&D outsourcing. However, R&D related policy support has for the most part been focused on the manufacturing industry rather than the service industry. The lack of R&D support in the service industry R&D Outsourcing and Firm Performance in Korea 411 can be traced back to the confusion surrounding the service R&D concept as well as the lack of interest in and understanding of service R&D. The growing importance attached to service R&D since the late 2000s has resulted in the expansion of the legal basis for service R&D support. In particular, the Service Industry Development Law enacted in November 2011 is designed to develop a broader definition of service R&D so as to expand the support targets. Unfortunately, no detailed statements regarding service R&D outsourcing were included in this Service Industry Development Law. This implies that the importance of R&D outsourcing has not been heightened. Therefore, it becomes necessary to include measures in support of service R&D outsourcing in the enforcement decree of the Service Industry Development Law. More specific measures might include the education of human resources for enterprises specializing in service R&D outsourcing and composition of information exchange networks, as well as the introduction of a standard service R&D outsourcing contract model and the strengthening of the role of outsourcing in service R&D related public programs. Particular attention should be paid to the different characteristics of the service and manufacturing industries when establishing service R&D outsourcing policies.
Research Report 2011-606
A Study on the Strategic Fit of Service Innovation Patterns
Hongseuk Kim and Hyunsun Ryu
A Study on the Strategic Fit of Service Innovation Patterns 415
Chapter 1. Introduction
1. Objective and rationale of the study
There has been a rapid shift towards a service economy, as economic growth has been accompanied by a heightening of the status of the service industry within the overall economy. However, the influence of manufacturing industry-centered growth policies means that the degree of servitization of the Korean economy has lagged behind that of the advanced countries. In this regard, the development of a service economy is expected to be accompanied by significant value-added and potential for job creation. Moreover, the service industry has increasingly been perceived as a potential new growth engine. However, the heightening of the importance of the service industry within the overall economy indicates that service sector productivity has also had a greater impact on the economy. The fact that Korea’s productivity and innovation capacity, as well as 416 its innovation activity, is lower than that of the advanced countries has led some to conclude that this could emerge as a potential factor limiting overall economic growth. The achievement of a service economy and smooth transfer from a manufacturing-oriented economy to a service-oriented one requires that improvements be made to service sector productivity and that service innovation be implemented. The achievement of sustainable economic growth through the development of the service industry is predicated on the improvement of productivity to a level similar to the advanced countries. Moreover, service innovation should be implemented in order to improve productivity. Although service innovation constitutes an urgent task, very few detailed studies or policies related to service innovation have been produced either domestically or internationally. As such, the concepts and guidelines for services and service activities, and even of service innovation, have been lacking. Moreover, no organized approaches to service innovation have been developed. By causing a reluctance to invest in service innovation amongst the enterprises that actually implement service innovation and complicating the government’s ability to establish policies which support investment in service innovation, these problems may lead to a failure to achieve service innovation at the socially required level. As such, systematic studies on the service innovation patterns and characteristics of Korean enterprises should be conducted to facilitate the mitigation of enterprises uncertainty vis-a-vis investment in service innovation and foster the establishment of effective and efficient service A Study on the Strategic Fit of Service Innovation Patterns 417 innovation policies by the government. This study analyzes the service innovation patterns of Korean enterprises and the characteristics thereof, and conducts an empirical analysis of the impact of the strategic fit of service innovation patterns, innovation resources, and enterprise strategy on enterprise performance. Based on these results, an attempt is made to introduce policy measures designed to activate innovation within the service industry.
2. Contents of the study
The study is composed of four chapters. In Chapter 1, the necessity, objectives, and contents of the study are reviewed. In Chapter 2, a review of existing studies is carried out as part of the process of establishing an empirical analysis model. First, the strategic fit theory used as the foundation for the analytical model is introduced; thereafter, a review of studies on the components of the strategic fit model, namely service innovation patterns and the dimensions of service innovation, as well as innovation resources and enterprise strategy, is carried out. Based on the results of the examination of existing studies conducted in Chapter 2, a hypothesis and analytical model for the empirical analysis are introduced in Chapter 3. The hypothesis is then verified using the results of a survey of service enterprises; thereafter, the implications as pertaining to the establishment of service innovation policy are derived. Chapter 4 revolves around a discussion of policy measures designed to support service innovation by domestic enterprises. 418
While a basic policy direction that all service innovation policies should follow is introduced, detailed policy measures are laid out based on this basic direction, such as those related to human resources and the urgently needed expansion of R&D infrastructure.
Chapter 2. Review of the existing studies
1. Strategic fit of service innovation
This study includes an empirical analysis of the impact of the strategic fit between service innovation patterns, innovation resources, and enterprises’ performance strategies. The present study stands out from previous ones in the following three regards. First, the majority of existing studies on service innovation patterns have classified the latter based on theoretical analyses. However, service innovation patterns are classified in the current undertaking based on the empirical results of firms’ tendencies or attitudes toward the main factors that make up service innovation. Second, the present study is based on an empirical analysis of the strategic fit of service innovation. While the use of empirical analyses in conjunction with the services sector has been uncommon, even fewer cases of empirical analyses of strategic fit have been recorded. Third, the empirical study carried out herein is one based on internal strategic fit. Existing empirical studies on the strategic fit of the service sector have focused on the fit between the external environment of a A Study on the Strategic Fit of Service Innovation Patterns 419 firm and its business strategy. Meanwhile, the current study is characterized by an analysis of the relationship between enterprise strategy, strategic fit, and firm performance. Strategic fit can be defined as the connectivity and consistency of a firm in terms of competitive priorities, operational strategy, and communication system. Based on this definition, the degree of strategic fit can be taken to refer to the degree to which these variables can be matched and aligned. Strategic fit theories are based on the assumption that the economic performance of a firm is maximized when the external and internal domains of a firm are strategically matched or aligned. For example, the business performance of a firm can be maximized when it achieves a strategic fit between its enterprise strategy and the infrastructure of its internal domain, thus allowing the firm to secure its competitive priorities with regards to the external environment. Venkatraman (1989) identified six types of strategic fit. This classification was based on the degree of specificity of the theoretical relation that displays the level of exactness of the functional form of fit, and whether the decision-making process conceptualizes or verifies the degree of fit based on a specific standard (example: efficiency) or whether the decision-making process specifies the strategic fit without any such standards. As the impact of the strategic fit between two variables, namely service innovation patterns and innovation resources and service innovation patterns and enterprise strategy, on firm performance, the analysis was conducted from the standpoint of fit as moderation. The standpoint of fit as moderation is based on a relationship where the impact of the predictor on the pivot 420 variable (dependent variable) is dependent on a third variable called the moderator. The degree of fit between the predictor and moderator becomes the primary determinant of the pivot variable. As such, the standpoint of fit as moderation can be adopted when the impact of the predictor (example; strategy) is specified as differing in accordance with various moderators (example: environment). Assuming that the relation between the two (or more) variables X and Y differs depending on the function of Z as moderator, this theory can be presented as the following equation.
Y = f(X, Z, XZ) (1)
(Here, Y= performance, Z= strategy, and Z = contextual variable matching the strategy to bring about the improvement of performance, XZ= effect of the fit between X and Z)
2. Major variables of strategic fit
There are various definitions of service innovation. However, service innovation can be defined herein as “a new or considerably changed service concept, client interface (client interaction channel), service delivery system or technological concept that individually, but most likely in combination, i) leads to one or more (re)new(ed) service functions that are new to the firm, ii) do change the service/good offered on the market, and iii) do require structurally new technological, human or organizational A Study on the Strategic Fit of Service Innovation Patterns 421 capabilities of the service organization.” (Van Ark, Broersma & Den Hertog, 2003) The classification of service innovation patterns, especially the micro-classification of service innovation patterns at the enterprise level, is necessary to heighten the understanding of service businesses and innovation process from the enterprise aspect and to develop, from a policy standpoint, effective measures based on the strategic analysis of the productivity, growth and knowledge capacity of the service industry, lifecycle of the service industry, and business potential of the service industry. By identifying policy targets with similar policy demands, behavior, and innovation activity needs, the analysis of service
Den Hertog’s four-dimensional model of service innovation
Existing/ marketing/ competitive Service distribution capacity Client Present/ service Concept Interface potential characteristics (service (cooperation client’s (business characteristics intelligence) design) with client)
human resources Organization Technological management capacity Options capacity
New Service Delivery System
Capacity, skills and attitudes of those engaged in the existing /competitive service sector 422 patterns makes the development of tailored policies possible. Unlike the general classification method, service innovation patterns in this study are classified based on attitudes toward the dimensions of service innovation, including service innovation targets and contents. As such, this study can be characterized as an exploratory research. As this study classifies service innovation patterns based on the attitude toward the dimensions of service innovation, the first task thus becomes that of classifying these dimensions. The perceptions and analysis of service innovation in an organized manner was facilitated by the adoption of the notions of service concept, client interface, and service delivery system found in Den Hertog (2003)’s four-dimensional model of service innovation. However, the notion of technological options was not applied herein. Hertog’s work built on Edvardsson’s service innovation model and innovation dimensions. Innovation resources are those which make it possible to actualize the service process and the implementation thereof. Broadly speaking, the concept of innovation resources includes the business concept; strategy; the firm’s goals and internal infrastructure; external laws and regulations; and the capacity of competitors, as the latter also influences the resources for innovation. Den Hertog (2003) suggested that there were three capacities with regard to innovation resources that could be used to connect the four dimensions of service innovation: marketing/distribution capacity, human resources management capacity, and organization capacity. Because technology capacity was deemed to be essential for the preparation of technological alternatives and viewed as a necessary resource for the achievement of a firm’s service A Study on the Strategic Fit of Service Innovation Patterns 423 innovation, this study also included technology capacity. A firm desiring to survive changes in the environment must be able to develop and maintain the strategic fit between the external environment and internal resources (Milgate 2001; Weill et al., 2002). Enterprise strategy can be defined as the method through which a firm competes with other firms in the market, and as a decision-making principle employed under uncertain situations where internal resources and technology should be matched with the environmental risks to create advantageous opportunities for the organization (Mintzberg, 1977; Glueck & Jauch, 1984). In other words, enterprise strategy can be regarded as the decision- making principle based on which the goals of a firm under a changing environment should be achieved. Various classifications of enterprise strategy patterns have been carried out. This study adopted Miller (1986, 1988)’s classification of business strategies, which in and of itself expanded the business strategy model first developed by Miles &Show (1987) and Porter (1980, 1985) in which the latter was divided into the cost leadership strategy, innovative differentiation strategy, and market differentiation strategy.
Chapter 3. Empirical analysis of the strategic fit of service innovation patterns
1. Outline of the empirical analysis
A firm that specifically implements service innovation has a 424 high likelihood of exhibiting different service innovation patterns; for example, the three dimensions of service innovation can be combined at various ratios. Therefore, to understand the service innovation of a firm, it is necessary to conduct an analysis of its service innovation patterns and of the characteristics of these patterns. The empirical analysis of the strategic fit between service innovation, innovation resources, and enterprise strategy was separated into two stages. In Stage I, the researchers derived the service innovation patterns of domestic service firms and compared the characteristics of the service innovation patterns based on the three dimensions of service innovation developed by Den Hertog (2003) and defined from a service-based perspective. In Stage II, the researchers applied the service innovation patterns, innovation resources, and enterprise strategies classified in stage I to the strategic fit in order to analyze the relationship between the strategic fit of service innovation patterns and firm performance.
2. Establishment of analytical model and hypothesis
The majority of the variables employed for the empirical analysis consisted of constructs found in previous studies. However, the variables which could not be obtained from previous studies, were based on new constructs. The major variables featured three or more detailed measurement items designed to ensure the fit of the variable. Each measurement item was, based on the Likert scale, assessed a value from very low (1 point) to very high (5 points). Cronbach’s coefficient alpha and a principle component factor analysis were conducted as part of the analysis A Study on the Strategic Fit of Service Innovation Patterns 425
Analytical model of service innovation patterns
Service innovation patterns (1)
Dimension of service innovation Service - Service concept Firm innovation performance - Service delivery patterns (1) - Service interface
Service innovation patterns (1)
of the reliability and validity of the manipulated variables. In addition, an analysis of service innovation patterns, a k-mean Cluster analysis, and an analysis of variance (ANOVA) were all utilized comprehensively, based on the overall objectives of the study. In cases where they are classified based on the dimensions of service innovation, service innovation patterns tend to differ depending on the importance which a firm attaches to the implementation of service innovation on a level by level basis. In other words, there emerges a type of service innovation pattern in which the three dimensions of service innovation are combined at various ratios. The characteristics and differences of the various service innovation patterns which have been identified were examined on the basis of such factors as the service innovation patterns of various industries, size of the firm, innovation activity, 426 sources of resources, R&D, obstacles to innovation, and the use of government support. In the basic research model, the relationship between the dimensions of service innovation, service innovation patterns, and firm performance was setup as, “Firm performance tends to differ depending on the prevailing service innovation patterns.” A strategic fit model formulated from the standpoint of fit as moderation was employed for the analysis of the relationship between the strategic fit of service innovation patterns and firm performance. In terms of the relationship between service innovation patterns, innovation resources, and firm performance,
Strategic fit of service innovation
Business strategy - cost leadership strategy - innovation differentiation strategy - market differentiation strategy Firm performance Firm size Strategic fit Upper level H2 (strategy Service innovation dimension) patterns - service concept Business type - service delivery - service interface Lower level H1 (management dimension) Strategic fit
Innovation resources - technology resources - human resources - marketing capacity A Study on the Strategic Fit of Service Innovation Patterns 427
states, “The strategic fit between service innovation patterns and innovation resources influences firm performance.” Meanwhile states, “The strategic fit between the service innovation fit and business strategy influences firm performance.” In accordance with these two hypotheses, an empirical regression analysis was conducted.
3. Data collection
The data for this study was extracted from the results of the survey of domestic service enterprises organized by KIET in 2011. A structured questionnaire developed based on previous studies was provided to Innovation Research, which was responsible for the actual conduct of the survey. The survey was carried out over a period of four weeks spanning from June 13 to July 8, 2011. Service enterprises included in the 2010 “Report on the Census of the Basic Characteristics of Establishments” produced by Statistics Korea were identified as the main population for the survey. After firm size and business type were introduced as the stratification variables, service enterprises with a history of service innovation were selected to take part in the survey. Based on the number of employees, firm size was broken down into five categories (10~29, 20~49, 50~99, 100~299, and over 300 employees). Business types were classified based on Statistics Korea’s Korean Standard Industrial Classification. Of the various service types (business type) developed by Miozzo and Soete, the current study primarily selected service enterprises that fell within one of the three following innovation patterns for 428 which the observation of innovation performance was deemed to be relatively easier: facility-intensive services, professional knowledge services, and technology-based services. In the end, six business types were selected, namely two from each of the three different services industries. Prior to the analysis of service innovation patterns, an assessment of the reliability and feasibility of the main variables was conducted. While the analysis of reliability revolved around the measurement of the Cronbach coefficient, a principal component analysis was carried out to assess feasibility. As seen in
, the results of the analysis of the Cronbach coefficient revealed a very high level of reliability. More to the point, all of the three service innovation variables, four innovation resource variables, three business strategy variables and the firm performance variable scored over 0.8, thus implying that none of the variables had any problems with regards to reliability. By conducting a principal component analysis of these eleven variables, the researchers were able to review how the detailed measurement items for each variable were grouped. The determination of the number of principal components was based on the Eigenvalue method in which the number of components is regarded as the optimized number of the principal component, when the Eigenvalue is greater than 1. The coefficient of the rotated component matrix was regarded as having a correlation with the relevant component when the coefficient was above 0.5. In addition, a Varimax with Kaiser normalization was employed as a rotation method for the principal component analysis in order to ensure linearity between A Study on the Strategic Fit of Service Innovation Patterns 429 the derived variables. Among the eleven variables, the results of the principal component analysis of service innovation level revealed that the client interface related variables were grouped in the first component, the service concept related variables in the second, and the service delivery system related variables in the third. As such, a fit exists between the three main service innovation variables and the detailed measurement items.
4. The results of the hypothesis verification
All eleven main variables exhibited a statistical significance level that proved satisfactory in terms of both reliability and feasibility. The service innovation patterns were examined based on these analysis results. More to the point, based on the determination that the service concept, service delivery system, and client interface had cluster attributes, a k-mean cluster analysis was conducted. As a result, four types of service innovation patterns were identified. Cluster Group 1 included firms focused on the innovation of the service delivery system. While Cluster Group 2 included the firms focused on the innovation of the client interface, Cluster Group 3 included the firms that showed a low concentration on all the dimensions of service innovation. Lastly, Cluster Group 4 included firms focused on the innovation of the service concept. Consequently, this study defined Group 1 as the service delivery- focused innovation pattern, Group 2 as the client interface- focused innovation pattern, Group 3 as the conservative innovation type, and Group 4 as the service concept-focused 430
Analysis of service innovation patterns
Content Result Details Firm performance Firm performance: service tends to differ concept innovation > service Hypothesis depending on the Partial delivery system innovation > 1 prevailing service support conservative innovation > innovation patterns. client interface innovation
innovation pattern. The analysis of whether there were any differences in firm performance occasioned by the derived service innovation patterns supported . This is because statistically significant differences in firm performance were observed across service innovation patterns. The examination of the characteristics of each service innovation pattern revealed that every pattern other than the conservative innovation pattern made more active use of non-technological resources than technological ones. This finding supports Sundbo (2000)’s emphasis on the importance of organizational change or learning in relation to service innovation. In addition, the main business strategy adopted was one of market differentiation. In case of firm size, the analysis showed that the ratio of the firms associated with the client interface innovation pattern rose as the size of firm decreased. Conversely, the ratio of the firms associated with the service concept innovation pattern rose as the size of the firm increased. A look at innovation patterns by business type showed that technology-based service firms and professional knowledge-based service firms tended to prefer the A Study on the Strategic Fit of Service Innovation Patterns 431 service interface innovation pattern. Meanwhile, facility-intensive service firms tended to exhibit the service concept innovation pattern and service delivery system innovation pattern. R&D investment was found to be high in the case of the service delivery innovation pattern, where technology resources were most actively used. In the case of the service concept innovation pattern, where firm performance was highest, the size of R&D investment tended to reflect the overall average. This means that while service firms approached R&D from the standpoint of technological innovation, they perceived non- technological centered innovation such as that related to human resources, organization capacity, and marketing capacity as something apart from R&D. The analysis of the relationship between the strategic fit of service innovation patterns, innovation resources, business strategy, and firm performance partially supported the hypothesis on the strategic fit between the service innovation patterns and innovation resources. The strategic fit between technology resources and organizational capacity positively influenced firm performance in the case of the service delivery system innovation pattern. However, technology resources, widely regarded as important innovation resources that traditionally impact firm performance, did not influence the performance of service enterprises, evenindependently. Technological resources only influenced firm performance when matched with the service delivery system innovation pattern. In addition, the service concept innovation and client interface innovation patterns positively influenced firm performance when they were 432 combined with organizational capacity. However, the results were not statistically significant. The strategic fit between the service innovation pattern and business strategy was partially supported. The strategic fit with the market differentiation strategy positively influenced firm performance in the case of the service concept innovation and client interface innovation patterns. The service delivery system innovation pattern had a significantly positive influence on firm performance when it was matched with the innovation differentiation strategy. These results imply that the decrease of the time lag between service innovation and firm performance and effective innovation implementation could be made possible through the achievement of a strategic fit between the service innovation pattern and business strategy. Contrary to market differentiation or innovation differentiation, the cost leadership strategy positively influenced firm performance only when it was combined with the service delivery system innovation pattern. This can be attributed to the fact that the service delivery innovation pattern, which emphasizes the efficiency of delivery and the decrease of service hours, can easily be combined with the cost leadership strategy. Based on the results of the study, the following implications were derived. First, to facilitate service innovation, it is necessary to establish a policy or system that is based on the expansion of the concept of innovation to non-technological sectors. Second, institutional management that emphasizes the combination of technology and non-technology should be considered when establishing future service innovation support measures. Third, in A Study on the Strategic Fit of Service Innovation Patterns 433 addition to improving the understanding of service innovation across all industry types, differentiated policies that take into consideration the characteristics of individual business types should also be put in place. Fourth, as far as the relationship between firm performance, new services creation, and public research institutes is concerned, the transfer of knowledge resources by public research institutes and joint research projects involving public research institutes should actively be promoted in order to facilitate service innovation within service enterprises.
Analysis of strategic fit of service innovation patterns
Content Result Details
- service concept innovation × technological resources: negative (-) influence - service delivery innovation pattern × technological The strategic fit resources: positive (+) between service Hypothesis innovation patterns Partial influences 1 and innovation support - service delivery innovation pattern × human resources influences resources: negative (-) firm performance. influences - service delivery innovation pattern × organization capacity: positive (+) influences
- service delivery innovation The strategic fit pattern × innovation between the service differentiation strategy: Hypothesis innovation patterns Partial positive (+) influences 2 and business support - service interface innovation strategy influences patter × market firm performance. differentiation strategy: positive (+) influences 434
Chapter 4. The direction of service innovation support measures
1. Basic direction
The establishment of an effective service innovation policy is predicated on the setup of a basic direction that takes into consideration the characteristics of the service innovation patterns revealed by the empirical analysis conducted herein. First, the government needs to design broad-based innovation policies that encompass both the technology (product) and non- technology fields (service, organization, marketing etc). Second, considering the importance of service innovation at the systemic level exemplified by service innovation combining technology and non-technology, the recent trend towards economic convergence, and the resolution of social issues, it is necessary to abandon the existing assimilating or differentiation approach and move in a comprehensive direction. Third, it is necessary to implement a policy where supply and demand are balanced by strengthening the basis of the demand for innovation services. Fourth, it is necessary to design and implement an innovation policy that reflects managerial flexibility in order to support innovation that is based on the characteristics of individual business types within a wider horizontal policy framework. A Study on the Strategic Fit of Service Innovation Patterns 435
2. Detailed measures
The detailed measures introduced in this study consist of the strengthening of the multi-disciplinary manpower base for service R&D, the strengthening of service R&D basis, and the establishment of an open-minded innovation supporting system. The strengthening of the multi-disciplinary manpower base requires the establishment of a long-term education plan for service science human resources at the government level, the development of a service R&D hub university similar to Alto University in Finland, and the development of a service R&D human resources-related certification system. It is also necessary to introduce a high-quality manpower support program in the service industry that is along the lines of the Business PhD program and Knowledge Pilots program established in Denmark. The strengthening of the service R&D base involves the mitigation of the discrimination between manufacturing and service industries in terms of R&D tax benefits, the improvement of the requirements for the establishment of company research institutes and research departments, the implementation of large-scale pilot convergence tasks led by the government, and the expansion of support for service R&D. The establishment of an open-minded innovation support system requires the introduction of a knowledge purchase voucher system for small & medium service enterprises, an innovation management support program for small & medium service enterprises, and a knowledge transfer support program. A review of the establishment of agency-type enterprises or institutions specializing in knowledge transfers is also required.
Research Report 2011-607
A Study on the Competition Factor in Exports The Cases of Korea, China and Japan
Minsung Kang, Hyunseung Cho, Daeyoung Koh and Jae Jin Kim
A Study on the Competition Factor in Exports 439
Chapter 1. Introduction
Korea has, much like Germany and Japan, been recognized as a manufacturing industry powerhouse. However, the rapid growth of developing countries such as China has created concern over Korea’s loss of price competitiveness. These fears have been further amplified by the fact that it has also failed to secure an advantage in terms of quality competitiveness. As such, the time has come to analyze and evaluate Korea’s export competitiveness in the manufacturing industry from various angles. The general analysis methods used in previous studies focused on the evaluation of export competitiveness in the manufacturing industry have consisted of the use of the Revealed Comparative Advantage (RCA) Index, Trade Specification Index, and export market share. While these methods make it relatively easier to present export competitiveness, they also depend too much on ‘quantitative comparisons’ of exports and imports. In other words, 440 they have been limited in their ability to show how the export unit value representing the quality or value added of a product has changed, and how these factors, export unit value or quality of commodity, have impacted the competition within the export market. As such, they have only produced simple quantitative trade indexes. A comprehensive understanding of Korean exports is predicated not only on the conduct of quantitative analysis based on export volumes, but also on export prices and competition factors. Put differently, the qualitative aspect of export should also be addressed. From this perspective, the present study analyzes the qualitative composition of product groups based on the theories and evidence presented in recent studies in order to reveal more fundamental competition factors. More specifically, it includes the assessment of trends in the change of export unit prices in Korea, China and Japan, and a review of the changes in the export competition structure at the individual industry level. Moreover, the three countries’ export competition factors within the manufacturing industry, factors that can be broken down into ‘quality’ and ‘price’ are comparatively analyzed from a quantitative standpoint.
Chapter 2. Review of existing studies and distinctions of the current study
Previous studies have focused on analyses that make use of various indexes calculated based on export volume. However, the A Study on the Competition Factor in Exports 441 accumulation of empirical studies whose results cannot be explained with existing theories has led to the emergence of a trend in which trade is approached from the standpoint of the quality of a product symbolized by export unit value. From a theoretical standpoint, Melitz (2003) and Baldwin and Harrigan (2011) conducted studies in which they assessed the competition factors of export commodities based on the (Quality) Heterogeneous Firm Theory (QHFT). In these instances, export unit value and the distance between trading countries were introduced as major variables. The empirical studies conducted by Hummels and Skiba (2004) and Baldwin and Ito (2011) have produced new interpretations of existing studies. However, with the exception of a few studies on China, little analysis of individual countries has been conducted from both a qualitative and quantitative standpoint. Using the export unit value as the determinant tool, this study examined the current state of the export competition between Korea, China, and Japan, as well as the general trends in competition factors (Chapter 3). In addition, based on HS 96, 6 digit export data, a quantitative analysis of the items exported by Korea, China and Japan was carried out. Thereafter, the determination was made as to whether quality or price constituted the main competition factor for these export items (Chapter 4). Based on these analyses, a qualitative explanation of the current state of Korea’s manufacturing exports and competition factors was conducted. The present study is significant in that its results can provide backgrounds and support for policymaking with the aim of improving and maintaining export competitiveness. 442
Chapter 3. The current state of Korean, Chinese, and Japanese exports and analysis of relevant trends
1. The current state of Korean, Chinese, and Japanese exports and related trends
Current state of Korean exports and related trends
Korea’s export volume increased three-fold from 128.0 billion dollars in 1996 to 361.0 billion dollars in 2009 (average annual increase rate: 8.2%). Exports temporarily decreased in 2001 because of the drop in the price of one of the main export items: semiconductors. However, the recovery in semiconductor prices that began in November 2001 led to exports starting to increase once again from 2002 onwards.
Increase in Korea’s export volume
400
300
200
Overall export volume (1 billion dollars) 100 1995 2000 2005 2010 Year Source : UN Comtrade data. A Study on the Competition Factor in Exports 443
The slowdown in global economic growth and decline in trade occasioned by the global financial crisis caused Korea’s exports to decrease by 13.8% in 2009. However, Korea’s share of the global export market increased from 2.6% in 2008 to 2.9% in 2009, a feat that enabled it to join the top 10 countries in global exports.
Current state of Chinese exports and related trends
China’s export volume increased 8.5-fold from 139.6 billion dollars in 1996 to 1.179 trillion dollars in 2009 (average annual increase rate 17.8%). The scope of the increase in Chinese exports was unexceptional from 1998~2000 as overall global trade worsened. However, China’s ascension to the WTO led to a significant increase in exports from 2002~2008, with a 20% average annual increase recorded during this period. The global financial
Increase in Chinese export volume
1,500
1,000
500
Overall export volume (1 billion dollars) 0 1995 2000 2005 2010 Year Source : UN Comtrade data. 444 crisis resulted in a 16% year on year decrease in China’s exports in 2009. However, China’s share of the global export market increased from 8.9% in 2008 to 9.6% in 2009, a move that catapulted it past Germany to become the top exporting nation in the world.
Current state of Japanese exports and related trends
Japan’s export volume increased approximately 1.4 fold from 398.2 billion dollars in 1996 to 539.0 billion dollars in 2009. This amounted to a 2.4% average annual rate of increase. Japan experienced a significant decrease in exports in 1998 due to the Asian financial crisis, in 2001 because of the rapid drop in semiconductor prices, and again in 2009 amid the continuing impact of the global economic crisis. The 26.5% drop in exports experienced by Japan in 2009 has had the effect of decreasing its
Increase in Japanese export volume
800
700
600
500
400 Overall export volume (1 billion dollars) 1995 2000 2005 2010 Year Source : UN Comtrade data. A Study on the Competition Factor in Exports 445 overall share of the global export market.
2. Comparison of the export competitiveness of Korea, China and Japan
China’s rapid growth and Japan’s relative slowdown can be regarded as the most outstanding trends in terms of Korea, China, and Japan’s exports for the period spanning from 1996~2002. Japan’s average annual increase rate (2.36%) was lower than Korea’s (8.2%) and China’s (17.8%). Moreover, Japan’s share of the global export market also decreased in the 2000s. Meanwhile, Korea and China heightened their share of the global market during the late 2000s, a period marked by the continuation of the global economic recession. The change in the export competition structure becomes even
Comparison of export trends of Korea, China and Japan
928.7 Unit : 1 billion dollars
636.0 566.2 516.3
309.2 247.2
Korea China Japan
1990~2002 2003~2009 Source : UN Comtrade data. 446 further pronounced when a comparison of the export unit value is conducted. Japan’s export unit value stood at 3.29 dollars/kg in 1996. This total was two-fold greater than Korea (1.64 dollars/kg) and more than three-fold greater than China (0.92 dollars/kg). However, this gap has continuously dwindled since 2004, with Japan’s level now similar or lower than Korea’s.1) Korea’s ability to usurp some of Japan’s export unit value can be explained by the drop in the export unit value of electronics and electric products that constitute some of the main items exported by both countries. The export competition structure of the three countries can be
Comparison of unit value for Korea, China and Japan
4
3
2
1 Entire unit value (dollars)
0 1995 2000 2005 2010 Year Korea China Japan Source : UN Comtrade data.
1) Caution should be exercised when interpreting Korea and Japan’s export unit value, a marker generally used to assess the quality or value added of a product. This is because a high ratio of data related to export unit values since 2005 was omitted (please refer to pp. 77~84 of the full version of this study). A Study on the Competition Factor in Exports 447 comprehensively summarized as follows. China’s manufacturing industry exports rapidly increased from the late 1990s onwards, to the point where they have now overwhelmed Korea and Japan in export volume. On the other hand, Japan’s status within the export market has diminished. For its part, Korea has exhibited the most outstanding results in terms of export unit value. While Japan boasted the highest export unit value up until the early 2000s, Korea’s export unit value began a steady climb in 2001 that allowed it to essentially catch up to and even surpass Japan in 2009. The competition between Korea and Japan within the export market during the late 2000s has been symbolized by Korea’s steady bridging of the gap in export volume and export unit value. China’s expansion within the global export market has been nothing short of outstanding. However, a closer look at its export unit value reveals that China’s export growth has been heavily focused on quantitative growth. China has failed to narrow the gap in export unit value with Korea since the mid-2000s. Although Chinese exports have rapidly increased, the results of this study serve to further strengthen the perception that China has focused on low value added products as its main export items.
Chapter 4. Empirical analysis of the shift in the trade competition paradigm between Korea, China, and Japan
Based on the methodology of Baldwin and Ito (2011), who 448 employed the (Quality) Heterogeneous Firm Theory (QHFT) as their basic model, and the results of existing studies related to export unit value, the present study introduced the follow equation designed to determine export competition factors.
i : export partner, j : Korea, China, or Japan depending on data t : export year UV : unit value during t period with regards to the export of an item (based on HS, j country) DISTi : distance between the country under analysis and export partner GDPit and GDPjt : GDP (gross domestic product) of i country and j country GDPCAPit and GDPCAPjt : GDP per capita of i country and j country
The factors determining the competition between price and quality were assessed based on the statistical significance and status (+ or -) of the distance coefficient. More specifically, while quality competition is deemed to exist when the distance coefficient has a (+) sign, a price competition exists when the distance coefficient has a (-) sign. Here, caution should be exercised when interpreting the terms price competition and quality competition. These should be regarded as referring to whether an enterprise places more emphasis on quality or price A Study on the Competition Factor in Exports 449
Ratio made up by the various competition factors in Korea, China, and Japan with regards to manufacturing exports
Analysis Analysis Analysis paralysis paralysis paralysis 10% 3% 7% Not Not Not significant significant Quality 25% significant Quality 31% competition Quality 37% competition 39% Price competition 34% Price competition 54% Price competition 14% competition 27% 19% (a) Korea (b) China (c) Japan when exporting a product, and not to the absolute quality level of the product.2) A quantitative analysis of more than 4,500 (4,517 for Korea, 4,565 for Japan, and 4,606 for China) HS 96, 6 digit export items was conducted to determine whether competition across a wide range of export items is based on quality or price. An analysis of all the export information over the 14 year- period spanning from 1996~2009 was carried out. Thereafter, the researchers divided the timeframe into two periods of 7 years and conducted an additional analysis in order to review temporal trends. The results of the examination of each country’s competitiveness for each export item for the period 1996~2009 can be found in .
2) A high ratio of quality competition does not always mean that the quality of a product is excellent or that the export unit value is high. On the contrary, quality competition means that an enterprise considers the quality of a product to be a more important factor within the export market than price. For more details, please refer to Chapter 2 (pp. 44~48). 450
Ratio made up by the various competition factors in Korea, China, and Japan with regards to manufacturing exports
Analysis paralysis Quality competition Analysis paralysis Quality competition Price competition Not significant Price competition Not significant (a) Korea (b) China
6 5 4 3 2 1 0 1995 2000 2005 2010 year
Analysis paralysis Quality competition Price competition Not significant (c) Japan
Japan exhibited the highest ratio (54%) of quality competition- based items. Korea and China exhibited similar levels in this regard, with 34% and 39% respectively. Thus, having focused on producing high quality goods, Japan has tended to regard the quality of a product as its main source of competition. While Korea exhibited levels similar to China, it engaged in quality competition in conjunction with a relatively lower number A Study on the Competition Factor in Exports 451 of export items. This does not mean that China has a greater number of higher quality items than Korea. Rather, it means that China has had a slightly greater number of export items where quality has been the determining factor than Korea. Although Korea’s absolute product quality is much more advanced than China’s, items that may be viewed from the standpoint of price competition in the Korean case may very well be seen from the standpoint of quality competition where China is concerned. However, attention should nevertheless be paid to the fact that Korea exhibited a lower number of export items based on quality competition than China. China exhibited the highest level (27%) with regards to price competition. This was followed by Korea (19%) and Japan (13%). Thus, China has regarded price competition as being more important than Korea and Japan. Based on overall manufacturing exports by country and year, the ratio of export volume by competition factor was calculated in . This was achieved by connecting the items to each country’s export volume. Korea exhibited a high ratio of cases where the competition factor was unclear. While quality competition was determined to be the main competition factor in 33% of cases in 2009, price competition was the prevailing factor in about 18% of instances. In other words, although the ratio of products based on quality and price competition both stood at about 20% before and after 2000, the ratio of quality competition products gradually increased thereafter while the ratio of price competition products decreased. China has exhibited contrary results. While quality competition 452 was the determining factor in the case of 34% of the items exported, the share of price competition-based items significantly increased from 31% in 1996 to 43% in 2009. This shows that instead of developing high quality and value- added products, the Chinese manufacturing industry has limited its focus to price competition products. Korea and China exhibited similar ratios of quality competition products in 2009 (33%). However, China (43%) boasted a much higher ratio of price competition products than Korea (18%). Meanwhile, in 44%
Analysis of the competitiveness of the Korean, Chinese, and Japanese manufacturing industry (comparison of the former and latter periods) Unit : number Korea China Japan 1996~ 2003~ 1996~ 2003~ 1996~ 2003~ 2002 2009 2002 2009 2002 2009 Analysis paralysis 824 966 338 249 728 582 >0 p < 0.1 1392 1244 1913 4523 2187 2178 <0 p < 0.1 762 741 931 1412 623 547 Not significant 1539 1566 1424 1422 1027 1258 Total 4517 4517 4606 4606 4565 4565
Unit : % Korea China Japan 1996~ 2003~ 1996~ 2003~ 1996~ 2003~ 2002 2009 2002 2009 2002 2009 Analysis paralysis 18.24 21.39 7.34 5.41 15.95 12.75 >0 p < 0.1 30.81 27.54 41.53 33.06 47.90 47.71 < 0 p < 0.1 16.87 16.40 20.22 30.66 13.64 11.98 Not significant 34.07 34.67 30.92 30.87 22.50 27.56 Total 100.00 100.00 100.00 100.00 100.00 100.00
Note : >0 indicates quality competition, <0 indicates price competition. A Study on the Competition Factor in Exports 453 of cases the determination of the competition factor (quality or price) could not be made in Korea; this was significantly higher than the 24% recorded by China. Japan exhibited very different trends from Korea and China. No major changes in export trends could be found. While the ratio of quality competition products was very high at over 50%, the ratio of price competition products was limited to a mere 15%. A quantitative analysis was also conducted by dividing the 14 year-period spanning from 1996~2009 into two periods, namely 1996~2002 (former period) and 2003~2009 (latter period). The results were then presented as panel data (refer to
). Korea did not show any major differences between the former and latter periods. However, while the items based on quality competition and price competition slightly decreased, those associated with analysis paralysis greatly increased. China exhibited a clear change across periods. More to the point, while quality competition products decreased, price competition products increased. Japan did not exhibit any clear change in the ratio of its competition factors during the former and latter periods. An examination of export items during the latter period based on the determinant competition factors during the former period reveals clear temporal changes in the competition factor. The determinant competition factor during the former period continued to prevail during the latter period in the majority of cases. However, clear country-specific characteristics were exposed. 48%, 50%, and 71% export of Korea, China, and Japan, 454 respectively, products that were found to be based on quality competition during the first period continued to be governed by this factor during the latter period. 18% of the products from China underwent a change in the main competition factor from quality to price competitiveness during the latter period, the highest such ratio amongst the three countries. 64% of Chinese products that were based on price competitiveness during the first period continued to be regarded as such during the second period. This total was much larger than in the Korean (34%) and Japanese (38%) cases. The number of export products in which price competition was the determinant factor during the former period while quality competition prevailed during the latter one was found to be 20.6% in the case of Japan, 15.9% for Korea, and 10.5% for China. 31% of Japanese products, 26% of Chinese products, and 21% of Korean products for which no clear results could be obtained during the former period were found to have quality competition as their determinant factor during the latter period. Meanwhile, 28.5% of Chinese products for which no clear results could be obtained during the former period developed price competitiveness as their main competition factor during the latter period. This was significantly higher than Korea (15.2%) and Japan (13.4%), thus reconfirming China’s focus on price competitiveness. These results are consistent with the former results showing Japan’s continued emphasis on quality competition and China’s strengthening of its price competition. These trends were also evident in the analysis of the ratio of export volumes. A Study on the Competition Factor in Exports 455
In addition to the analysis of the current state of all export items, the present study also includes a quantitative analysis. More to the point, an analysis of Korea’s top 10 export items during the period spanning from 2001~2009 was conducted, and an examination of the current state and trends in competition factors was carried out in conjunction with some export products.3) The coefficient of the competition factors can be found in
. The positive (+) sign denotes quality competition and the negative (-) sign price competition. Meanwhile the absolute value indicates the degree of competition. In order to facilitate the comparison of the three countries, Korea is assigned a value of 1 for the entire period in
. However, when divided into former and latter periods, the recalculated values are based on the value of 1 assigned to Korea during the former period. An analysis of the entire period with regards to items coded 271000 (Petroleum oils & oils), which exhibited the highest export volume, revealed that all three countries favored quality as their main competition factor. In terms of the degree of quality competition, the countries ranked in the following order: Japan, Korea, and China. Analyzing these results from the standpoint of the former and latter periods, the study found that the three countries favored quality competition and that no changes occurred in terms of the order of the degree of competition. However, the overall level of quality competition was found to
3) The detailed of the top selected 10 items can be found to
in p. 115 of the full study. The explanations about the detailed items show that the methodology used in this study can objectively explain the current state of trade and provide detailed policy implications. 456
Estimation and comparison of coefficients for the top 10 Korean, Chinese, and Japanese manufacturing items
Top Entire period Former period Latter period ISIC Item (1996~2000) (1996~2002) (2003~2009) 10 3 code items Korea China Japan Korea China Japan Korea China Japan 1 23 271000 1.0 0.3 2.5 1.0 0.5 2.8 0.7 0.2 1.7 2 32 852520 -1.0 -17.9 1.8 -1.0 -9.3 0.3 0.1 -11.0 2.0 3 34 870323 1.0 -17.1 0.4 1.0 -2.7 0.4 0.1 -1.9 -0.8 4 32 854230 -1.0 14.4 -2.2 1.0 62.4 -8.0 -0.4 97.2 -62.7 5 35 890120 -1.0 7.3 8.3 1.0 5.3 0.5 -0.1 1.3 1.8 6 32 854213 -1.0 2.6 -3.2 1.0 36.7 -2.7 0.2 7.5 -39.9 7 33 901380 -1.0 -2.6 0.3 -1.0 -0.6 0.4 0.0 -2.7 0.6 8 35 890190 1.0 2.4 0.8 1.0 3.2 1.0 0.0 1.5 -12.0 9 30 847330 -1.0 -1.4 0.3 -1.0 -1.5 0.2 -0.6 -0.9 0.2 10 32 852990 -1.0 -5.1 0.9 -1.0 -65.9 31.8 -39.5 -83.0 -23.3 Note : The numbers in bold indicate cases where the determination of the price or quality competition factor as the significant coefficient value was calculated at the 10% significance level. have weakened. This implies that although the quality of oil products was regarded by the three countries as an advantageous export competition factor, the importance of the price factor has recently been emphasized. Moreover, Japan most strongly adhered to a quality competition strategy for international export markets, followed by Korea and then China. In terms of the largest share of export volume by period, Korea had the largest ratio with regards to items coded 271000, followed by China and Japan. However, from the perspective of the increase in export volume, these items were found to account for a 5.5% increase in the case of Japan, 2.4% for Korea and 2.7% for China. Thus, Japan scored much higher in this regard than the A Study on the Competition Factor in Exports 457
Competition factors for 271000 items during the former and latter periods and comparison of the change in competition factors
2.8
1.7
1 0.7 0.5 0.2
Former period (1996~2002) Latter period (2003~2009)
Korea China Japan
Comparison of the change in the relative ratio of the export volume of 271000 items during the former and latter periods
3.4
1.4 1 1.1 0.4 0.2
Former period (1996~2002) Latter period (2003~2009)
Korea China Japan
other two countries. This shows that Japan’s strategy of strengthening price competition (weakening quality competition) has been effective in actual export markets. 458
Chapter 5. Conclusion and implications
Based on elements such as export unit value and export competition factors generally excluded from existing studies on trade, this study analyzed the export competition structure of Korea, China and Japan. The present study can in particular be distinguished from previous ones by the fact that the analysis focused not only overall exports, but also export unit value and competition factors or the detailed export items. The results and implications of this study can be summarized as follows. In terms of export results, the period 1996~2009 can be summed up by the quantitative growth of China, qualitative growth of Korea, and the slowdown of Japan. Having averaged an annual increase in export volume rate of 17.8% from 1996 to 2009, China had become the largest exporter in the world by 2009. Meanwhile, Korea boasted outstanding results with regards to export unit value. Here, attention should be paid to the fact that while Korea’s export unit value increased by a similar or higher margin than Japan; the gap with China remained largely the same. The quantitative examination of export competition factors revealed that Japan was in fact the country with the highest ratio of quality competition products; meanwhile, China was found to be the country with the highest ratio of price competition products.4)
4) See footnote 2. A Study on the Competition Factor in Exports 459
The results of the analysis hint at the following implications with regards to the manufacturing industry export competition structure of Korea, China and Japan. First, Korea’s export competitiveness within the manufacturing industry has greatly improved to reach the global level. However, the analysis of export competition factors revealed that the ratio of Korean products governed by quality competition within the global market remains rather low. In other words, although Korean products’ gained higher reputation in the global market to the point where an increase in export product prices has become possible, Korea continues to compete with other countries in that it has not yet secured a clear advantage in terms of quality. The results of the study also support the perception that Japan’s status as a strong manufacturing exporter has been weakened. Of course, given its technological prowess, it is difficult to clearly ascertain whether Japan has lost its manufacturing export competitiveness in global market only based solely on the results of an analysis of export unit value and export volumes. Be that as it may, this study clearly shows that Japan’s status within the export market is in fact weaker than what it was in the past. The examination of export competition factors showed that Japan boasts a high ratio of quality competition. However, these results only imply that Japan pays more attention to quality competition than price competition in export markets. They do not mean that Japanese products have maintained the same level of quality competitiveness within export markets as in the past. Rather, we can conclude that the loss of the edge in the price competition has led to increased 460 importance being paid to quality competition. Contrary to Japan, which experienced a general slowdown, China has enjoyed rapid growth in terms of its exports. China has become the world’s top country in terms of export volumes; moreover, the products it exports have also become increasingly diversified. However, China’s continued focus on exporting low- priced products has resulted in its export performance being much less impressive when viewed from a qualitative standpoint than from a quantitative one. These results were confirmed by the analyses of both the current state of export unit value and export competition factors. Research Report 2011-608
A Study on the Management & Investment Strategy in “Smart Era” for Improving Firms’ Competitiveness
Donghyuk Suh, Dae-Young Joo, Chuel Cho, Jae Young Choi and Hyejin Jin
A Study on the Management & Investment Strategy in “Smart Era” for Improving Firms’ Competitiveness 463
1. Purpose and Differentiation of the Study
While the new paradigm in various aspects of industries herald the smart era, management strategies are required from a different point of view than from the responses thus far in the smart era. This study aims to seek investment strategies for achieving industrial structure enhancement and generating high added value through the consolidation of major industries’ growth capabilities in response to the industrial paradigm shift, which can be dubbed as the advent of the smart era. As smartization is a concept that embraces convergence, mobile devices, and intelligence, an approach from a standpoint different from the existing investment concepts is needed. This study analyzes the changing investment conditions and searches for new growth capability factors (investment subject) in line with the smart era by expanding the concept of investment into a concept encompassing the newly emerging and important competitiveness factors from the industrial viewpoint. 464
With regard to the industries targeted in this study, typical key manufacturing industries with high relevance in the smart era were selected among the key manufacturing industries, except for the service industry. The selection prerequisite is having a high correlation with the theme of the smart era, rather than the entire manufacturing industry. Thus, three industries — automotive, machinery, and electronics — were selected. Meanwhile, this study is different from the previous studies from the following standpoints. Systematic studies on overall industry smartization and preparation for the smart era have yet to be attempted. First, this study focuses on presenting desirable investment directions to cope with a paradigm shift by selecting investment strategies that would be apt for the smart era, which was the theme of this study. By adopting a new investment concept in the smart era, the investment strategies that must be pursued by the future industrial investment from a new standpoint were presented. Second, this study expands the investment subject scope, which includes some management activities beyond the existing scope, such as R&D and facility investment, to reflect the fact that a different set of functions or sectors is considered the new set of investment subjects, as great importance is given to intangible assets. Third, this study verifies the subjects of strategic investment required for smartization through empirical analysis, based on the data obtained from a questionnaire survey targeting major industries, unlike the studies related to investment from the A Study on the Management & Investment Strategy in “Smart Era” for Improving Firms’ Competitiveness 465 macroeconomic and total-amount standpoint, which used the past time series data. The limitations of this study were that the industries targeted were limited to three major industries, and there were limitations in securing data on intangible assets. There were many restrictions in terms of empirical analyses, as full-scale smartization has not been pursued. There were just about 100 questionnaire survey respondents for each industry, which indicates a limitation in identifying extensive industry recognition.
2. Theoretical Background of the Smart Era and Industrial Capability Consolidation
This study has aimed to conceptualize the meaning of smartization, which has diverse interpretations from an industrial viewpoint. That is, smartization is defined as a mobile-function- based convergence concept equipped with intelligent networking and customer value. From such a scope, an approach from the industrial standpoint was devised. Why do some companies have a competitive advantage while others in the same industry and with the same conditions do not? The firms equipped with competitiveness will still grow in the new industrial environment — that is, in the smart era — while the others will decline. Smartization is a paradigm that has recently emerged, and it is not easy to present a suitable theoretical background for an explanation. This study, however, intended to mainly use the resource-based view and the network 466 theory as the framework for determining the sector capabilities in the major industries for consolidation so that such industries can cope with the smart era. The resource-based view can be used as an analysis framework to explain that smartization is promoted through intangible-asset rather than tangible-asset expansion. According to this view, firms can secure a continuous competitive advantage only if they create values in their own mode that competitors cannot easily imitate in terms of corporate activities. The contribution of the resource- based view is that it values not only the possessed resources but also the ability to combine and utilize them. Firms utilizing superior resources can be efficient while other firms remain ineffective. Therefore, whether a firm is an efficient one actually depends on the superior abilities it possesses compared to its competitors. The network theory’s analytic background is that it can be explained as an important motivation that can promote smartization from the standpoint of networking between products and between firms through complementary relations between cooperation and competition. To secure a new competitive advantage and to maintain it, a new capability to combine and reestablish internal and external resources is required, which is the core of the network theory. Under such theoretical background, this study adopted the concepts from the management and industrial standpoints rather than the economic concept in terms of investment. This study viewed the investment concept as the subject of intangible-asset formation and accumulation, regarding technology management, A Study on the Management & Investment Strategy in “Smart Era” for Improving Firms’ Competitiveness 467
Growth Capability Factors Analysis Model in the Smart Era
Industrial environment - Shape the industrial environment (financing, system, etc.) - Establish social infrastructure (communications, transport, etc.)
Resource- Static/dynamic internal based view capabilities - Possessed tangible assets - Possessed intangible assets Enhance the - Ability to combine and utilize manufacturing resources industry’s growth Network Network features capabilities in theory Relations between firms the smart era - Close cooperation with other firms - Strategic alliance - Communication ability with customers organizational innovation, and networking with the outside as important assets, in addition to the narrow meaning of investment, bearing the smart era in mind, instead of the conventional investment concept. It is desirable to expand the existing investment scope and simultaneously to shift towards the investment concept paradigm, where weight moves to intangible assets in terms of investment to cope with the smart era.
3. Investment Strategy Perception and Empirical Analyses to Cope with the Smart Era
This study identifies what changes in perception firms have through the questionnaire survey targeting the firms. Using 468 purposive sampling targeting the three industries (automotive, electronics, and machinery industries) with high correlations with the smart era, this study used 308 useful samples among 323 responses through the selection of some 100 firms in each industry. As a result, the larger firms with high investment ratios and focus on capital goods relatively invest more in intangible assets. In the electronics industry, the responses of the firms with an over 15% intangible-asset investment ratio reached 19.8%, which was higher than twice that in the automotive industry. About 60% of the respondent firms have perceived the need for preparation for the smart era, and they are thus regarded as considering responsiveness to the smart era as important regardless of the firm’s size. Concerning the comparison of the existing investment levels of firms or their recognition of the importance of investment to cope with smartization, the firms recognize new-technology and new- product development, core and base technology development, and software as being much more important than it is regarded at present in terms of technology development. In the technology development mode, the firms recognize co-design and technology development that consolidate investment as much more important than external-technology adoption, a firm’s own design, and technology development consolidation. In terms of product portfolio capabilities indicating the product composition and diversification level, firms have been identified to regard investment in flagship products’ diversification, convergence and new-product development, and the securing of software and solutions related to products as more important in A Study on the Management & Investment Strategy in “Smart Era” for Improving Firms’ Competitiveness 469 the future than now. In terms of productivity and organizational innovation, the importance of investment in talent nurturing and reeducation/retraining, evaluation and reward system, and creative organizational culture is emphasized at almost similar levels. Meanwhile, in management strategy innovation, firms have recognized investment in production/sales networking innovation, R&D networking innovation, customer management system, and strategic M&A to cope with smartization as very important. Based on the questionnaire survey, this study empirically analyzed the effects of a firm’s investment strategies on its competitiveness, identified the correlations and substitute/complementary relations, and predicted the investment strategy directions in the smart era. It also identified the correlations and substitute/complementary relations between investment sectors. As the questionnaire survey used a 5-point scale, this study used the ordered and multivariate probit models. The empirical analysis results of the competitiveness impact factors are as follows. Whether profitability is achieved is very important compared to a firm’s sales, size, and life span. Also, results implying that the facility investment so far consolidated by a firm may not significantly affect the firm’s competitiveness. With regard to product portfolio capabilities, flagship product diversification and outsourcing production expansion appeared to be significant variables positively affecting a firm’s competitiveness, as productivity, human resources nurturing program in productivity and organization innovation, and customer management system investment did in relation to management system innovation. Concerning whether future investment consolidation is required 470 in the six sectors analyzed using the multivariate model, it was found that firms with high sales need to focus on investment strategies to strengthen their facility investment, product portfolio capabilities, and productivity and organizational innovation and to cope with the smart era. Investment in the productivity and organizational innovation sector to cope with the smart era is more important in the automotive industry than in the machinery industry. In addition, product portfolio capability consolidation is considered relatively more important in the electronics industry
Analysis of the Effects of the Existing Detailed Sector Investment on Competitiveness
Effect Contributing to Competitiveness Investment Positive Effects Negative Effects sectors by large -scale classification Facility investment No significant effect No significant effect Technology Joint technology development and development External technology core technology Commercialization of adoption management new technologies Technology innovation No significant effect No significant effect New-convergence- product development Product portfolio Diversification of Diversification capabilities flagship products Outsourcing expansion Productivity & Productivity organizational HR nurturing No significant effect innovation program Management strategy Customer Production at local innovation management system sites A Study on the Management & Investment Strategy in “Smart Era” for Improving Firms’ Competitiveness 471 than in the machinery industry. Concerning the relations of the six sectors, very significant and close complementary relations were found to exist between productivity and organizational innovation strategies. From the substitute and complementary standpoints between the top six strategies by large-scale classification, management strategy innovation is regarded as playing a pivotal complementary role among the investment strategies to cope with the smart era.
4. Investment Shift Directions of Major Industries and Policy Demand, in the Smart Era
(1) Automotive Industry
1) Smartization trend in the automotive industry and future investment directions
As the aspect of the driver’s value increase is more emphasized at present through the precision control and cutting-edge safety devices of vehicles, smartization is carried out in the direction of enhancing vehicle safety, efficiency, and intelligent system. Future investment in the automotive industry is forecasted to be made in the direction of consolidating smartization capabilities. So far, machine technologies, including those pertaining to the engine and transmission, have been important, but the investment demand in the electrical/electronic, software, and ICT sectors will greatly increase because they are expected to become more 472 important in the smart era. In the smart era, investment related to marketing is likely to be shifted to online systems, including the Internet, rather than to outlets or dealership increase/expansion. At present, although intangible-assets investment, including knowledge and R&D, is important, its importance is expected to increase in the future. Even though the percentage of firms that recognize the enormous need to cope with smartization, which leads the current automotive industry’s environmental changes, is currently above 50%, it is still at a low level compared to other industries, and the investment in intangible assets, which is the core of smartization, is also insufficient. Although firms recognize that the importance of innovative technology related to smartization will rise in the future, they do not believe that its importance will increase as much as that of the continuous technologies. In facility investment, new-facility expansion is most important, and it is also predicted to become of the upmost importance t in the future. Firms focus on convergence- or new-product development and on the existing product portfolio mode, such as flagship product diversification. Even though firms are currently inactive in the extensive product portfolio, including software and solutions, service networking, and entry into non-related sectors, its importance gradually increases according to the environmental changes. Moreover, firms place a premium on the more creative organizational culture change in line with smartization progress. A Study on the Management & Investment Strategy in “Smart Era” for Improving Firms’ Competitiveness 473
2) Investment cases and intensive investment sectors for industrial smartization promotion
A case of smart product development investment strategy in the automotive industry is a realistic situation recognition system (3D recognition system) for cars that is applicable as an active and safe system for smart cars, including clash avoidance and autonomous navigation. The technology marked the convergence of software and hardware technologies, and external technology adoption, joint design, and technology development consolidation are thus necessary. Innovative technologies such as network and intelligent technologies mainly comprise the system. To come up with a system that can most effectively respond to the surrounding situation, a creative organizational culture is necessary, in addition to HR nurturing related to electronic technology and information and communications technology (ICT). The investment priorities that need to be set to cope with smartization can be selected as follows. Semiconductors for cars or software for electronic control become the foundation of automotive smartization, but as most of them are imported, future investment expansion is urgent, and the strategic importance is high. Although the electronic control system can be made partially available in South Korea, its dependence on overseas products is high, and new types of control devices are continually being applied. In this context, the importance and urgency of investment are relatively high in this area. Safety systems, ICT, and electronic control technology are compounded and evolve into a car’s autonomous navigation system and network-infrastructure- 474 integrated safety system. Although the futuristic technologies’ strategic importance is higher, their urgency is lower at present. Although the strategic importance of futuristic telematics is slightly lower, because people regard it as an auxiliary function, it is currently being applied, and its urgency is slightly higher because telematics is an area where continuous improvement is required. To develop and produce relevant products, R&D or production facility investment should be simultaneously carried out, and IT and relevant HR nurturing can be a very important investment item. Moreover, investment relevant to the use of external resources in the IT sector must be expanded. In the case of intelligent road system establishment, which is important to smart driving, its strategic importance is slightly high, but its urgency is not.
(2) Machinery Industry
1) Smartization trend in the machinery industry and future investment directions
The existing technology development has been focused on machine and product development while investment to cope with smartization is needed to destroy the boundary between industries and to get closer to human-oriented R&D. Ambidextrous organizations, setting up teams to which open innovation with companies and talented personnel and innovative technologies in other sectors can apply, may be included in such an investment. The establishment of a system that can draw the needs of the customers and can cope with the demand by focusing on B2B A Study on the Management & Investment Strategy in “Smart Era” for Improving Firms’ Competitiveness 475 products’ marketing capability consolidation is required. Although the firms in the machinery industry highly evaluate the need to prepare for the smart era, they have been determined to be lacking in investment in intangible assets, or software and contents. The automation application technology, which is a continuous technology in the process of smartization, is still assessed as an important area, but an eco-friendly technology is seen as being valued more in the future. Firms highly evaluate the importance of organizational innovation, and especially, they show interest in talent nurturing and reeducation/retraining programs. In this manner, the change in the organizational sector appears to lead the smartization. Although the current investment level in the marketing and customer management sector is low in the machine industry, it seems that the investment will increase in the future, and thus, the importance of two-way communications is expected to go further up in the smart era. The importance of customer-oriented design and product-service package may also go up.
2) Investment cases and intensive investment sectors for industrial smartization promotion
Some examples of a typical smart product in the machinery industry are the vertical machining center DNM series, with which IT technology has been combined, among the mother machines (machine tools) developed by Doosan Infracore. This product has made the process stages automated and intelligent by adding an artificial intelligent function, and has enabled the function, which is possible only in the high-performance mother machines, at a 476 low cost. To obtain such an outcome, analyses of the intelligent functions of advanced companies’ mother machines, and of the process of extracting the functions required by the customers, were performed. The progress of smartization is forecasted to further consolidate such customer-oriented attributes. In the future, the importance of investment in eco-friendly and low- power-consuming technologies is projected to further increase. The intensive investment sector that is related to intelligent production systems is the customer-tailored flexible processing system. This product enables quick one-stop customer-tailored processing line setup and package supply through the complexity and modulization of the cell and line systems, in addition to the processing equipment. In relation with the robot, investment in sensor, software, and convergence technologies for the recognition function is gradually becoming more important.
(3) Electronics Industry
1) Smartization trend in the electronics industry and future investment directions
The effective innovative activities for the enhancement of a firm’s productivity are not limited to R&D but broadly include brand establishment, management organization improvement, and qualitative talent improvement through education/training. Nowadays, when smart societies are being built, the importance of built-up intangible assets, in which such activities have been accumulated, is emerging in addition to tangible assets. In relation A Study on the Management & Investment Strategy in “Smart Era” for Improving Firms’ Competitiveness 477 with intangible-asset investment in the electronics industry, the investment sectors of informatization assets are OS, SI (system integration), package software (SW), and DB. Innovative assets’ investment sectors are mainly R&D in the natural science field, resources development rights, copyright & license, and R&D for product development, design, and industrial display/design. The investment sectors of competitive assets include the brand asset and a firm’s unique human resources and organizational structure.
2) Investment cases and intensive investment sectors for industrial smartization promotion
In actuality, the expansion and establishment of smart gadgets’ value chain is necessary through business area destruction. Looking into the business areas of the ICT industry, Google has carried out business with its unique advertising business earnings model, Apple with its handset manufacturing business, Microsoft with its software business, and Amazon with its online distribution business. Global large ICT corporations, however, currently strengthen their competitiveness through entire value chain areas, such as information service (contents), platforms, and handsets, via M&A. Nowadays, when a small number of companies are aggressively competing with one another for global ICT market dominance, the South Korean companies also need to precisely recognize the environment and make an effort to come up with a stable management environment. As for the investment target sectors, smart products appear in various forms through convergence with other industries, not to 478 mention ICT itself. For this reason, the investment target sectors need to be classified into network technology, smart parts, finished smart products, OC, embedded SW, package SW, security technology, contents, applications, and information service by supply chain and prioritized.
(4) Comparison of Major Industries’ Strategies to Cope with Being ‘Smart’ and its Implications
The core growth capabilities thus far in the major industries in terms of the technical factors are the machine, precision, and digital technologies. Productivity, product quality, economies of scale, facility investment, timely production, and core parts technological prowess are non-technology factors. Low power- consuming and human-interface technologies, however, will be more important than cutting-edge and mass production technologies in the future. Also, the importance of the accumulation of intangible assets such as qualitative patents rather than quantitative patents, and creative organizational culture nurturing, two-way customer management system and M&A, and partnership between the same and heterogeneous business types will be much more important in the future. The core capabilities and strategic investment consolidation fields identified through each industry analysis move from parts functionality to intelligent parts, from equipment for processing to integrated solution bolstering combined with hardware (HW) and SW, and from one-on-one service to platform-based service. The sectors of the major industries in which there is high A Study on the Management & Investment Strategy in “Smart Era” for Improving Firms’ Competitiveness 479
Growth Capabilities and Investment Consolidation Sectors for Smartization
Automotive Machinery Electronics - Machine - Mechatronics technology - Tangible-asset investment, technologies,including - Electronization of including large-scale Existing engines & transmissions machine control facility investment for core growth - Drive function and quality - Large-scale investment massproduction capabilities - Facility investment - Core parts technologies, including semiconductor & LCD - Electric/electronic, ICT - Various strategic alliance - Intangible assets, including umanliketechnology, SW modes development for SW, contents, patents - Technology cooperation system package - Ubiquitous world, with external firms - Cooperative system including smartphone and Core - Intangible assets, consolidation between smart home appliances, growth including design, auxiliary countries and ICT technology capabilities communications, - Multifunctional and development in the customer communication solution offering - Network, convergence smart era - Customer-oriented technology, design, product development humanlike technology - Two-way direction conveyance of information and social media system - IT and intelligent products - HW-SW combined solution - HW SW power Core - Open innovation offering capabilities - One-on-one service - Creative human resources - Human-centered platform-based service direction of technologies, including - Product functionality investment autonomous control- product sensation consolidation perception-autonomous - Economies of scale acquisition of knowledge economies of scope - Semiconductor for cars - Energy application and - Platform, embedded SW - Electronic control SW compound equipment - System semiconductor, - Electronic control system - Intelligent dispersion realistic display, mobile Techno - Integrated infrastructure control and remote - Smart grid logy safety system diagnosis of retention - Core patents acquisition develo - Autonomous navigation - Human-friendly robot and management pments system platform - Human interface, tage - Futuristic telematics - Situation-recognition- humanlike technology Investig based language and behaviorperceiving ation technology consoli dation - IT utilization including lean - Open CNC and system - Next-generation network sectors Comm production mode integration establishment to cope ercializ - Quality control - Multi-head compound - Smart work ation consolidation processing equipment - Smart health with - Application offering - Hybrid grinding system smartiz product for smart car ation ion - Infrastructure investment stage for smart-car operation Organi - Creative organizational - Global cooperation - External network zation innovation channel diversification cooperation/alliance mgmt- - External network - Creative knowledge - Value chain establishment cooperation - alliance sharing system through M&A mgmt - Two-way customer - Customer-oriented - Securing of creative strategy Mgmt system product development human resources stage - IT personnel nurturing and design 480 policy demand to cope with the smart era is are as follows: searching for finished car-parts-IT joint technology development task, tax break related to smart-car development, IT technology convergence support (automotive), adoption of new equipment applying convergence technologies, roadmap and consulting on the next-generation technologies (machinery), SW convergence technology development support, human interface technology development consolidation, and securing of knowledge information security technology and core technology (electronics) in the technology development stage. In the merchandising stage, policy support demand takes place in the activation of venture capital and funding for new companies (automotive), field test, test certification procedure simplification on next-generation field products (machinery), and proactive investment support for next- generation mobile-communications establishment (electronics). In the organizational management and management strategy stage, there is considerable policy demand in external network consolidation support, M&A activation base shaping, cooperation system consolidation between specialized firms, and smart- business-model discovery assistance.
5. Policy Tasks for Investment Promotion to Cope with the Smart Era
(1) Policy Tasks in the Overall Industries
The sectors with high-priority policy support to cope with A Study on the Management & Investment Strategy in “Smart Era” for Improving Firms’ Competitiveness 481 smartization are the acknowledgement of R&D expense as an investment, intellectual property rights protection, technology innovation infrastructure establishment (human resources,
Policy Task Priorities to Deal with Major Industries’ Smartization
Priority Automotive Machinery Electronics Innovation-type R&D expense 1 corporate investment acknowledged as Intellectual property incentives investment* rights protection* Technology R&D expense Financial support innovation 2 acknowledged as expansion* infrastructure investment* establishment* Technology innovation Technology R&D expense 3 infrastructure innovation acknowledged as establishment (HR, infrastructure investment* facilities, cluster, etc.)* establishment* Smart-response-type innovation 4 National R&D system technology Financial support improvement* development biz expansion* consolidation Intellectual property National R&D system National R&D system 5 rights protection improvement* improvement* Smart-response-type innovation Innovation-type 6 technology corporate investment Shaping of M&A development biz incentives conditions* consolidation Social infrastructure Open-trading establishment promotion Smart-response-type (intelligent between firms innovation 7 communications (alliance, technology network, road cooperation, M&A, development biz network, etc.) etc.) consolidation Note : 1) * indicates relative and absolute investment importance at present and in the smart era. 2) Innovation-type corporate investment incentives: Establishment of a taxation incentive system linked with investment achievements, including joint businesses, spin-offs, and searching for creative business models 482 facilities, cluster, etc.), and innovation technology development business consolidation. In particular, if the R&D expense is acknowledged as an investment, it is expected to become highly effective because the investment expense can be reduced while efficiently using the internal capital. The perception that there is a need for an approach based on the concept of investment rather than capital accumulation in terms of R&D in the smart era seems to be reflected. The new investment strategies for coping with the smart era are considered the convergence promotion, intelligence consolidation, and diffusion types for the automotive, machinery, and electronics industries, respectively. It is desirable to strategically strengthen investment in line with such industrial characteristics, and plural types need to be used depending on the situation. Now is a critical time as the automotive industry, in accordance to the convergence type, needs to produce products suitable for smartization through IT technology. If an investment strategy adding service and intelligence is bolstered, the automotive industry’s capability to cope with smartization are expected to further improve. The machinery industry’s direction for investment in order to deal with smartization takes on the strong characteristics of the intelligence consolidation type, in which there is a high demand for control ability and unmanned production. For the electronics industry, which has a high level of smartization, investment consolidation into bolstering networking, beyond just the convergence stage, is important. By properly combining A Study on the Management & Investment Strategy in “Smart Era” for Improving Firms’ Competitiveness 483 convergence technology and service for the network diffusion type, the investment strategy can be complemented. The core of smartization in the electronics industry is the enhancement not only of product value but also of customer value. For this reason, technology and function sharing through alliance and cooperation with other firms, and investment consolidation enhancing demand satisfaction through external resources utilization and innovative ideas absorption, are much more important than the firm’s own technology consolidation, mass production technology accumulation, and new-product development. The strategies for coping with smartization by sector can be summarized as follows. First, the activation of open R&D, technology innovation bolstering, core technology development and standardization required for smart convergence products, and smart platform technology development business promotion are required to promote technology development and innovation. Second, support for private-sector R&D investment activation is necessary. A tax deduction system for R&D, which can be cancelled anytime when certain conditions are not met, should be extended. Also, the tax deduction rate on HR development expenses, which applies to the case where joint research business is implemented with large, small, and medium businesses or universities, needs to be expanded. Third, core technology management and use capabilities need to be strengthened. Towards this end, it is important to enhance the patent’s qualitative value and to pursue the unique application of R&D project management with regard to the core technology and innovation technology types. Fourth, the activation of the M&A of 484 firms is necessary because the active use of external resources is a desirable management strategy in the smart era. Fifth, industrial- environment improvement is necessary to promote smartization. The following are identified as the sectors for preferential policy support: smart venture startup-growth expansion, virtuous-circle consolidation, nurturing of a network-type mini-cluster (smart valley), capital-procuring channel diversification, and smart forum activation assistance.
(2) Policy Tasks by Industry
In the automotive industry, investment related to technology innovation and development is regarded as the infrastructure in which firms are the most interested and crucial for governmental support. It is desirable for technologies, the base of smart cars, including semiconductor for cars, sensors, and SW, to be supplied to the industry after support is offered, as the firm’s own task development from the dimension of co-base technologies. For venture businesses entering a new field, such as the developed smart-car parts production, the investment fund assistance function including venture capital should be strengthened. For the automotive industry, the diversification of the product portfolio must be induced by consolidating support for exchange with other business types. Also, the mediation function that enables supply to automakers or relevant firms, and the expansion of the existing marketing support function to expand the export of various smart products should be bolstered. In addition, the road and service infrastructure needs to be built by A Study on the Management & Investment Strategy in “Smart Era” for Improving Firms’ Competitiveness 485 the government so that the operation of smart cars can run smoothly. The establishment of a manpower supply and nurturing system in line with car smartization is necessary. Concerning the M&A for automotive-related firms to enter the relevant sectors, ease of regulations and tax break benefits are needed. In the machinery industry, a tax break is necessary when the adoption of or investment in the convergence and smartization of new facilities is carried out. As for technology, development assistance for core technologies related to intelligence and ultra-precision for networking with smartization is required. Also, products that can meet the customer needs should be developed and produced by establishing a joint IT-based R&D channel. The most important response of firms is cooperation between specialized firms using IT through collaboration. As the need for improvement of financial support conditions is larger than the other demands, an improved system through which the securing of funds can be linked and relayed from the private financial sector, in addition to the government’s direct fund support, is required. Sharing and disseminating knowledge to enhance the capability to respond to the industry demand by opening a program for coping with smartization in the machinery industry can be an important measure for network expansion and open innovation. Lastly, enabling the use of mobile and ubiquitous-based infrastructure at worksites by shaping such infrastructure can also be important with regard to the industrial infrastructure. Through all these, technology development for the autonomous and intelligent machines and robots needed at production sites, which can be the core of 486 smartization, is expected to advance further. As for the direction of technology development investment in the electronics industry, SW convergence technology development consolidation, investment in human interface technology development, and investment in knowledge information security technology development need to be intensively implemented. In terms of the investment directions in the electronics industry, investment needs to be intensively made in SW convergence technology development consolidation, human interface technology development, and knowledge information security technology development. Also, a new investment strategy needs to be established for next-generation mobile communications construction and smart-contents development consolidation in the facility investment and product portfolio sector. In the production and management strategy sector, new value chain establishment, investment in smart-business-model creation, and differentiated financial assistance by the firm’s growth stage should be conducted. Research Report 2011-609
Conditions and Policy Tasks for Sustaining the Growth of Korea’s Global Leading Industries
Kyoungsook Lee, Sungin Hong, Jongki Kim, Kyoungyou Kim and Eunmi Jung
Conditions and Policy Tasks for Sustaining the Growth of Korea’s Global Leading Industries 489
1. Background and Need for the Study
While Korean leading companies have recently exhibited good performance in the global markets, the factors involved in competition are changing together with the changing properties of industries and products. Despite the fact that the Korean companies’ global status is on the rise, the role in demand is changing from the role of a fast follower to the role of a first mover. However, growth opportunities are reduced since Korean companies become inactive in creating a highly risky yet innovative market. For this reason, enjoying the economies of scale has become difficult after the Korean companies have grown into global players and as they avoid resources input into future businesses. Meanwhile, change is required in the growth of mass production and large quantities of supply involved in high growth and consumption, as the world economy enters into the low growth and consumption era due to the global financial crisis. As 490 the technology paradigm shifts towards smartization, 3D trend, networking, convergence, and eco-friendliness, the source of competitiveness creation likewise shifts. That is, software/contents competitiveness and the network competitiveness of horizontal cooperation/collaboration become more important. In addition, responses to a deepening competition with the expanding influence of China become much more important. This study recognizes the multiple changes taking place simultaneously along with the shift of competitiveness among sources. Therefore, this study aims to present policy tasks and corporate strategies, after deducting new growth conditions and examining the capabilities to cope with new growth conditions required for sustaining growth, while Korean industries/companies maintain their global status. This study particularly examines the achievements of the global leading industries that include the pioneers in home appliance (digital TV), mobile phone, shipbuilding and automotive industries. The problems in the growth process and analyzes environmental changes are also covered in this study. Likewise carried out in this study is a comparative analysis through deduction of the conditions that contributed to the era before the global financial crisis and the significant future growth conditions in which a dynamic analysis evaluates the industrial capabilities. Based on those analysis results, this study then presents.
2. Deduction of Growth Condition Indicators
This study established the analysis framework to deduct Conditions and Policy Tasks for Sustaining the Growth of Korea’s Global Leading Industries 491 growth conditions by composing the evaluation indicators of growth conditions. The study likewise carried out the evaluation by industry, while a comparative analysis was based on four key theories related to the growth of companies or industries: resource theory, RPV (resources, process, value) theory, network theory, and the theory of industrial ecology. The growth conditions that were finally selected through a 3-step process were 3 upper level factors (resource, process, and the theory of industrial ecology) and 13 evaluation indicators (investment source, manpower, facility [equipment], technology, brand/design, marketing, decision-making mode, production mode, manufacturing competitiveness, linkage with downstream industry, linkage with upstream industry, linkage with complementary industry, and infrastructure [system, standard, DB, etc.]). The detailed evaluation indicators have been used to analyze
Diagram of Growth Conditions Evaluation Structure
Upper level Resources Processes The theory of industrial ecology factors
Technology types Decision making Linkage with Evaluation Investment (platform, core, finance application mode(top-down, downstream industry indicators technologies) bottom-up) Technological prowess Linkage with Manpower types (HW, SW, (skilled R&D, contents technological Production upstream industry prowess) modes (vertical planning, Linkage with design, integration, Brand/ outsourcing) complementary marketing) design industry Manufacturing Facility competitiveness Infrastructure (system, (equipment) Marketing standard, DB) 492 the change of growth conditions. The manpower indicator has been segmented into skilled personnel, R&D personnel, design personnel, and marketing personnel. The technology has been segmented into technology types (platform technology, core technology, and application technology), and the technological prowess types (hardware, software, and contents). The decision- making mode has been segmented into vertical integration and outsourcing.
3. Major Industries’ Performance and Problems in the Growth Process
(1) Leading Industries’ Performance
First, the production of the four global leading industries recorded higher increase rates compared to the manufacturing industry’s average (except for home appliance) in 2000 and 2009. The annual average rate of production increase in shipbuilding was 18.7%, highest of the four industries, followed by communication devices at 12.7%. The automotive industry was similar to the average of the manufacturing industry, while home appliance was quite low at 5.7%. Second, the shipbuilding industry posted the highest increase in production, rising from 3% in 2000 to 6.7% in 2009, up to 3.7% points. The communication devices rose from 4.4% to 6.2%, up to 1.8% points. However, the automotive industry rose from 10% in 2000 to 12.4% in 2006, and then fell to 10.1% in 2009. The home Conditions and Policy Tasks for Sustaining the Growth of Korea’s Global Leading Industries 493 appliance industry peaked in 2003 at 3.1%, and then fell to 2.3% in 2009. Third, the worldwide production rate of shipbuilding and automotive industries maintained 33% and 5% in 2000 and 2010, respectively, while the communication devices rose from 8% to 12%. However, home appliance fell from the 5% range to 2% range. Fourth, the annual average total export increase ratio of the manufacturing industry was 10.5% in 2000 and 2010. Nonetheless, shipbuilding, communications devices, and automotive industries were higher at 19%, 13.9%, and 10.8%, respectively. The total export ratio of the four industries in the manufacturing industry went up from 21.7% in 2000 to 27.2% in 2010. Fifth, the Korean shipbuilders ranked top to the sixth places in the world market share as of 2010. The automotive industry took off to the fifth in the world markets in 2010. The mobile phoneindustry ranked second place with Samsung Electronics in the world markets, after rising to the upper rank in the early 2000. The digital TV industry maintained the top place with Samsung Electronics from 2006, when the company ranked at first place. LG Electronics also maintained second place since 2009.
(2) Problems in the Leading Industries’ Growth Process
First, the industrial vitality is weakening since the number of companies entering the leading industries sharply fell, after they peaked in 2004 and 2005. Second, the increase in the number of employees is very low, compared to the increase of production. The employment 494 coefficient in the automotive industry indicates that it dropped from 3.52 in 2000 to 2.27 in 2009, while it declined from 6.28 to 2.48 in the shipbuilding industry during the same period. The home appliance and communications devices slid from 4.56 to 1.87, respectively, in 2009. Third, the localization rate of the three industries (except for communications devices) fell in 2000 and 2009. This implies that linkage with the national economy weakened. Fourth, the value-added rates of the automotive, shipbuilding, and home appliance (except for communications devices) industries fell in 2000 and 2009, and they were lower compared to the manufacturing industry’s average. Fifth, the bipolarization of management achievements was remarkable, as the gap of operating profit ratio between large corporations and small and medium businesses (SMBs) increased.
4. Changes in the Environment and Growth Conditions of Leading Industries
(1) Leading Industries’ Environmental Change Analysis
The top 10 environmental change factors in which ripple effects have been analyzed to be large on the demand and supply of the major industries are as follows: a. Convergence trend of technology and product in that full scale convergence between technologies and products, between products and between products and services by Conditions and Policy Tasks for Sustaining the Growth of Korea’s Global Leading Industries 495
new technology development is carried out b. Rapid progress of smartization and humanlike technologies and the smartization and humanlike trend of product demand that promotes the expansion of demand and supply of products c. Full-scale network/digital society including mobility/ multimedia by the advancement of digital technology, and ubiquitous society and culture d. Trends in standard/system consolidation and safety regulations fortification, derived from the consolidation of technological hegemony and emphasis of standards and intellectual property rights e. Aging as part of the change in the population structure, and the resulting industrial comparative advantage structure change, emergence of the elderly-friendly industries, change in manpower supply structure, decrease in economically active population, shift into production structure to cope with low growth and consumption f. As change in demand conditions and new consumption pattern, the resulting consumer needs level improvement and diversification, expansion of consumer-value creation, prioritizing safety, health, and sensitivity, placing importance on nature-friendliness/energy efficiency, and prioritizing product/service differentiation g. Change in competition composition according to emerging economies, such as China and India h. The deepening regionalism, FTA increase, and multinational corporations’ competition strategy consolidation in the 496
diffusion of world economic integration/FTA i. The environmental protection/nature circulation type consolidation of production/consumption mode, implementation of low carbon, green growth strategy, and bolstering of energy efficiency in the fortification of circulation type socioeconomic paradigm j. The expansion of securing alternative energy supply sources and market expansion for energy development in the changing structure of energy consumption
(2) Analysis of Growth Conditions of Leading Industries before the Financial Crisis
This study has evaluated the growth conditions in which contribution was high among Korea’s global leading industries before the global financial crisis. This was achieved through the questionnaire survey that applied the analytic hierarchy process (AHP) technique upon commissioning internal and external industrial experts (professors, research institutes, associations). The resource factor in the shipbuilding industry was 0.596, implying that it greatly contributed more to growth, compared to the other industries. The resource factor contribution of digital TV1) and mobile phone industries was 9.473 and 0.454, respectively, which were similarly high. Meanwhile, the process
1) Growth conditions of the digital TV sector, which is among various products leading the home appliance industry, were analyzed. Conditions and Policy Tasks for Sustaining the Growth of Korea’s Global Leading Industries 497 was the factor contributing to the growth of the automotive industry. The upper level factor with the second highest contribution was the automotive industry resource, while it was the process in the other three industries. Meanwhile, the theory of industrial ecology was relatively lowest in terms of its contribution in the four industries. The theory’s contribution to the digital TV and mobile phone industries was the same at 0.196, while it was 0.146 in the shipbuilding industry and 0.132 in the automotive industry (this is the lowest in terms of the use of the theory of industrial ecology). Although the difference of contribution by industry was observed, the highest evaluation indicators were analyzed to be manufacturing competitiveness, manpower (planning/design personnel), production mode (vertical integration), technology (application technology), investment finance, decision-making mode, and facility. The top five growth conditions include manufacturing competitiveness and manpower as the factors with high growth contribution in four industries, production mode in three industries (digital TV, mobile phone, and automotive industries), investment finance and technology in two industries (digital TV and automotive industries, and digital TV and shipbuilding industries, respectively). The brand/design and marketing were evaluated based on their industrial characteristics. They are important growth factors in the mobile phone industry, facility, and linkage with downstream industry in the shipbuilding industry and decision-making mode in the automotive industry. 498
(3) Future Growth Conditions Analysis of Leading Industries
While the use of resources was the most required factor for future growth in the shipbuilding and automotive industries among upper level factors, the use of the theory of industrial ecology was the more important growth condition in the digital TV and mobile phone industries. The growth conditions are changing in comparison with the era before the financial crisis, from resource to ecosystem in the digital TV and mobile phone industries, and from process to resource in the automotive industry. However, resource was still the most important growth condition in the shipbuilding industry. Although the differences in contribution existed by industry, the intangible assets like technology/design and the theory of industrial ecology (linkage with downstream industry, linkage with complementary industry, and infrastructure establishment) were the most important conditions. To summarize the change in growth conditions with average value by adding growth contribution value and the importance value of growth in the four industries, the technology ranked 5th in growth contribution before the financial crisis, but was evaluated as No. 1 in the future importance, while the brand/design went up from 9th to 2nd. Linkage with complementary industry rose from 13th to 3rd, linkage with downstream industry ascended from 8th to 4th, and infrastructure rose from 12th to 5th. Such a change in growth conditions means that new growth foundation should be built, deviating from the past growth pattern. Conditions and Policy Tasks for Sustaining the Growth of Korea’s Global Leading Industries 499
Change in Growth Conditions by Upper Level Factor of Leading Industries
Digital Mobile Automotive TV phone Shipbuilding industry Contribution before the 0.473 0.454 0.596 0.399 Resource financial crisis Future importance 0.370 0.271 0.566 0.491 Contribution before the 0.331 0.350 0.258 0.469 Process financial crisis Future importance 0.183 0.136 0.148 0.246 The Contribution before the theory of financial crisis 0.196 0.196 0.146 0.132 industrial ecology Future importance 0.447 0.594 0.287 0.263 Source : KIET’s expert questionnaire survey, September 2011
Change in Growth Conditions by Evaluation Indicator of Leading Industries
Average of the 4 industries Ranking Future Growth condition Change before the ranking Contribution Future value financial before the crisis financial crisis importance 1 Technology 0.082 0.157 0.075 5 2 Brand/Design 0.053 0.120 0.067 9 Linkage with 3 complementary industry 0.024 0.116 0.092 13 Linkage with 4 downstream industry 0.074 0.110 0.036 8 5 Infrastructure 0.026 0.087 0.061 12 Linkage with 6 upstream industry 0.043 0.085 0.042 11 7 Decision making mode 0.077 0.081 0.004 6 8 Manpower 0.136 0.058 -0.08 2 Manufacturing 9 competitiveness 0.162 0.057 -0.105 1 10 Marketing 0.052 0.049 -0.002 10 11 Production mode 0.112 0.040 -0.072 3 12 Investment finance 0.075 0.022 -0.05 6 13 Facility (equipment) 0.083 0.018 -0.07 4 Source : KIET’s expert questionnaire survey, September 2011 500
5. Analysis of Capabilities to Cope with the Sustaining Growth of Leading Industries
In analyzing the capabilities by growth condition of the leading industries through expert questionnaire survey and quantitative evaluation based on the average of four industries,
Capability Level by Key Growth Condition of Leading Industries
Capability level Ranking Growth condition 4.0 or 2.0~2.4 2.5~2.9 3.0~3.4 3.5~3.9 higher Platform technology Core technology Application technology 1 Technology SW technology Contents technology HW technology 2 Brand/Design 3 Linkage with complementary industry Linkage with Materials 4 downstream industry Parts Manpower fostering system Technology development system 5 Infrastructure Financial system Standards Securing of relevant DB 6 Linkage with upstream industry Decision- Bottom-up mode 7 making mode Top-down mode Source : KIET’s questionnaire survey in October 2011 and internal analysis. Note : 1) Equal at 3 points, and a bit higher at 4 points 2) Average value of the capabilities of the four industries Conditions and Policy Tasks for Sustaining the Growth of Korea’s Global Leading Industries 501 the facility capability was the highest. This was followed by manufacturing competitiveness, production mode, manpower, marketing, and decision making which were slightly higher compared to the global competitors, in that order. Investment finance and technological capabilities showed equal level compared to the global competitors. The lowest growth condition was linkage with complementary industry, followed by infrastructure, upstream industry, downstream industry, and brand/design, in that order. The top 7 growth conditions’ capabilities of the four industries were distributed diversely from 4.5, highest (manpower in the shipbuilding industry) to 2.1, lowest (linkage with complementary industry in the digital TV industry). Concerning the average capability, the shipbuilding industry showed highest at 3.3, and the remaining industries were about 2.8. Looking by appearance based on top 7 growth conditions, the shipbuilding industry’s potential growth is high with the capabilities more than equal, compared to global competitors, while the digital TV, mobile phone, and automotive industries are relatively lower.
6. Strategies to Cope with Sustaining Growth
Korea’s leading industries are weak in terms of important factors for future growth compared to global competitors. These industries thus need to cope in the direction of expanding potential and secure competitiveness through the consolidation of weak capabilities to ensure future growth. 502
Consolidation of Platform/Core Technologies through Convergence R&D System
Shift into a unified R&D policy implementation system, which is an integrated department at overall ministry level or a permanent council between ministries leads, is required. The efficiency of R&D policy support and synergy creation is needed, centered on convergence via pan-ministry’s mid- and long-term R&D implementation system. This comes from a sustaining growth standpoint through the consolidation of R&D capabilities of platform technology and core technology and competitiveness enhancement. Firms should lay down an organizational foundation that can carry out the platform/core technologies development of the next generation through convergence of various technologies. The task force operation of the required research personnel by technology project or common research type by an organized work group of a strategic business can be considered.
Consolidation of Software/Contents Technology Capabilities
First, the improvement of software trading practices and fostering of high-quality manpower are required. To this end, the base expansion of software personnel is demanded by improving low price orders of software projects, high-quality software for nurturing personnel, equipped with global competitiveness and activating startups via shaping software of a company startup environment and support of the startups. Conditions and Policy Tasks for Sustaining the Growth of Korea’s Global Leading Industries 503
Second, the expansion of the contents industry base and the nurturing of creative companies are necessary. The expansion of the contents creation/production base and specialized personnel fostering and systematic nurturing of creative companies are needed. This means that various administrative services support like taxes, marketing and fund procurement required for company operation, and offering of specialist consulting services to enter the overseas market are necessary.
Brand Image Establishment through Differentiated Products/Services Creation
Korea’s leading companies need to create markets that are classified with new products/services in the first mover position to continue growth, while leading the global markets. A brand linkage strategy blocking the competitors’ penetration in the markets is required by letting the products/services to be identified as specific brands. In this regard, investment in new product/service idea search should be enormously expanded through a bottom-up mode. If possible, an organizational culture that forgives failure, together with an organizational structure in which injection/input is made, is necessary.
Nurturing of Small but Robust Innovative Companies
First, expansion support for R&D of SMBs is necessary. Increasing assistance is needed while using some of the R&D 504 budget to support government-funded research institutes and colleges. These tie-ups will then support innovative SMBs equipped with technology development capabilities to commercialize technologies. Efforts shall be achieved by expanding the participation of innovative companies beginning with the project planning stage. The development and accommodation of the demand for various R&D projects shall be carried out though the bottom-up mode. Second, the SMBs’ entry into the overseas markets is needed. Certain actions should then be conducted as follows: the same payment mode in foreign countries as in the domestic market, the simplification of regulations related with M&A of local small-sized companies, the establishment of user approach-convenient information offering system, and the regular risk management support on the SMBs’ overseas management capabilities through the operation of risk managing programs.
Promotion of the Theory of Industrial Ecology through Infrastructure Fortification
First, large corporations should employ the required workers and offer them high-quality education/training and practical work experiences through good facilities and environment to equip them in serving the society. The existing structure needs to change into such a structure. Second, the activation of joint technology development consortium among large corporations and SMBs is required in the materials and equipment-manufacturing sector. Conditions and Policy Tasks for Sustaining the Growth of Korea’s Global Leading Industries 505
Third, large corporations and SMBs can mutually win via an open innovation system in the diffusion of technology development model. Fourth, a shift of system is required to benefit companies of policy financing, government, and financial institutions that share risks, accompanied by the appropriate policy-financing operation with enhanced efficiency. Fifth, a virtuous circle of the financing system is desirable as it supports technological innovation or new startups’ growth through angel investment activation. Sixth, building a virtuous circle is necessary in connection to structure of technology development patents-standardization. This concentrates on patent’s international standardization having high- economic value and high usability, as it improves the corporate standardization process. Seventh, the establishment of a collaborative community is necessary while sharing data and information required among heterogeneous industries related to convergence. The digital TV industry is required to fortify linkage with the nurturing of weak complementary industry, and this is the most important growth condition. Smart 3D TV’s pilot project implementation, software consolidation, and 3D contents industry nurturing foundation together with high-speed network investment expansion are needed. In addition, a support for bolstering of downstream industry’s competitiveness and for strategies to secure platform is required. Securing the core technologies at an early stage in the mobile cloud computing service sector and leading new markets are 506 essential. Doing so will help consolidate the capability-weak complementary industry, and this is the second growth condition in the mobile phone industry. The policy support is needed along with the establishment of joint infrastructure to secure the industrial ecology, the consolidation of upstream/downstream industry’s capabilities, the symbiotic cooperation system preparation, and the capability fortification of innovative software technology.
Equal/Advantageous Capabilities’ Major Growth Conditions by Leading Industry
Growth condition Task Details Industry - Shift into a unified R&D implementation system under pan ministry permanent Platform/Core council technological prowess - Firms shift into a task Four Technology consolidation through force by technology industries convergence R&D project and technology system convergence R&D organization, like a work group by strategic business - Implementation of Brand image brand linkage strategy Mobile Brand/ establishment through - Expansion of investment phone and Design differentiated in search for new automotive products/services product/service ideas industries creation in the bottom-up mode - Improvement of Consolidation of software trading practices Digital TV software technology - Nurturing of high-quality and mobile capabilities SW personnel phone Linkage - Support of SW startups industries with activation complementary industry - Nurturing of specialized personnel Digital TV Expansion of contents - Systematic nurturing of and mobile industrial foundation contents creative phone companies industries Conditions and Policy Tasks for Sustaining the Growth of Korea’s Global Leading Industries 507
- Expansion of support for SMBs’ R&D Digital TV, Nurturing of small but - Development of shipbuilding, robust innovative various R&D tasks and companies demand in the automotive bottom-up mode industries - Application of the Linkage with same mode in the downstream domestic and industry international markets - Simplification of local Digital TV Support of SMBs’ small-sized companies’ and penetration overseas M&A related regulations automotive markets - Establishment of user industries approach-convenient information offering system - Need to manage follow-up risks - Large corporations nurture specialized personnel within the Expansion of large companies and supply Automotive corporations’ role as them into society and manpower-fostering - Nurturing of customized shipbuilding center - Specialized personnel industries through collaboration between the industry and academia - Activation of joint technology consortium Automotive Technology of large corporations and development system and SMBs shipbuilding improvement - Diffusion of open industries innovative system
Infrastructure - Policy financing’s Financing system efficiency enhancement Shipbuilding improvement - Angel investment industry activation
- Technology patent- standardization linkage Standardization activity consolidation Four consolidation - Standardization industries process improvement - Establishment of collaboration community DB sharing network sharing DB and Four establishment information between industries heterogeneous industries related to convergence Source : KIET 508
Necessary for the shipbuilding industry are the technological capability through the efficiency rate of enhancing the platform technology, core equipment, and linkage consolidation with the shipping sector; the ship financing system consolidation; the domestic and international standards competency fortification; the retention and consolidation of manpower capabilities; the productivity enhancement for manufacturing competitiveness fortification; and the product differentiation. When it comes to the automotive industry, priority should be placed on the support of enhancing the capability weak a brand, which is the top growth condition. The policies include the consolidation of support that secures platform technology to cope with the environment-friendly era. The support of win-win cooperation to fortify linkage with downstream industry, the assistance for customized manpower, and the formation of a collaboration ecosystem to cope with green and convergence trends are necessary.
7. Contribution of this Study
First, this study analyzed the growth conditions of industries/ companies showing good performance. Recently, the leading and increasing world market share and the factors that restrict the growth process have identified the competitiveness of industries in the creation sources and problems. Second, this study then analyzed the impacts of industrial environmental change on the supply and demand of Korean Conditions and Policy Tasks for Sustaining the Growth of Korea’s Global Leading Industries 509 industries/companies. The study has objectively deducted conditions required for sustaining growth and their priorities when Korean companies continue to maintain their global status. Third, this study diagnosed future growth potential by analyzing the establishment and capabilities of internal and external resources of Korean industries and companies. This study has likewise presented policy tasks and firms’ strategy directions based on the diagnosis of results. Because the priorities of growth conditions of internal resources and the industrial ecology are different by industry and leading companies, the analysis that takes industrial characteristics into account is useful for deducting effective implications and policy tasks.
Research Report 2011-610
Indicator Analysis on Regional Development and Policy Implication
Dongsoo Kim, Hyungjin Park, Changuk Byeon and Wonvin Rhee
Indicator Analysis of Regional Development and Policy Implications 513
Chapter 1. Background and necessity of the study
Regional development policies have been actively implemented in countries where significant regional disparities prevail such as England, France, and Japan. While these regional development policies were commenced with with an exclusive focus on moving beyond development of the capital area to include non- capital areas, the focus of these policies has now shifted to the development of regions where economic growth has lagged somewhat, and the strengthening of the competitiveness of economically developed regions. Consequently, although programs for balanced growth between regions were implemented when the objective of regional policy was to ‘mitigate regional disparities,’ industrial development policies designed to pursue effectiveness have become the focus now that the objective of regional policy has shifted to ‘enhancing regional competitiveness.’ However, questions have been raised as to whether the current objective of regional development policies, namely that of strengthening 514 regional competitiveness, will ultimately promote regional development. Wilkinson and Pickett (2011) have posited that a positive relationship (+) exists between regional income inequality and social issues. They revealed that the United States, where income inequality has been relatively more pronounced, exhibited higher figures in terms of health and social issue indexes. Their study emphasized the fact that mitigating regional disparities represented the ultimate objective of regional policies. The first civilian government in Korea was inaugurated in 1992. The subsequent introduction of the local autonomy system in 1994 had the effect of shedding some much needed light on regional disparities between the capital and non-capital areas, and the need for regional development. This denouement, in turn, paved the way for increased demands for regional development policies. In keeping with this trend, the local governments of Busan, Gyeongnam, Daegu, and Gwangju in 1997 established strategic industrial plans for the activation of regional economies, and demanded that the central government provide financial support for these endeavors. This period has by and large been perceived as the formation stage of Korean regional development policies. The inauguration of the Participatory Government in 2003 ushered in a new emphasis on regional policy as an integral part of the national policy agenda, and on ‘balanced regional development.’ Although the regional policy paradigm shifted from ‘balanced growth’ to the ‘enhancement of regional competitiveness’ following the inauguration of the current government in 2008, the ‘mitigation of regional disparities’ has in effect remained the overarching objective. The current governmenent’s regional Indicator Analysis on Regional Development and Policy Implication 515 development policy, which has been evaluated as a departure from that of the Participatory Government, can be divided into three themes. The first is the desire to strengthen local autonomy by planning and implementing regional development policies based on the expansion of block grants. The second theme is the intention of dividing the spatial governing scopes of regional policies into mega-regional economic development zones, regional economic zones, and basic settlement areas as part of efforts to establish spatial units that are more effective in policy implementation than the existing 16 administrative districts. The third theme has been the reorganization of the regional industrial development strategy based on the current two-stage program for the development of leading industries. The termination of the current major regional industry development programs in 2012 and 2013 has only served to further increase the necessity to conduct a review of existing regional policies. In keeping with this trend, the leading, strategic, and regional specialized industries are now in the process of being reorganized as strategic leading and regional specialized industries. As such, it has become essential at the current point in time where 13 years have passed since regional development policies were first implemented, to thoroughly review the objectives of regional development policies, the impact that the relevant programs have had on the regional economies, and the improvements that should be wrought. To this end, the present study examines the regional development indicators that can be used to review the performance of regional development policies. Moreover, an attempt is made to strengthen the awareness of the 516 need for statistical indicators and indexes that reflect the objectives of regional development policy. Furthermore, based on the analysis of regional development related indicators and indexes, the present study derives policy implications and suggests means for improvement of the current regional development policies. In Chapter 2, previous studies on the selection of statistical data-based indicators to analyze the current state of policy are examined. In Chapter 3, a discussion on the composition of sectoral indicators and spatial scope is conducted as part of efforts to analyze the current state of regional development. Chapter 4 of the study involves analyses of spatial categories based on the selected statistical indicators. Based on indicators appropriate for the established policy objectives and newly developed indexes with which to examine the extent to which performance has kept pace with policy objectives, the current state of affairs, and performance of regional policy is assessed using data from 2000. Chapter 5 takes a look at the scale of the budget set aside for regional policies and the manner in which the budget has been allotted within individual spatial categories in order to review whether this process has been in keeping with the objectives of regional development policies and deduce implications that could help supplement regional development policies.
Chapter 2. Previous studies on the development of statistical indicators that reflect policy objectives
In the current age of information overload, many attempts Indicator Analysis on Regional Development and Policy Implication 517 have been made to analyze policy effects and outcomes through the selection and examination of statistical indicators deemed capable of reflecting a particular phenomenon. Previous studies have for the most part consisted of efforts to control statistical indicators that can be applied to various sectors as part of the pursuit of a specific objective, and the analysis of trends based on the calculation of these indicators within a single index, or of examinations of a particular indicator that can be used to express specific implications. Meanwhile, various attempts have also been made to assess the structural performance of regional policies by controlling statistical indicators based on casual relationships, such as those between input and output and results. However, the limitations of statistical data, as well as the lack of appropriate statistics and controls, have led to problems in terms of the interpretation of such data. Due to the absence of a wide range of regional types, serious interpretation-related errors have emerged in the case of regional statistics. Examples of domestic and international development indexes and indicators connected to regional development and policy include sustainable development indicators (SDIs), environmental indicators, social indexes, regional development indicators, performance indicators, and quality of life indicators. In many instances, these indexes and indicators were employed in a manner that did not establish any clear demarcation between them. Most of these have been composed of the following structure: ‘integration-sector-sub-indicators.’ In this regard, ‘integration and sector’ can be associated with the concept of indexes, and ‘sub-indicators’ with that of indicators. As the 518 majority were developed as indexes with which to diagnose regional policies or as indicators to measure the performance of regional policies, they exhibited characteristics that were at once comprehensive and general in nature. However, the limiting of the spatial scope of potential policy targets to administrative districts has created ample room for errors to creep in where the statistical interpretations are concerned. Jang Jae-hong et al. (2006) took a look at the calculation and determination of innovation indexes for 16 cities and provinces as part of their examination of the trends, determinants, and spill-over effects of regional innovation activities. Kim Young-soo et al (2006) developed a regional development index for 16 cities and provinces that was based on residents’ economic power and vitality as part of their review of degrees of regional development and development disparity. Yu Jae-yun et al (2010) introduced the monitoring indicator system developed to assess the Japanese Land Building Plan and derived the implications for Korea’s own efforts to establish a monitoring indicator system for land in the capital area and nationwide. Song Mi-ryeong et al (2011) calculated indexes in individual sectors including the life service index, regional economic power index, quality of life index, and residents’ vitality index, and also estimated the RDI (Regional Development Index). Thereafter, based on the combination of these indexes, they sought to comprehensively diagnose basic settlement areas. Mun Jeong-ho (2010) applied the concept of Creativity City first advocated by Richard Florida to targeted areas in order to calculate the creativity index for basic settlement areas. This was achieved by integrating three creative industry Indicator Analysis on Regional Development and Policy Implication 519 indicators, three creative base indicators, four creative resources indicators, and five creative talent indicators. Kim Hong-ju (2010) further extended Mun’s study by breaking down creativity talent into creative core, creative professional, Bohemian, and higher education background (higher than bachelor’s degree). Kim measured creative technology at the stage where patents and tech pole are integrated. After having measured the tolerance levels based on the ratios of foreigners and homosexuals, Kim analyzed creativity at the city, county, and district levels. For their part, Song Chi-woong and Jang Seong-il (2010) measured and compared the creativity indexes of 15 OECD members, including Korea. They revealed that Korea scored lower on the talent and tolerance indexes than the technology index. Particularly significant was their finding that Korea’s tolerance index score ranked amongst the lowest within the OECD.
Chapter 3. Composition of RDI (Regional Development Index)
The RDI indexes employed in this study consisted of 21 sub- indicators in five sectors: economy, innovation & creativity capacity, SOC (social overhead capital), industry, and social issues. Trends were analyzed at the regional economic zone, city and provincial, andMetropolitan Statistical Area (MSA) levels using data from 2001. Cognizant of the errors caused by inappropriate separation of regions, the analysis conducted herein was based on economic geographic areas rather than administrative districts. In the case of innovation & creative 520 capacity, the present study employed the ratio of creative talent and tolerance indicators, as well as generally employed innovation indicators, to overcome the extreme standardization of existing studies. Moreover, while the majority of indicator-based analyses have revolved around standardized statistical data, the current study was able to develop a more qualitative analysis by including social issue indicators. Meanwhile, two indexes were developed to analyze the extent to which regional economies have changed in the manner desired by the planners of regional policies. The development disparity index was based on a comparison and analysis of the average regional labour wage and gross regional domestic production (GRDP). In this regard, it was designed to measure the extent to which the current state of regional economies has reflected the objective of regional policy known as ‘balanced development’. Most previous studies have based their national level analysis on
Sectoral indicators in regional development
Sub-indicators Gross regional domestic production (GRDP), average wage, Economy economically active population, employment rate, industrial production index, exports
Innovation Ratio of higher education background, R&D investment, & creativity industrial property rights, ratio of creative talent, capacity ratio of creativity industry, tolerance SOC Expressway, railroads, industrial complexes Industry Key industry, knowledge based industry, leading industry Rate of residents without health insurance, Social issues divorce rate, suicide rate Indicator Analysis on Regional Development and Policy Implication 521
16 cities and provinces. However, the present study measured development disparity at the regional economic zone as well as at the national level by calculating the development disparity index for MSAs (Metropolitan Statistical Areas) within the regional economic zones. The centripetal index involved a comparative analysis designed to measure the extent to which the current state of regional economies has been altered in accordance with the objectives of regional policy. This was assessed based on the population of hub metropolitan statistical areas within the regional economic zones and the ratio of gross regional domestic production (GRDP). The centripetal force of the capital area was analyzed at the national level. The centripetal force of hub metropolitan statistical areas was measured within the regional economic zones. Such an approach made it possible to derive implications for both the central and local governments. The spatial scope was not limited to administrative districts, but also included economic geographic zones. The United States’ Census Bureau1) has met statistical demands by providing a wide selection of geography.2) It provides statistical data at the national, state (equivalent to metropolitan city and province in Korea), and county levels (equivalent to the city, county, and district level within Korea’s administrative districts). In terms of economic geography, the Census Bureau divides its data byrelated city or
1) http://www.census.gov 2) American Fact Finder (www.factfinder2.census.gov) 522
Composition of index by spatial scope
Index Regional economic zone Nationwide Development disparity Distribution Distribution Centripetal index Ratio of hub city Ratio of capital area
town, metro/micro area, zip code, and census tract. As such, in addition to the city and province as well as city/county/district levels, this study also analyzed the data of regional economic zones and metropolitan statistical areas, whose spatial scope can be regarded as being akin to economic geography zones. Eric Heikkila has suggested that regional demarcations, which serve as the spatial scope of regional policies, can be perceived as an endogenous variable and identified in various manners depending on the overall objectives and uses.3) To this end, the present study has adopted regional economic zones, cities and provinces, and metropolitan statistical areas as its spatial scope. This decision was motivated by the fact that these entities were used as subjects of spatial analysis by the central government and cities and provinces. Moreover, metropolitan statistical areas were deemed to be an appropriate subject for the spatial analysis of local autonomies.
3) Regional Policy Seminar, 2011 (Eric Heikkila, University of Southern California), Korea Institute for Industrial Economics and Trade (KIET) Indicator Analysis on Regional Development and Policy Implication 523
Chapter 4. Analysis of the current state of regional development based on regional development indicators and indexes
The study reviewed regional development trends based on an analysis of 21 indicators in five sectors (economy, innovation & creativity capacity, SOC (social overhead capital), industry and social issues) distinguished by spatial scope. The researchers then analyzed the extent to which this development has reflected the objectives of regional development policies. In consideration of the similarity of indicator values across sectors, a cluster analysis was employed to divide each sector into high, medium and low levels. Thereafter, implications were derived based on a comparative analysis of the levels of regional economic zones. The results of the comparative analysis of indicators in 2006 and 2009 revealed that the capital area fared relatively well in all sectors except social issues. Moreover, while the Chungcheong region was found to lag behind in terms of SOC and industry, the SOC capacity of the Daegu-Gyeongbuk and Southeast regions had been heightened. While the capital area proved to be dominant as far as innovation and creativity, the Chungcheong region showed a great improvement in the number of patent registrations per 10,000 people. In the case of industry, the analysis revealed that the integration of leading industries had been heightened in all regions except Honam. However, the instance of social issues was found to have increased in the capital area and Chungcheong region, a situation that can be interpreted as a side effect of economic development. While the 524 rate of residents without health insurance was lower in 2009 than it had been three years prior, the divorce and suicide rates were higher. Although the overall structure has remained much the same, the seriousness of social issues within regional economic zones has generally increased. The social issue indicators can be regarded as key because they help to shed some light on the darker side of economic growth. In addition to the 21 sub-indicators, two indexes that could be used to examine policy performance were also calculated herein. As far as balanced development is concerned, the development disparity index was calculated using the average labor wage and gross regional domestic production (GRDP) data. The comparison of GRDP between regional economic zones revealed that the Daegu-Gyeongbuk region exhibited the highest development disparity, a determination that was based on the measurement of the coefficient of variation (COV) across the metropolitan statistical areas within this particular regional economic zone. Meanwhile, the Gangwon and Southeast regions exhibited the lowest level of development disparity. Although limited by a lack of time series data, the conclusion can nevertheless be reached that development disparity within the Daegu-Gyeongbuk and Gangwon regions worsened as the coefficient of variation (COV) gradually increased. Meanwhile, development disparity in the capital area and Southeast region can be seen as having decreased. The development disparity at the national level was measured based on the distribution of regional economic zones. The intensification of the population concentration in the capital area Indicator Analysis on Regional Development and Policy Implication 525
Integrated analysis of regional development indicators in 2006
Daegu- Capital Chung Honam Gyeong Southeast Gang Jeju area cheong region buk region won region region region region Economy Innovation and creative capacity SOC Industry Social issue
Integrated analysis of regional development indicators in 2009
Daegu- Capital Chung Honam Gyeong Southeast Gang Jeju area cheong region buk region won region region region region Economy Innovation and creative capacity SOC Industry Social issue Note : high, medium, low
and the continuous increase in gross regional domestic production (GRDP) shows that the disparity between the capital and non-capital areas has continued to increase, albeit slightly. A 526 closer look at development disparity between regional economic zones in the form of the coefficient of variation (COV) of gross regional domestic production (GRDP) revealed that the latter increased from 2.481 in 2005 to 2.514 in 2007. Thus, although more balanced development was identified as an objective of regional policy when the Participatory Government was inaugurated in 2003, development disparity has in fact taken a turn for the worse since 2005 in terms of gross regional domestic production (GRDP). Nevertheless, the ability to assess the performance of regional policies is limited by problems associated with the measurement of development disparity and the interpretation of the results, as well as by the time lag in terms of the point in time in which the policy effects were actualized. The disparity between metropolitan statistical areas based on average labor wages was found to be lowest in 2002, and to have gradually increased thereafter, reaching its peak in 2008. The annual trend in development disparity was analyzed based on the calculation of the Gini coefficient of the average wages of 50 metropolitan statistical cities and the average wage per hour. The average wage disparity between the 50 metropolitan statistical cities calculated using the inequality measured by the Gini coefficient and coefficient of variation (COV) was lowest in 2003 (0.052) and increased thereafter to reach 0.085 in 2009. Thus, we can see that the inequality between metropolitan statistical areas has become more pronounced. The wage disparity between regions tended to increase in times where negative external economic conditions such as a financial crisis prevailed. The average labor wage in the metropolitan statistical areas specialized Indicator Analysis on Regional Development and Policy Implication 527
Inequality of gross regional domestic production (GRDP)
Metropolitan economic zone 2005 2006 2007 Capital area(%) 53.0 53.5 53.4 Non-capital area(%) 47.0 46.5 46.6 Coefficient of variation(COV) 2.481 2.512 2.514 Populations of capital area(%) 48.2 48.5 48.9
in key manufacturing industries was revealed to be high. However, the relatively low ratio of employment meant that this factor had a less pronounced influence on the average labor wage in the knowledge-based manufacturing industry. As part of efforts to assess the success of the ‘enforcement of regional competitiveness,’ a comparative analysis of the ratio of hub metropolitan statistical areas in regional economic zones was conducted. The Seoul metropolitan statistical area serving as the economic hub for the capital area can be interpreted as performing a centripetal function. However, these centripetal functions were found to have gradually decreased. Meanwhile, the ratio of gross regional domestic production (GRDP) by hub metropolitan statistical area was lower than the population ratio in the case of the Chungcheong, Honam, Daegu-Gyeongbuk and Southeast regions, thus implying that these cities only played a limited role as an economic hub. The significant decrease in the ratio of gross regional domestic production (GRDP) by hub metropolitan statistical area in the cases of the Chungcheong, Daegu-Gyeongbuk, and Southeast regions can be interpreted as a sign of the gradual weakening of their functions as economic 528 hubs. These results were consistent with the results of previous studies showing a population decrease in non-capital areas such as the Busan and Daegu metropolitan statistical cities, a net population outflow in the Busan, Daegu and Gwangju metropolitan statistical cities, with the notable exception being Daejeon, and a net outflow of highly-skilled human resources in the Busan, Daegu, Gwangju and Daejeon metropolitan statistical areas. The actualization of balanced development in the aftermath of the inauguration of the participatory government involved a series of attempts to establish regional development hubs. These included the forging of 10 innovation cities, multifunctional administrative cities, and enterprise cities. However, as it took over 20 years to establish and construct these cities, special caution should be exercised when analyzing the performance of these cities as part of wider efforts to ascertain the efficiency of policy. The lack of materials related to the city/county/district GRDP since 2008 have created difficulties in analyzing whether the ratio of gross regional domestic production (GRDP) has, in fact, increased at the individual hub metropolitan statistical area level. Consequently, a certain amount of time will be needed to verify whether the current government’s regional policy objective of enforcing regional competitiveness has been actualized. Therefore, it becomes essential that city/county/district GRDP materials be compiled and released in a timely manner. These city/county/district GRDP materials should in the future be supplemented to create a statistical system with which to analyze trends based on time series data. The necessity for innovation capacity indicators such as R&D investment with which to Indicator Analysis on Regional Development and Policy Implication 529 measure hub city’s enforcement of their functions of mitigating development disparity and strengthening regional competitiveness has also been heightened. The accumulation of materials for these highly demanded regional development indicators in conjunction with various spatial units, including city/county/district, will make it possible to implement more precise analyses in the future.
Chapter 5. The status and desirable direction of regional development policy
As the size of the budget for regional development policies is relatively small when compared to the overall national budget, the ability to actualize the objectives of regional development policy is in fact limited. In many ways, this is akin to the logic behind the proverb, “The tail can’t wag the dog.” The majority of the budget for regional development policies has been allocated and executed based on the logic of balanced development. The budget for the ‘enforcement of regional competitiveness’ that constitutes the basic strategy of the current government’s regional development policy has been limited to a smattering of programs related to regional industrial development governed by the Ministry of Knowledge Economy. However, a closer look at the regional industrial development policies implemented by the Ministry of Knowledge Economy shows that with the exception of the capital area, the budget for related programs has been allocated in a relatively even manner at the regional economic zone level. As such, while the ultimate objective of regional 530 development policy can be regarded as ‘mitigating regional development disparities,’ the detailed goal of ‘enforcing regional competitiveness’ was established to effectively achieve the overall policy objective. The special account that started out as the Special Account for Balanced National Development in 2004 and was reborn as the Regional Development Special Account in 2009 reached 9.86 trillion won in 2010, accounting for 4.0% of the total expenditures of the central government. However, the influence of this regional development special account has been relatively limited. The current government has supported the establishment of regional development accounts that would serve as a form of block grant within the Regional Development Special Account. Despite these efforts to expand the autonomy of local governments in terms of regional development the regional allocation of budgets has continued to be implemented in an equal manner. In addition to the Regional Development Special Account, the regional development budget includes other governmental expenses such as the general accounts and special funds of various departments of the central government. When local governments’ financial allocations and the private capital matched by the government is factored into the equation, the regional development budget has in fact increased from 21.2 trillion won in 2005 (about 11.0% of the total expenditures of the central government) to 28.0 trillion won in 2010 (11.3%). The regional industrial development policy implemented under the leadership of the Ministry of Knowledge Economy can be divided into regional industrial development, industrial location, and regional Indicator Analysis on Regional Development and Policy Implication 531 investment activation policies. The scope of the budget and overall compatibility with the objectives of regional development policy lends itself to the conclusion that regional industrial development policy in fact constitutes the government’s main policy tool with regards to regional development. The regional industrial development policy currently pursues the development of leading industries, regional strategic industries and regional specialized industries, and is focused on strengthening regional competitiveness based on industrial development that emphasizes regional characteristics. However, as previously mentioned, the budget for regional industrial development policy has been evenly allocated to the regions. As a result, concrete gaps have emerged in terms of the actualization of the enforcement of regional competitiveness. European countries that began to implement regional policies prior to Korea have much like the latter shifted paradigms from balanced development to the enforcement of regional competitiveness. However, the ultimate objective behind their regional policies has been the mitigation of regional development disparities. The major trends in regional policies that can be gleaned from the steps taken by advanced countries can be summarized as follows. Rather than maintaining the uniform balanced policy of mitigating regional development disparities, the shift in terms of the detailed implementation goals of regional policy to the enforcement of regional competitiveness, a shift that takes into account regional characteristics, should be perceived as being in keeping with the prevailing periodic trend. Another move that has been taken by advanced countries with 532
Regional industrial development policy
Spatial scope 1999~2002 2003~2008 2009~2013
Regional Leading industry in economic regional economic zone zone
Metropolitan Regional strategic industry for 4 cities and provinces city and Post 4+9 regional Regional strategic industry strategic industry province for 9 cities and provinces
City/county /district Regional specialized industry
regards to the implementation of regional policies has been the active execution of discussions on integrated regional policy in lieu of sectoral regional policy as a means to ensure the effectiveness of related programs. Linkages and cooperation rooted in close communications between the main actors involved in regional policies has also been emphasized. The two representative programs related to regional economic zone policies in Korea are the Ministry of Knowledge Economy’s leading industry development program and the Ministry of Education, Science and Technology’s education of human resources for leading industries. However, these programs have been plagued by a lack of organic cooperation between the ministries. Another change currently being discussed has been the provision of indirect support for enterprises through such means as the establishment of an industrial ecology structure, rather than the provision of simple subsidies. The three following policy implications can be derived from Indicator Analysis on Regional Development and Policy Implication 533 this study. First, economic and geographic spatial units should be officially added to the administrative districts in order to create various spatial scope-based statistical systems in order to facilitate the task of making precise analyses reflecting the objectives of regional development policy. In addition, discussions should also be held on the development of various indicators and indexes that reflect the objectives of regional development policy. Continuous efforts should be made to analyze the performance of regional policies through the development of effective indexes. For instance, regional development disparity indexes should be prepared to assess balanced development, and centripetal indexes for hub metropolitan statistical areas to measure the enforcement of regional competitiveness. Furthermore, special attention should be paid to not only quantitative economic indicators, but also various social indicators. Such an approach would simplify the task of measuring the extent to which regional policy has approached the ultimate objective of ‘regional development’. Second, effective implementation measures should be established in conjunction with the programs developed to actualize the objectives of regional development policy. The ultimate objective of regional development policy is to mitigate the regional development disparities. This can be achieved by developing a consensus around the establishment of the enforcement of regional competitiveness as an effective sub- objective. Therefore, the effective achievement of the ultimate objective of mitigating regional development disparity is predicated on the establishment of different regional industrial 534
Shift in regional policy paradigm
Regional policy of Traditional regional policy strengthening competitiveness Implement a balanced policy Implement a regional policy to based on temporal support for strengthen the potential for Objective the mitigation of regional enforcement of disparities competitiveness Integrated development Strategy Sectoral approach project-type approach Tool Subsidies Infrastructure Main actor Central government Various levels of government Source : Internal data, Development Centre, OECD development plans for each region. To this end, indirect and tailored support should be provided instead of direct, simple, and uniform support such as R&D investment. Such support might include the establishment of an ecological industry system. Lastly, cooperation between the policy actors is essential for actualizing the objectives of regional development policy. A close cooperation system should be established between central government entities such as the Ministry of Knowledge Economy, Ministry of Land, Transport and Maritime Affairs, Ministry of Public Administration and Security, and the Ministry of Education, Science and Technology. Moreover, synergy effects should be created based on the linkages and cooperation between these departments. Here, the establishment of communications channels should be seen as essential. Such an endeavor can help remove the barriers occasioned by the implementation of various policies and foster the establishment of integrated and tailored regional policies. Research Report 2011-611
Determinants of German Green Industry’s Development and Implications for Korean Policy
Kye Hwan Kim, Dae-Young Joo and Yonghyeop Oh
Determinants of German Green Industry’s Development and Implications for Korean Policy 537
1. Study objectives and methodology
Based on an examination of Germany’s experience with the development of the renewable energy industry and the deriving of policy tasks, this study seeks to identify the implications for Korea’s own green industrial development policy. To this end, the focus was placed on four policy goals, namely market creation, R&D and commercialization, strengthening of the value chain, and the strengthening of the basis for enterprise growth. This study employed an analytical framework to analyze the industrial innovation system, focusing not only on the factors that impact innovation activities, but also on those that impact industrial development as a whole. The various factors impacting industrial innovation and development were divided into those related to supply and demand, and the determinants of policies linked to the wind and photovoltaics industries were also divided into two groups. 538
Main contents of each chapter and research process
Analysis of the current state of German green industry - The status of the German renewable energy industry - Two-stage development of the German renewable energy industry Analysis of the use of the policy process to facilitate the growth of German green industry - Analysis of the political background to the establishment of policy - Analysis of the policy tools at the developmental stage - Examination of demand development policy in Korea and overseas
Examination of the ecosystem and core competence of the German wind and photovoltaics industries - Analysis of the industries upstream and downstream industries from the wind and photovoltaics industries - Examination of competitive assets such as R&D and capital mobilization - Analysis of the formation of industrial clusters - Analysis of the virtuous cycle structure of enterprise growth
Suggestion of policy measures for the development of Korean green industry
- Market development policy - Strengthening of industry ecosystem policy - Strengthening of Korea-Germany cooperation policy
2. The current state of the German wind and photovoltaics industries
(1) The status of the German wind and photovoltaics industries
A world leader in wind and photovoltaics industries
Germany is a leader in the renewable energy sector in terms of market size, industrial competitiveness, institutional support, and policy development standards. Germany has a wind power Determinants of German Green Industry’s Development and Implications for Korean Policy 539 capacity of 27 GW, lagging behind only the United States and China. In addition, Germany is one of the leading forces in the global PV market that has been at the take-off stage since the mid-2000s. Germany’s wind and photovoltaics industries’ well- developed division of labor structure has resulted in a high level of competitiveness within the industrial ecosystem.
Moving beyond the traditional manufacturing industry: job creation-type export industries
Germany’s renewable energy industry has already achieved industrial importance at the macroeconomic level in terms of value added production, job creation, and exports. The GVA (gross value added) created by the German renewable energy sector in 2009 was estimated at over 36.0 billion euros when investment and operations were combined. In particular, the photovoltaics industry accounts for 45% of overall value added for this sector and the wind energy industry 17%. The wind and photovoltaics industries are also among Germany’s key export industries. The German wind industry’s export share of sales has continuously increased since the 1990s. Having reached share of 75% in 2009, it has effectively become an export industry. In the case of the photovoltaics industry, the export share of sales increased from a mere 14% in 2004 to 60% in 2009, thus implying that it has also become an export industry. The German renewable energy sector has grown to become an industry capable of employing in excess of 300,000 people in 2009. As 160,000 people were engaged in this industry in 2004, 540 the industry has in effect showcased its high job creation capacity by recording a growth rate of 87% over the last five years. Both the wind and photovoltaics industries are regarded as job creation- type industries. More to the point, while the wind industry employs 87,000 people, 79,000 individuals are actively engaged in the photovoltaics industry. These totals are second only to the biomass industry, which employed 110,000 people as of 2009.
(2) The two-stage development of the German green industry
The development of the wind and photovoltaics industries can be divided into the experimental period before the early 1990s and the take-off and growth period after the early 1990s. The production of electric power via renewable energy sources has rapidly increased in Germany since the mid-1990s. This rapid increase was led by the wind energy. The wind power generation capacity increased from 55 MW in 1990 to 4,600 MW in 2000 and 25,777 MW in 2009. Although its take-off stage started in 2000, the photovoltaics industry exhibits a developmental pattern that is similar to that of the wind energy.
3. Stage-based demand expansion policy
(1) The political background to Germany’s renewable energy industry policy
The growth of the German renewable energy industry has Determinants of German Green Industry’s Development and Implications for Korean Policy 541 been characterized by the creation of demand through government policy playing the role of the driving force for industrial growth. Important measures have included incentive systems such as feed-in-tariffs to extend the renewable energy market traditionally burdened by high costs, and the German Renewable Energy Act designed to eventually bring an end to the use of nuclear fuel and increase its use. The background to Germany’s successful introduction of renewable energy policy before the other advanced countries in Europe can be traced back to the aftermath of the nuclear meltdown in Chernobyl in 1986 when public opinion that the use of alternative energy should be expanded began to emerge in German society. In addition, Germany has long been dependent on the import of energy sources such as oil and gas. In this regard, the German government has sought to substitute imported energy by producing renewable energy from indigenous energy sources. The development of the renewable energy industry was also facilitated by the government’s desire to create new jobs and increase exports based on the growth of this industry. Germany’s political sector has greatly supported greater use of renewable energy. The Green Party of Germany, which formed a coalition government with the Social Democratic Party from 1998- 2005, has been recognized as the most successful green party in the world. It has played an important role in extending the use of renewable energy in Germany through such means as the passing of the German Renewable Energy Act and the disuse of nuclear facilities. 542
(2) Growth stage-based policy
Experimental period : 1970s~1980s
The energy crisis of the 1970s motivated the German government to increase investment in coal and nuclear fuel facilities. The German public possessed a positive perception of renewable energy during this period that was also marked by a significant increase in related R&D activities. The level of investment in R&D increased from 20 million marks in 1974 to 300 million marks in 1982. Nevertheless, a general political and economic apathy towards the production of electric power using renewable energy sources continued to prevail in the 1980s. It was amid such a vulnerable environment that an outstanding institutional change occurred, in the form of a government- supported R&D program for renewable energy. This program provided universities, research institutes, and enterprises with the funds needed to develop various new technologies. In the case of wind power generation, investment was made in 40 different R&D projects designed to develop small and medium-sized wind power generators during the period spanning from 1977~1989. Meanwhile, 18 universities, 39 enterprises, and 12 research institutions received support for R&D projects related to photovoltaics, a move that played a decisive role in helping the German renewable energy industry secure internationally competitive technologies. Other important infrastructures for the renewable energy industry were also established during this period. These included Determinants of German Green Industry’s Development and Implications for Korean Policy 543 the creation of organizations representing the various interest groups. Various organizations such as energy resource-specific renewable energy associations, the environmental protection .. organization Ecological Body, Forderverein Solarenergie, and Eurosolar were formed and started operations during this period. These organizations played a decisive role in introducing renewable energy-related institutions and policies.
Take-off and market expansion period : 1990~
During this period, the interest in political support for renewable energy greatly expanded. The growing opposition to nuclear energy in Germany following the Chernobyl nuclear meltdown in 1986 had positive effect on the formation of a consensus around the need for renewable energy sources. Various institutional changes, including the adoption of feed- in-tariffs, were effectuated during this period. In 1988, the German government implemented two large-scale renewable energy market formation programs. The first market formation program was related to wind power generation, and revolved around the installation of an additional 100 MW wind power generation capacity and a promise to purchase the electric power produced at 4 euros per kW. The second market formation program was related to photovoltaics, and involved the installation of 1,000 solar roofs. Enacted in 1990, the German Electricity Feed-in Law has been evaluated as an institutional change that played an important role in the future development of the German renewable energy industry. 544
The period after 1998 was the one marked by the epochal expansion of the photovoltaics market and the steady growth of the wind energy market. In particular, there emerged a great change in German politics as pertains to green growth. The red- green coalition of the Social Democratic Party and the Green Party’s seizure of political power in 1998 were followed by the adoption of a large-sized photovoltaics market formation program. This was accompanied by the decision to introduce an energy tax, to install 100,000 new units of photovoltaic facilities, and to gradually decrease the use of nuclear energy. In 2000, the current foundation of German renewable energy policy was formed when the Electricity Feed-in Law was amended and the Renewable Energy Sources Act was adopted.
(3) The domestic dissemination policy
The rapid development of the German wind and photovoltaics industries was directly influenced by the German Electricity Feed- in Law in place from 1991~2000 and the Renewable Energy Sources Act implemented since 2000. The German government’s support for R&D and various financial benefits also played an important role in the growth of these markets. In addition, the decision to completely deactivate nuclear power generation by 2020 ensured that the German renewable energy industry could establish a sound foundation for continued sustainable growth in the future. This means that Germany’s international competitiveness in the field of green industry will be further strengthened. The case of Germany is a good example of how the enforcement of a Determinants of German Green Industry’s Development and Implications for Korean Policy 545 domestic dissemination policy can create an opportunity to heighten export competitiveness.
4. Industry ecosystem and competitiveness
(1) Well-balanced industry ecosystem
Germany is home to world-class enterprises that cover the entire process from parts and equipment manufacturing to system manufacturing and the installation and operation of the system. While large and multinational enterprises have played a leading role in system manufacturing, small and medium sized enterprises with long histories have played a pivotal role in the manufacturing of parts and equipment. One of the unique characteristics of the German wind and photovoltaics industries has been the fact that the development of system manufacturing enterprises has been accompanied by that of component (wind) and equipment (photovoltaics) industries. Small and medium sized enterprises with a long history have played the leading role in the component and equipment industries. Thus, one of the general characteristics of Germany, namely that enterprises with high technology levels, or Mittelstand, constitute one of the main sources of German industrial competitiveness, is also applicable to the wind and photovoltaics industries. Many of these small and medium sized enterprises were born out of industries where Germany has traditionally been highly 546 competitive such as mechanical engineering, optical, chemical, semiconductors and glass. This implies that parts and equipment enterprises may play a relatively bigger role in the supply of the knowledge and knowhow needed for industrial development. One of the characteristics of Germany’s wind and photovoltaics industry ecosystem is the diversity of enterprise types. The wind power industry’s system production stage is dominated by large- scale multinational enterprises. Meanwhile, although the ratio of small and mid-sized enterprises is more significant in terms of parts than at the system production stage, a significant ratio of large enterprises can nevertheless be found at this stage as well. Finally, the majority of services enterprises are small and medium sized entities that have only been in business for relatively short periods of time. While industries upstream of the photovoltaics industry such as silicon and wafer have seen production controlled by a few enterprises, downstream industries such as cells and modules have been characterized by the presence of a relatively larger number of enterprises in the production process. Very few enterprises are engaged in the production of items such as silicon situated at the first stage of the value chain. The production of silicon is a technology and knowledge intensive process that requires large amounts of capital. Meanwhile, many enterprises compete with one another at the last stage of the value chain; for example, the production of modules. The presence of diverse forms of cooperation between enterprises is another characteristic of the German wind and photovoltaics industries. Turbine enterprises within the wind Determinants of German Green Industry’s Development and Implications for Korean Policy 547 power industry have tended to develop as vertically integrated enterprises that engage in not only the production of core parts but also the provision of services. However, loose vertical cooperation where systems are produced based on the integration of tailored parts into self-developed turbine designs remains the dominant form of cooperation within the industry. The diversity of enterprise types exemplified by the coexistence of vertically integrated and independent enterprises represents another characteristic of the photovoltaics industry. Vertically integrated enterprises have played an important role in the wafer-cell-module market. However, the market share of vertically integrated enterprises in this particular field has dropped. This can be attributed to the appearance of many independent small and medium sized enterprises engaged in cell production. Put differently, the characteristics of the pertinent technologies have made the combined production of wafer-cells more advantageous than the full vertical integration of the three industries. Meanwhile, the mass production of modules is complicated due to the need to alter and adapt so as to meet the varied requirements of the market and demanders. In this regard, small and medium sized enterprises in the field of module production capable of providing differentiated services in individual regions and markets may enjoy an advantage.
(2) Development of an industry ecosystem and determinant roles of market expansion
The determining factors which allowed the German wind and 548 photovoltaics industries to move into the developmental stage based on its own impetus were on one hand, the market expansion made possible by large-scale market formation programs, and on the other hand the institutional reforms that were undertaken from the early 1990s onwards. Although the German government continued to provide resources and control the overall direction of development through R&D investment, it was the large-sized market formation programs that made the move to the second stage of growth possible. These market formation programs made possible the accumulation of knowledge such as installation knowhow, system installation standards, the development of new inverters, and the entrance of many electric facility businesses in downstream fields. It furthermore created conditions that were ripe for the linking of shunt electric power systems. As the market expanded, new enterprises entered the market and broadened the scope of the technology system and, which in turn led to the establishment of a more sophisticated division of labor system within the industry. A network was developed between the turbine and parts producers in which parts enterprises produced their goods based on the special demands of turbine enterprises. The development of the parts industry made it easier for new enterprises to enter the market by relying on a complete infrastructure. Furthermore, this also made it possible for some enterprises to specialize in design without participating in the production of parts or in the assembly of turbines. This in turn made it possible to decrease the minimum capital requirements needed to enter the market. While this process led to the formation of a more sophisticated division Determinants of German Green Industry’s Development and Implications for Korean Policy 549 of labor system within the industry, it also played a role in improving the productivity of the overall industries through the cycle of learning and knowledge gaining.
(3) Competition factors faced by clusters and core enterprises
Another important element in the development of the German wind and photovoltaics industries has been the presence of well- developed industrial clusters. The wind cluster that developed in the Northern coastal area and the photovoltaics cluster in the former East German area can be seen as good examples of how government policy and correlated industries can be combined to create world-class industrial competitiveness.
Wind clusters
The offshore wind energy cluster in the Rostock region and the wind power cluster in the Oldenburg region can be identified as the leading clusters within the wind industry. Germany, with state government at the forefront, has induced enterprises to install wind power generation in local sites, and used local strengths and economic resources in supporting enterprises to realize the majority of their value creation within the state. The German government has also induced the formation of networks involving enterprises, research institutes, and industrial associations in regions where numerous correlated industries are already present. This has greatly contributed to improving the general competitiveness of the wind industry. 550
Photovoltaics clusters
The Solar Valley widely regarded as the leading cluster within Germany’s photovoltaics industry was formed in three former East German states. The joint projects related to photovoltaics conducted by enterprises and research institutes as part of the wider Solar Focus-project provided the impetus for the expansion of the industrial base for growth. The German government has implemented various policies designed to foster the establishment of photovoltaics industry clusters. These have included the development of core enterprises, the strengthening of the training of skilled human resources, the establishment of the foundation for public research institutions- based R&D, the development of parts and materials enterprises, and market creation efforts. The foundation of industries based on the technological prowess and knowhow of competitive enterprises such as optical, chemical and precision equipment industries has provided the basis for the development of photovoltaics clusters. The German case implies that industrial clusters have been the key to the success of the wind and photovoltaics industries. Moreover, the integration of related technologies and industrial knowhow from fields such as semiconductors, shipbuilding, and engineering constitutes the major condition were critical to develop these clusters. These correlated industries have provided the knowledge and human resources needed to develop the wind and photovoltaics industries. In addition, the clusters has been developed and implemented Determinants of German Green Industry’s Development and Implications for Korean Policy 551 in close coordination with regional industrial policies. In the case of the photovoltaics industry, federal and state governments have actively provided support for the development of the former East German area. Meanwhile, in the case of the wind industry, the active support of the state government as part of efforts to discover new ways for sustaining growth in existing industries, such as the shipbuilding industry in the northern area, afflicted by decreasing demands has greatly contributed to the development of clusters.
5. Korea’s policy tasks
(1) The implications of the German case and further development of the Korean green industry
Diverse industrial development paths
Above all, there is a need to foster a clear understanding of the differences between German and Korean green industries in terms of their in development paths. While the German green industry is more akin to an innovative endogenous development type where a great emphasis is placed on the domestic market and self-developed technologies, the Korean green industry is more of a catch-up type in which exports and imported technologies play a pivotal role. That being said, the formation of a well-developed industry ecosystem that encompasses all stages of the value chain and ability to move towards innovative 552 development is predicated on the establishment of a large-scale domestic market.
Importance of market formation as part of the move towards the take-off and growth stages
The expansion of the market represents the key to growth. Market formation programs such as the Germany’s 250 MW Wind Programme and the Electricity Feed-in Law have made it possible to establish a virtuous cycle characterized by new enterprises’ market entry, which led to increase in investment followed by development of a division of labor system within the industry to finally create learning network. By ensuring a relatively protected domestic market, government policy in effect created an opportunity for German enterprises and the industry ecosystem to develop. The take-off and growth of Korean green industry is predicated on the expansion of exports and the establishment of active measures to extend domestic demand.
Need for system implementation and long-term standpoints
The development of green industry is regarded as a long-term change that encompasses a general change in the energy systems employed. In this regard, the sustainable development of the green industry should be accompanied by an overhaul of the service infrastructure, institutions, and overall public perceptions. Various forms of learning will be required; to this end, the creation of stable spaces for continuous learning should be Determinants of German Green Industry’s Development and Implications for Korean Policy 553 regarded as the main role of the government.
Moving towards the establishment of an organic division of labor system that encompasses the entire value chain
Ultimately, the renewable energy industry should move towards the establishment of a well-developed division of labor system that encompasses the entire value chain. This organic division of labor system will in due course become the main source of industrial competitiveness. There is a particular need to develop cooperative relationships between parts & equipment and system enterprises, as well as interactive networks between system enterprises and consumers (users). The effective functioning of the organic division of labor system is dependent on the achievement of a stable level of domestic demand. Here, the decisive role played by the domestic market until the German enterprises were ready to assume a leadership role within the global market should not be forgotten.
(2) Tasks related to the development of the Korean green industry
The detailed measures for the development of the Korean green industry can be divided into the development of demand, strengthening of the industry ecosystem, and Korea-Germany strategic cooperation. The development of demand should be carried out from two standpoints: the increase of domestic demand and the 554 diversification of export markets. The increase in domestic demand should be rooted in efforts to increase the domestic market through the institutionalization of incentives such as the feed-in-tariffs and RPS (renewable portfolio standard). Moreover, the development of overseas markets should be jointly undertaken as part of a Korea-Germany supply chain. Successful results can be achieved through the establishment of an overseas market development consortium in which while Korean enterprises are in charge of systems, German enterprises are responsible for parts and materials. In addition, the joint German-Korean construction of renewable energy power plants in North Korea can be considered as a way of expanding the market. At the same time, the construction of distributed renewable energy power plants can also pave the way for an increase in inter-Korean exchanges. The securing of basic original technologies and the establishment of policies are needed in order to improve the effectiveness of the industry ecosystem. The establishment of the R&D foundation needed to secure original technologies is predicated on the establishment of research institutions specialized in basic research that have Korea’s take-off as an R&D powerhouse in Northeast Asia as their overarching goal for the future. Joint research institutes should also be established between universities. Such a move should come as part of a model that encompasses not only communal research amongst universities, but also government-academia cooperation, the expansion of the basic research function, industry-academia cooperation, and the development of spinoff enterprises. Determinants of German Green Industry’s Development and Implications for Korean Policy 555
Strategic responses by Korean green industry
- Expansion of domestic market through the Market creation institutionalization of incentives through the - Construction of renewable energy power plant in development of NorthKorea demand - Joint Korean-German development of overseas markets
- Establishment of research basis to secure original Strengthening of the technologies industry ecosystem - Establishment of joint research institutes between through the facilitation universities of the basis for growth - Strengthening of competitiveness through the enforcement of total factor productivity - Joint technology development Strengthening of the - Expansion of human resources exchanges Korea-Germany - Establishment of joint testing & certification body strategic partnership - Inducement of investment in German enterprises
The importance of the continuous development of technology and improvement of productivity highlights the need to strengthen research through the establishment of linkages with universities and research institutes. Efforts should also be made to ensure the establishment of a virtuous cycle encompassing research institutes-enterprises-universities-government support. A strategic partnership between Korea and Germany could greatly contribute to the development of Korea’s green industry. Above all, such a partnership would make possible the implementation of joint technology development in the field of green industry that would reflect the tenets of the United Nations Framework Convention on Climate Change. Environment-friendly manufacturing process technology and renewable energy technology can be regarded as fields where the two countries can engage in joint development. Human resources exchanges should also be expanded through 556 diverse exchange programs. Exchange programs could be based on exchanges between university students, the use of internships within the counterpart nation’s enterprises, the provision of re- employment opportunities to retired and unemployed engineers, the activation of startup businesses through the bringing together of specialists, and collaboration between research institutes and enterprises. The export of Korean products should be facilitated through the establishment of a Korea-Germany joint testing & certification body capable of expanding the mutual certification of reliability based on Germany’s famous certification system. The inducement of the international standardization of the green technologies jointly developed by Korea and Germany in next-generation growth fields can also provide the basis for the expansion of the market. Lastly, active use should be made of the Korea-EU FTA. In this regard, it is necessary to engage in promotional activities such as those designed to convince German enterprises that Korea can serve as a strategic hub to enter emerging markets in Asia such as China, ASEAN and India. Efforts should also be made to attract investment by German enterprises and organizations in various aspects such as the commercialization of green technology, core parts and materials, and research institutes. Research Report 2011-612
Promotion and Improvement of Regional Industrial Promotion System
Jongseok Jung, Hayool Song, Youngsoo Kim and Chanjun Kim
Promotion and Improvement of Regional Industrial Promotion System 559
Chapter 1. Background and Objective of Study
Although there are a number of projects that are administered by the central government to support regional industries, their main focus is on enhancing the individual core factors of industrial development such as local companies, human resources, industrial-education cooperation, and scientific technology rather than on the efforts to generate the synergistic effect between these core factors. The European Union, on the other hand, promotes the regional development policies in order to focus on securing an organized system that combines these supporting projects under an integrated implementation plan. Therefore, it is necessary for the central government to shift the direction of current projects from increasing funding for discovering new businesses to establishing an integrated promotional system that concentrates on nurturing the regional industries. It is not recommended for the central government to lead the 560 establishment of integrated promotional system, but rather it should reorganize the framework of the current supporting system; one that will assist the regional governments to systematize the supporting projects themselves, and thereby inducing the introduction of integrated promotional system at regional level. Since the regional governments lacked any planning capability and experience in the early stages of regional- industrial development, the central government had to set up all the details of project planning for the regional governments to follow. However, today’s regional governments are different from the ones in the past. The experiences gained from project promotion over the past ten years have greatly improved the regional governments’ capability in project planning and implementation. Therefore, it is time to contemplate methods to enhance the regional governments’ ability to drive supporting projects as their main focus. Recently, the goal of regional industry supporting project places more emphasize on the outcome rather than on the efficiency of the output. Promoting the supporting projects individually will face certain limitations in achieving the desired outcome, which can only be resolved by establishing an integrated system through a linkage of individual factors of regional industrial development. Some have suggested that the national resources concerning the fostering of regional industries should be converted into block grants through which the regional governments can integrate various supporting projects. However, this method is deemed inadequate as it is more likely to cause problems such as a lack of Promotion and Improvement of Regional Industrial Promotion System 561 connectivity to the national industrial policies and inefficient use of investments due to competitions between regions. Instead, a viable scheme should be able to take advantage of the block grant in order to increase the autonomy of regional governments, whom then can simultaneously perform the central governments’ conventional function of controlling and adjusting the project. For example, from 2010, the Ministry of Knowledge Economy tied together the Regional Strategic Industrial Promotion Project and the Regional Specialized Industrial Promotion Project, and established an integrated promotion plan so that both projects can proceed autonomously by the regional governments. This new regional industrial roadmap unites all the separated tasks such as technology and infrastructure development, business support services, human resource training, etc. As a result of this plan, the regional governments are attempting to setup the optimum project system conditions by autonomously balancing the composition of task details (portfolio), budgets, and managerial method (process). To provide such an integrated promotion system, the governance system of regional industrial development should be reorganized to allocate more authorities to the regional governments. Moreover, it is a prerequisite to provide a foundation on which the regional governments are capable to autonomously compose and operate the implementation tasks (i.e. supporting means) that meet the regional demand. A structural reorganization of the Regional Development Special Account is therefore essential in order to ensure an effective operation of the integrated promotion plan. Furthermore, it is also 562
Basic Concept for the Integrated Regional Industrial Promotion Project
Ministry of Ministry of Small and Ministry for Food, Rural Knowledge Education, Medium Agriculture, Development Economy Science and Business Forestry and Administration Technology Administration Fisheries Project Project Project Project Project Project Project Project Project Project Project Project Project Project
Establishment of regional integrated promotion plan (planning and adjustment) Autonomous Regional composition of government-centered supporting measures governance based on regional demand
Regional autonomous outcome management and evaluation (Feedback and adjustment for individual projects)
imperative to provide a legal basis to guarantee the stability of such a promotion plan.
Chapter 2. Status and Roles of the Regional Industrial Promotion Project
In this study, the regional industrial promotion project is defined as a project which is based on the regional development policy and operated at the national level to promote regional Promotion and Improvement of Regional Industrial Promotion System 563
Scope of the Regional Industrial Promotion Project (based on the Regional Development Special Account)
Industry/Company Industry-Education Science and Ministry Support Cooperation Technology Support - Metropolitan Leading Industry Incubation1) - Regional Strategic Industry Incubation2) - Regional Specialized Industry Incubation Ministry of - Regional S/W - Hub University for - Establishment of Knowledge Industry Promotion Industrial R&D Special District Economy - Regional Investment Collaboration3) Promotion - Industrial Cluster Competitiveness Enhancement - Glocal Industry Development - Regional Characterization Industry Promotion - Economic Region Human Resource Development Project - World Class - Regional Base University Ministry of Research Center - Regional Science Education, - Incubation and Research Science and - Hub University for Complex Incubation Technology Industrial - Regional Innovative Collaboration Human Resource - Industry-University- Development Institute Collaboration System Activation - Regional Strategic Ministry for Food Industry Food, Incubation Agriculture, - Sea Food Industrial - - Forestry and Base Complex Fisheries Construction - Regional Ministry of Environmental Environment Technology Center - - Operation 564
Ministry of Land, - Regional Transport and - - Technology Maritime Innovation Affairs
- Industry-University- - Regional Agricultural Rural Institute Research Development - Collaboration for Infrastructure Administration Regional Strategic Development Crops - Establishment of Small and Industry-University- Medium - Business Incubation - Grant for Enterprise Institute Business Center Establishment Collaborated and Administration Establishment Investment Enterprise-Affiliated Research Institute Total 13 7 6 Note : 1) Including the Metropolitan Regional Cooperation Project 2) Including the Regional Technology Innovation Project and Regional Innovation Base (TP) Incubation Project 3) Including the Establishment of Industry-Education Convergence Zone
industries. This also includes any projects where their objectives or policies directly and/or indirectly related to the regional industry. Complying with the above definition, the scope of the regional industrial promotion project, on the basis of the Regional Development Special Account, will include utilization of regional universities to position the industrial-education cooperation projects, science and technology promotion projects, as well as industry and company supporting projects. A total of 25 promotional projects are being operated by the Ministry of Knowledge Economy, the Ministry of Education, Science and Technology, the Ministry for Food, Agriculture, Forestry and Fisheries, the Ministry of Land, Transport and Maritime Affairs, the Ministry of Environment, the Rural Promotion and Improvement of Regional Industrial Promotion System 565
Development Administration, and the Small and Medium Business Administration. Since the reorganization of the Regional Development Special Account, the budget for the regional industrial promotion project has increased by an average annual rate of 4.7% from KRW 1,528.6 billion in 2009 to KRW 1,679 billion in 2011. The regional industrial promotion project also accounted for 28.5% of the total Economic Region Development Sub-account budget (KRW 5,884.9 billion) in 2011, second biggest to only the SOC project (45.6%). The objective of this study is not to suggest a scheme to reorganize individual regional industrial promotion projects, but to search for an alternative measure whereby the regional government can unify these individual projects. From this perspective, the current projects have the following problems: due to the rigidity of project system and the separated project operations, it is considered inflexible in dealing with the dynamics of each individual project due to the similarity and repetitiveness of all tasks units and supporting measures. Most support projects are progressing with the standardized project contents and supporting methods which do not taking into account the circumstances and features of each region. Furthermore, due to the rigid project process and operation system, only a small number of the support programs specialized in individual regions are utilized. As both the interim and final evaluation of implementation tasks are supervised by an agency of the central government, the outcome evaluations are too broad to fit into the characteristics of regional industries. Worst of all, there are insufficient attempts by the agency in evaluating and managing 566
Problems and Future Assignments of the Current Regional Industrial Promotion Project
Problems of theRegional Industrial Source of Future Promotion Project problems Assignments
Insufficient strategic investments Central Construction of tailored to regional characteristics government- Planning due to separated projects integrated project centered, system led by the Stage decentralized and Lack of connectivity and similarity and regional segmented government redundancy between projects project system
Inadequate design of support measures Uniformed for regional circumstances Introduction of Executing support measures support system Stage apart from the tailored to Insufficient support programs characteristics of regional demand characterized for individual regions regions
Lack of evaluation considering regional Absence of Establishment of circumstances managing and comprehensive Evaluating evaluating the outcome Stage Absence of comprehensive outcome comprehensive management management owing to the separation of outcome by system in main agents evaluating individual projects region individual regions
the entire outcome of the promotion plan. The above problems are fundamentally a result of the current project system and promotion method. Despite some successful cases, the overall outcome of industrial promotion is ambiguously evaluated due to the following structural problems: the ‘central government-centered, decentralized and segmented project system’ utilized in the planning stage, the ‘uniformed support measures apart from the characteristics of regions’ utilized in the executing stage, and the ‘absence of managing and evaluating the comprehensive outcome by region’ in the evaluating stage. Promotion and Improvement of Regional Industrial Promotion System 567
Chapter 3. Measures to Establish an Integrated Project System by the Regional Government
The current regional industrial promotion projects are planned and designed by the central government. The designated central government agencies manage and evaluate the projects and organizations such as Technoparks, specialized centers, universities and government-funded research institutes in each region that perform the implementation tasks of each project. Although this vertical structure of the project system connects the central government, managerial agencies from the central government, and regional institutions or companies performing the projects, the absence of any managerial agencies from the
Problems and Future Assignments of the Current Regional Industrial Promotion Project
MKE MEST MFAFF ME MLTMA RDA SMBA Central Korea Korea Institute of Korea govern National Korea Agro- Association Institute for Research Fisheries & Construction & ment Advancement Transportation of Industry, of Foundation Food Trade Academy of Korea Corp. Technology Evaluation and Research Technology and Planning Institute
Leader (leading Regional Agricultural Local Small industry Techno Metropolitan Environmental Research & and Medium support park Government Office Extension Business ing Services Administration agency) Region
Project Executing Organizations Company, Technopark, specialized center (independent foundation), university (industry-education coordination group), government-funded research institute, industry-university-institute project agency, local government 568 regions creates a communication gap between the planning of implementation tasks and the characteristics of regions, and thereby result in redundant or overlapping enforcement plans. Based on the Special Act on Balanced National Development, the Regional Development Plan has to be reestablished every 5 years while the enforcement plan is redesigned annually. However, these plans are set up separately from the comprehensive evaluation and thus will not be able to secure the roles and effectiveness of the execution plans set out for the integrated regional industrial promotion project. Meanwhile, in the cases of the Regional Strategic Industrial Promotion Project and the Regional Specialized Industrial Promotion Project, each regional government has mapped out an integrated promotion plan (Regional Industrial Promotion Plan) by establishing the outcome targeting system, adjusting the project budget for implementation tasks, and restructuring the supporting measures (R&D, technical support, human resources training, marketing, etc.), all of which are tailored to the circumstances and characteristics of the region it has set out to promote. Yet, the adjustment of the budget for implementation tasks is only available within a restricted range due to the fixed budgeting standard of the central government, while the adjustment of larger framework such as the change of eligible target (field of industry) and the settlement between the subordinate programs of implementation tasks remain sketchy at best. In order to overcome the above problems and limitations, the plan requires an integrated promotion measure which will enhance the autonomy of the regional governments without Promotion and Improvement of Regional Industrial Promotion System 569 impairing the current structure of regional industrial promotion project. For this to happen, the budgeting, planning and adjusting authorities for each implementation task should be allocated to the regional governments. In order to successfully utilize this integrated promotion system plan with effective adjustments at the regional level, it necessitates a structural reorganization of the Regional Development Special Account (Economic Region Development Sub-account). In other words, the integrated governance authority should be granted to the regional governments. In regards to the structural reorganization of the Regional Development Special Account, the projects within the Economic Region Development Sub-account have to be divided into regional autonomous projects and central government-centered projects which are categorized according to each project’s own attributes. The regional autonomous projects comprise of the regional industrial promotion, scientific technology promotion, industry-education cooperation and human resource training, while the budgeting procedures and management systems for these projects will require improvement in order to be capable of backing up the region’s autonomous budget adjustments. The categorization of budgets is a critical part of the main project, subordinate project and also the implementation task. In order to successfully apply the budgeting adjustment between these categories without any limitations, the types of financial resources, which are the subsidy and contribution, should be unified into the contribution process. As the excessive number of regional autonomous projects (25 main projects and 44 subordinate 570 projects) makes it difficult for the regional governments to devise the necessary detailed plans of the projects and adjustments to their budgets, those with similar objectives and contents should be merged and rearranged in order to reduce the number of main projects from 25 to 17. The current project system is formed by the central government, managerial agencies within the central government, and project executing institutions. However, in order to establish an integrated governance system at the regional level, the individual provinces and cities are required to establish and operate their own management agency. Furthermore, it will be more advantageous to both the provinces and cities if the respective management agencies can operate as a cooperative
Problems and Future Assignments of the Current Regional Industrial Promotion Project
Submitting Requesting budget bill budget Local Each ministry (adjusted) Ministry of Central government Strategy and government- Submitting call Opinions from Finance centered examination for estimates National Science & and budget project Technology Commission adjustment bill (current) Presidential Committee on Regional Development Evaluation result
Official notice of the limit of Official notice of the limit of budget for budget for individual projects individual ministries
Submitting Requesting budget Regional budget bill Local Each ministry (adjusted) Ministry of Autonomous Strategy and government Opinions from Project Submitting call examination Finance (reorganized) Official for estimates National Science & and budget notice of Technology Commission adjustment bill guidelines Submitting Evaluation result for budget budget bill Presidential Committee on and budget preparation Regional Development adjustment bill Promotion and Improvement of Regional Industrial Promotion System 571
Reorganization Method for Regional Industrial Governance
Regional Industry Promotion Center Managerial agency Policy Planning Regional Evaluation Agency Agency
University (industry- Government- Technopark education agency) funded institute KICOX Provinces Project and executing cities Regional institution Industry Evaluation Agency
Business Human Regional Policy Specializ Resource Innovati Planning Promoti ation on Center Training on Agency Agency Center Center
Regional Committee
MKE KIAT Metro politan Metropolitan Committee Leading Industry Joint areas Support Agency
A B C Local government in Regional Industrial Regional Industrial Regional Industrial provinces & cities Promotion Center Promotion Center Promotion Center
organization, thereby resolving any segmentation challenges between the projects from different provinces and cities. This will also empower local governments of the responsibility for the projects which will take place at the Economic Region. 572
Chapter 4. Establishment of the Support System Tailored to Regional Demand
In the current regional industrial promotion projects, a variety of programs such as infrastructure utilization, research and development (R&D), human resources training, and business support services are being operated to improve the intrinsic
Route through which Policy Measures Affect Company Performance
Raising intrinsic The 1st The 2nd Policy support method capacity quality outcome outcome Establishing specialized center Enhancement of Developing Infrastru Supporting equipment utilization and cture residential areas enhancing Improvement of test, new and construc Building and supporting tion analysis and existing for common use evaluation capacity product Supporting equipment fee Supporting fund for Improving production technology development process development Support Supporting Acquiring intellectual Increasing of productivity technol technology transfer property Patent ogy Supporting technology Enhancing ability of application develop mediation product and design ment development Supporting common R&D Establishing network Supporting technology Contribution for process efficiency error and product improvement
Supporting technology Increase of paten and Establishing Extending Services and patent information market analysis capacity of network sales technol Supporting human Extend quality of human resources (value records ogy resources on research and produce chain) support Supporting marketing Marketing enhancement Supporting management Improvement of business consulting management Promotion and Improvement of Regional Industrial Promotion System 573 capacity of the companies within the region, which also extend to the development of new products, patent applications and productivity improvements.
Definition of Variables and Summary of Statistics
Average Name Define (standard deviation) Min Max Outcome variables (Dependent variable) Sales record on new and existing product GoodRD development 0.2952(0.4567) 0 1 ProcRD Improving process sales record 0.1145(0.3188) 0 1 Patent Patent sales record 0.2214(0.4157) 0 1 Explanatory variables RDI R&D R&D investment (as of 2009) 2.0102(5.6046) 0 65 RDasset Level of R&D assets of patent (D19) 2.4682(9.1621) 0 160 Proportion of R&D human resources RDhuman Comparing with total number of workers 20.1095(31.1052) 0 100 CareerRD 5 years experience among R&D human resources 19.9911(31.1222) 0 100 RDprog Exclusive department for planning R&D 0.4427(0.4973) 0 1 RDabil Patent analysis and technical assessment ability 2.2646(1.3329) 1 5 CoRD Joint cooperation research 0.3766(0.4851) 0 1 RBD Technical business capacity 2.3613(1.3985) 1 5 Mark Marketing strategy and management ability 2.0585(1.1136) 1 5 Control variables Business growth (history) PGrow Self sustainable growth(1 3 1) 2.2824(0.8655) 1 3 Take-off(4 6 2), Advanced (7 years or more 3) R&D capacity stage - Research development RDlevel expense comparing to sales 1.4148(0.6574) 1 4 (0 % 1, less than 1% 2, 5% 3, 5% or more 4) HwInfra Infrastructure utilization level 0.4046(0.4914) 0 1 RDsup Technological development support 0.4046(0.4914) 0 1 RDsw Business support services 0.5725(0.4953) 0 1 574
In chapter 4, we will analyze the relationship between company performance and the supporting method based on the companies’ characteristics such as growth phase, the level of R&D capacity, etc. The results of the analysis will determine the effectiveness of the different supporting methods and will also provide a recommendation as to whether these methods should be sustained going forward. The analysis will be also be used as sources for program planning that will be customized to the specific characteristics of the companies. The analysis utilized in the database of the Korea Technopark Association monitored the groups of companies in 2011. The data from 402 companies were used to form this database. The performance of a company is determined by its development of new and existing products, sales record, status of improvement in the manufacturing process, and the history of patent registration and application. The data which were applied to the performance variable has the value of either 1 or 0, referring to the occurrence or nonoccurrence of performances, respectively. Due to the discontinuous performance variable having only either a 1 or 0 value, the Probit model was applied to analyze this dichotomous data. The Model 1 in the next table shows the correlation between the performances of the companies and the corporate characteristics variables, which include the growth phase of company and the capacity of R&D. For example, the higher the level of R&D a company had, the more positive statistics were resulted on the performance variables such as the performance of developing new/existing products and the performance of improving the Promotion and Improvement of Regional Industrial Promotion System 575
Analysis on the Growth Phase of Company, Level of R&D Capacity and Outcome
Dependent Model 1 Model 2 Variable New and Patent New and Patent existing Process registration existing Process registration product improvement and product improvement and Independent development record application development record application Variable record record record record PGrow 0.0307 0.0132 0.0017 0.0177 0.0064 0.0025 (0.3542) (0.1288) (0.0182) (0.2008) (0.0613) (0.0265)
RDsw - 0.1040 0.1976 0.2902* - - (0.6765) (1.0723) (1.7511) McFadden R-square 0.2109 0.0793 0.2059 0.2281 0.0894 0.2334 Chi squared 100.58 22.19 85.54 108.80 25.01 96.96 Akaike I. C. 0.9728 0.6705 0.8549 0.9671 0.6786 0.8411 Note : *, ** and *** are statically significant within the significant level 10%, 5% and 1% respectively. The numbers in the ( ) are t- values.
manufacturing processes. Therefore, the companies that invest in the development of new products and patent application tend to reveal relatively higher performances. The growth phase of company (the history of company) shows a positive effect on the performance of the company, yet its influence was relatively small compared to its R&D capacity. This implies that although the support policy reflects the characteristics of regional companies, the policy should put more value on the R&D capacity rather than on the growth phase. 576
In the meantime, Model 2 describes the relationship between performance of the company and its support measures such as infrastructure utilization, technology development support and business support services. Although the statistics slightly vary with the performance variables, however in general, the technology development support and business support services pose a significantly influence on the performances of new/existing product development and patent registration/application. On the contrary, performance of the company appears to be relatively less influenced by the support of infrastructure such as the use of public equipment, land support, and the discount of equipment rental fee. As seen in Model 2, the most successful programs were the ones with involvement from technology development support and business support services. According to a questionnaire survey, these two support services have wielded the most influence on raising the company competitiveness from the past three years. In order to heighten the innovation of Korea’s regional industry, internal competencies of the regional companies will require to be increased, thereby stimulating R&D and eventually commercialization. The policy directions that can be carried forward based on the above mentioned principle are as follows: First, the regional governments should form a portfolio on support measures tailored to the internal competencies of the regional companies. Second, more programs should be activated to strengthen the internal competencies and the R&D capacity of small- and medium-sized companies. In order to target the Promotion and Improvement of Regional Industrial Promotion System 577 companies with poor competencies, the supports should be able to provide various methods to elevate their competencies. Third, the construction of equipments and centers should be minimized in order to focus on enhancing the technology development support and business support services required by the companies. Fourth, the companies should be motivated to exert themselves so as to increase their own internal competencies.
Chapter 5. Introduction of the Outcome Management System of the Regional Industrial Promotion Project
Under the current system in which the central government evaluates the individual support projects, there are some limitations in evaluating the degree of contribution that the implementation tasks would affect the industrial development in the region. In other words, since the central government has a poor comprehension of individual regions, its evaluation of the regions cannot automatically be assumed to be accurate. Although the goal of the project set by each region should be varied because of the differences of regional situations, the central government still applies uniformed standards to the evaluation, which most likely would not reflect the true regional characteristics and situations. Therefore, the central government should share the roles of managing and evaluating the projects with the regional governments such that: First, the goals of all support projects and subordinate 578 implementation tasks should be to reset to the new plan which strategically corresponds to the regional circumstances. Second, in cases where more than one project is progressing in a region, the
Relationship between Economic Region Development Sub-account of Regional Development Special Account and Regional Unit Evaluation regarding Regional Development Plan
Regional Development Plan
A B Development Plan by Divisions Development Plan by Supra-Metropolitans
Global Regional Open type System Chungch Dongn Metro Gang Competitiveness Community Land Base eong Honam Dakyung Nam won Jeju Reinforcement Formation Development Establishment Areas Areas Areas Areas politan Areas Areas
Reorganization of Regional Development Special Account Global competitiveness reinforcement for Economic Formation of vibrant regional Human Resources Scientific Technique community
South and North Interchange Belt Region East, West, and South Costs Belt Living condition Improvement Four-River Restoration Project Source of income Expansion Human Resources Scientific Technique Tailored Development Agriculture, Forestry and Fisheries Culture & Tourism Traffic & Logistics Regional Industry Culture, Tourism, and Sports Water resources and Traffic Industrial Small Businesses Regional Strategic Industry Inland Belt Living Base Expansion Health and Welfare Development Base Culture & Tourism Traffic & Logistics Leading Industry Environment
a b Economic Region Local Development Economic Region Local Development S Development Sub- Sub-account Development Sub- ub-account Projects of account Projects of Projects of Regional account Projects of Regional Development Regional Development Development Special Regional Development Special Account Special Account Account Special Account (22)-centered (280)-centered (22)-centered (280)-centered (22)-centered
= = Promotion and Improvement of Regional Industrial Promotion System 579 regional government should manage the evaluation of implementation tasks, while the central government should deal with the general outcome. Third, for the project units within the Economic Region Development Sub-account (part ‘a’ in the Figure) which are also currently being evaluated, an additional evaluation should be made on the units of regions (metropolitan areas, provinces, or cities) which operate the integrated projects supported by the central government ministries. The central government will then be able to utilize these results as part of a comprehensive evaluation on the integrated promotion plan established by the regional governments. Relationship between Economic Region Development Sub- account of Regional Development Special Account and Regional Unit Evaluation regarding Regional Development Plan
Chapter 6. Implications of the General Policy
The regional integrated project system is established in the planning stage, where together with the reorganization of budgeting and accounting system, in order for the project to proceed effectively. However, if the support system, measures and programs are not properly operated and factoring in the characteristics of regional industries in the executing stage, eventually the whole project will confront a problem where it can no longer elevate the effectiveness of the integrated promotion. Moreover, if the outcome management system is not properly established in examining the possibility of success and eliminating 580 the inefficiencies, then the integrated promotion by the regional government will most likely not be able to produce any fruitful outcomes. In light of this, it is still very important to approach the establishment of the outcome management system based on the following principles as follows: establishment of the regional government-centered integrated project system, establishment of the support system tailored to the regions, and sharing of the roles between central government and regional governments. Additionally, other complementary policy tasks should be developed in order to launch the integrated project successfully and to elevate its effectiveness. These tasks include: introducing the feasibility evaluation system on regional development project; enhancing the inspection system on the redundancies of R&D between regions; and establishing the investigation panel system for the regional companies. Research Report 2011-613
Facilitating a Convergence between Small-and-Medium Sized Enterprises in Different Business Sectors Focusing on a Technological Aspect
Hyun-Bong Yang and Jong-Bok Park
Facilitating a Convergence between Small-and-Medium Sized Enterprises in Different Business Sectors 583
Chapter 1. Introduction
In the past, low wage levels, high trade rates by subcontractors, dependence on the domestic markets, etc., have been considered the sources of growth for small-and-medium sized enterprises (SMEs). However, as these sources have reached their limits, a new paradigm is needed for the SMEs to continue to develop. Convergence is being emphasized as the new paradigm of the 21st century in enterprise activities, and it can be employed as an alternative measure for the development of SMEs. In 2011, the Korean government enacted the Industrial Convergence Promotion Act. However, supportive systems for convergence of SMEs, as well as systematic research, are still insufficient. This study defines the concept of SME convergence, and for the first time conducts an empirical analysis on the status of SME convergence, as well as the factors influencing convergence capacity. In addition, by benchmarking the Japanese support system on SME convergence, this study aims to contribute 584 to the development of a support system for SME convergence and the promotion of convergence.
Chapter 2. Theoretical Study on SME Convergence
1. General Concept of Convergence
The dictionary meaning of ‘convergence’ is ‘joining two or more different things together to form one thing without discrimination.’ Convergence is a direction demanded not only in the field of science and technology, but also in the fields of humanities and sociology. Still, it reveals itself more specifically in the field of technological renovation. Technological convergence can be defined as the chemical and synergistic combination of new high technologies, including IT, BT, and NT. Such combinations are made to fulfill the common goal of a future society and nation by overcoming scientific and technological limits. Industrial convergence, a concept related to technological convergence, can be defined as activities which renovate conventional industries or create new industries with social and commercial values by creatively combining and integrating different industries, technologies, or both. Today, new convergence industry is proposed as the performance of industrial convergence. New convergence industry can be defined as a new industry created by industrial convergence made to resolve future national issues such as securing competitive advantages in the Facilitating a Convergence between Small-and-Medium Sized Enterprises in Different Business Sectors 585 global market, improving people’s quality of life, etc.
2. Background and Concept of SME Convergence
Network organization theory can be reviewed as the theoretical background of SME convergence. Defined as a flexible and direct relationship of reliance among enterprises, network organization can be an alternative to replace the previous vertical relationship of enterprises, or to supplement the negative elements of such a relationship. Among the network-type cooperation of SMEs, exchanges between different industries can be considered the most representative type of cooperation which pursues the convergence of knowledge and technology among enterprises. Exchange between different industries is made among multiple enterprises working in different fields, or in the same field but not in a competitive relationship. The aim is to expand the market through R&D and cost-reduction by exchanging and networking their manpower, technology, information, markets, etc. Based on the concept of convergence and the theoretical background of network organization, this research first defines the concept of SME convergence as ‘the combination of various management skills, technologies, etc. of SMEs in different fields, aiming to increase the value-added and the capacity of commercializing new fields by developing new technologies, new products, and new services.’ As shown in
, SME convergence can be divided into technological convergence and industrial convergence, based on the subject, object, and result of convergence. The convergence of 586
Comparison between SME convergence and similar concepts
Technological SME convergence convergence Industrial convergence Subject SME Unlimited Unlimited Management resources Object (Technology, Technology, Industry, technology knowledge, etc.) industry, discipline Level Enterprise (firm) level Discipline level Sector level Renovating previous Result Developing new Resolving economic industries or creating industries and social demands new industries Source : Korea Institute for Industrial Economics & Trade (KIET).
SMEs goes through a long process of exchanging (searching) stage (researching) developing stage commercializing stage market developing stage. Through convergence, SMEs can improve performances in sales, research efficiency, cost-reduction, search for convergence projects, and technology & product development.
Chapter 3. Assessment of SME Convergence
1. Status of SME Convergence
In order to analyze the status of SME convergence, this research surveyed and analyzed the convergence of 327 SMEs in the manufacturing and knowledge-based service industries. First of all, 87.2% of the respondents said that the promotion of convergence is necessary, showing that most SMEs agree that Facilitating a Convergence between Small-and-Medium Sized Enterprises in Different Business Sectors 587 convergence are necessary. For the question regarding the motivation for participating in convergence, the top answer was, ‘to find new businesses and fields for the future.’ For the question regarding the type of technology which SMEs wish to develop through convergence, the top answer was, ‘development of a new process and product.’ For the question which asked the SMEs which stage of convergence activity promotion they are currently in, 52.2% answered, ‘the stage of finding convergence projects.’ This demonstrates that most of the SMEs feel that they are in the exchanging stage (searching for convergence project) of convergence activity promotion. For the question asking the current partners for discovering convergence projects and developing convergence technologies, the top answer was ‘SMEs in other fields’ rather than ‘universities (professors),’ or ‘research agencies (research labs).’ However, for the question asking the future partners of conducting convergence, the top answer was ‘research agencies and universities participating in SME cooperation,’ showing that SMEs are planning to go beyond their current cooperation with other SMEs and work together with research agencies and universities in their cooperation with SMEs in the future. The survey showed that it takes about 11 months to find an appropriate convergence project, and then about a year to develop the related convergence technology, although this might differ based on the type of technology subjected for development and the creation of a mutual bond among the participating enterprises. For the question regarding the level of exchange in 588 each factor of convergence, the top answer was ‘building friendship among enterprises and exchanging opinions,’ and for the question asking the greatest difficulty that SMEs are facing while conducting convergence, the top answer was ‘the lack of money and manpower.’ For the question asking why the search for convergence projects and the development of convergence technology is not being made actively, the top answer was ‘due to the insufficient support system; such as the lack of monetary support for technology development after a convergence project has been found.’ For the question asking the benefits obtained by convergence, the top answer was ‘diversification of business items,’ followed by the improvement in management conditions (increase in sales and profit), conquest of technological limits, development of new products and improvement of ideas toward enterprise management. For the key factors of successfully promoting convergence, most of the SMEs pointed out the technological level of the enterprises participating in convergence, followed by the confidence among participating enterprises and the active support made by the government and the public sector. For the support system that the government should preferentially provide to promote SME convergence, most of the SMEs answered ‘monetary support on developing convergence technologies,’ followed by ‘installing and operating exclusive support agencies such as an SME Convergence Support Centers,’ ‘providing professional manpower and technological consultations related to convergence,’ and ‘providing commercialization funds and credit Facilitating a Convergence between Small-and-Medium Sized Enterprises in Different Business Sectors 589 guarantees to enterprises participating in convergence.’ 95.4% of the respondents replied that SME Convergence Support Centers should be established, while 75.0% agreed to the necessity of convergence education for the CEOs of SMEs.
2. Suggested Issues
The issues suggested by the results of the survey can be summarized as follows. First, to allow SMEs to develop new products and find new businesses through convergence, it is crucial to promote the search for appropriate convergence projects. To do so, convergence education for the CEOs of SMEs, as well as the promotion of exchanging experts is necessary. Second, it is necessary to find a way to allow not only SMEs, but also universities (professors) and research agencies (research labs) to participate in convergence as partners. Since the search for appropriate convergence projects and the development of convergence technologies is difficult, the participation of universities (professors) and research agencies (research labs) can be very helpful. The participation of these parties can also tighten up the 0cooperation and intimacy of enterprises. Third, to promote the convergence of SMEs, a systematic support system must be prepared. This system should have connectivity in each stage of convergence promotion, providing support on education, funding, technological development, nurturing of manpower, development of markets, etc. Finally, an infrastructure to generally support the convergence of SMEs should be constructed. SME Convergence Support Centers can be an example of such an infrastructure. 590
Chapter 4. Empirical Analysis of SME Convergence Capacity and Influential Factors
1. Model and Method of Analysis
Based on the hypothesis that the performance of SME convergence is influenced by the level of convergence and the internal/external management conditions of the subject enterprises, this research has developed a conceptual performance model. For dependent variables, the performance of convergence was divided into sales performance, research efficiency performance, cost-reduction performance, and search & development performance. The performance of discovering convergence projects and developing technologies was again divided into discovering convergence projects, developing convergence technologies, and developing convergence products. For independent variables, the SMEs’ level of convergence activity was considered as the exchange activities between enterprises, while management conditions were divided into the internal capacity and the external environment of the enterprise. The capacity of developing technologies and infrastructures for creative renovation were considered as the internal capacity of the enterprise, while the characteristics of partners, changes of economic environment, and change of the eco-structural environment were considered as the external environment of the enterprise. For control variables, the enterprise’s size, growth stage, and the technologies of its major business field, type of industry, location, etc. were set. Facilitating a Convergence between Small-and-Medium Sized Enterprises in Different Business Sectors 591
In cases where the dependent variables for convergence performance were sales performance, research efficiency performance, and cost-reduction performance, the performance model was estimated with multiple regression analysis, since measurements were made on a 5-point Likert scale. On the other hand, in cases where the dependent variable was research & development performance, the performance model was estimated with Probit regression analysis, since measurements were made with binary numbers. Furthermore, stepwise regression methods were used, since it was difficult to decide the influencing variables in advance. Here, the significance level of the regression coefficient for the regression variables, which were removed stepwise, was set at 10%. 327 SMEs responded to the questionnaire. However, because the questionnaire included many conditional questions, the size of the sample valid for the empirical analysis of the performance model was limited to 102.
2. Analysis Results and Suggested Issues
The result of the multiple regression analysis showed that ten variables had an influence within the significance level (10%) to at least one of the three types of convergence performance. In cases of Probit regression analysis, six variables had an influence within the significance level (10%) to at least one of the three types of performances for discovering convergence projects and developing technologies (See
). Based on the result of the empirical analysis, the following can be suggested to improve the performance of SME convergence: 592
Result of regression analysis based on stepwise estimation method
Infrastructures Individual Signifi Signifi Signifi for creative compensation level Internal renovation for new ideas cant cant cant capacity of enterprise Capacity of Possessing key Signifi Signifi Signifi Signifi developing technologies for technologies convergence cant cant cant cant
Capacity of supplementing Signifi Signifi technologies which the enterprise lacks cant cant Characteristics (expertise) of partners Partner’s mutual sympathy on the Signifi Signifi External importance & cant cant environment urgency of the of enterprise convergence project Change of Burden to follow the Signifi Signifi economic trend of product & environment service convergence cant cant
Change of the eco- Burden for the Insign Insign Insign Signifi Signifi structural deteriorated structure ificant ificant ificant cant cant environment of profit generation
Control Technology variable of the main Convergence Signifi Signifi Signifi business technology cant cant cant field
Size of enterprise Signifi (Small = 0, Medium = 1) cant Source : KIET. Facilitating a Convergence between Small-and-Medium Sized Enterprises in Different Business Sectors 593 first, the system of compensating employees who invented new ideas should be enhanced. Second, it is necessary to find partners who can fully sympathize with the enterprise in understanding the importance and urgency of searching for convergence projects, and promoting convergence together. Third, to successfully promote the development of convergence technologies or products, it is important to have key technologies for the convergence. It is also important to build partners who are co- developing convergence technologies or products with the enterprise, fully supplement the technologies lacking from the enterprise so that the enterprise will eventually have full expertise with the technologies. Finally, convergence should be promoted before the profit generation structure deteriorates excessively, or before the enterprise goes into the maturity stage. In cases of Probit regression analysis, six variables had an influence within the significance level (10%) to at least one of the three types of performances for discovering convergence projects and developing technologies (See
). Based on the result of the empirical analysis, the following can be suggested to improve the performance of SME convergence: first, the system of compensating employees who invented new ideas should be enhanced. Second, it is necessary to find partners who can fully sympathize with the enterprise in understanding the importance and urgency of searching for convergence projects, and promoting convergence together. Third, to successfully promote the development of convergence technologies or products, it is important to have key technologies for the convergence. It is also important to build partners who are co- 594 developing convergence technologies or products with the enterprise, fully supplement the technologies lacking from the enterprise so that the enterprise will eventually have full expertise with the technologies. Finally, convergence should be promoted before the profit generation structure deteriorates excessively, or before the enterprise goes into the maturity stage.
Chapter 5. Japanese SME Convergence Support System and Suggested Issues
1. Major Contents of the SME Convergence Support System
In 1988, Japan enacted the Temporary Measures for the Promotion of the Development of New Fields by the Knowledge Convergence of SMEs in Different Fields [known as SME Convergence Act ( )]’ as a temporary law for ten years. This law stipulated the systematic support for exchange, technology development, and commercialization between SMEs of different industries. The law certified exchange groups established between SMEs of different industries as business cooperatives, so that it may receive various support from the government. To promote commercialization, the law also provided financial and tax favors to the participating SMEs. Specifically, the business cooperative (‘specific cooperative’) that had SMEs of different industries as its members was certified by administration agencies - given that it wrote the ‘plan for developing knowledge convergence projects,’ Facilitating a Convergence between Small-and-Medium Sized Enterprises in Different Business Sectors 595 and that such a plan met the criteria of promoting the development of new fields through the knowledge convergence of SMEs of different industries. In the exchange stage, SMEs of different industries met about once a month to exchange opinions and information regarding technologies/markets. In each region, a ‘local convergence center’ was installed to provide a place for SMEs to share and exchange information. The SME Project Committee supported the opening of the ‘Technology/Market Exchange Plaza’ and dispatched a ‘catalyzer’ to the exchange group of different industries. The catalyzer played the role of a catalyst during the exchange activities of SMEs. The catalyzers provided guidance and advice during the exchange so that it could be more productive instead of being a mere meeting. In the development stage, the law provided the development funds necessary for conducting projects to promote convergence development, and in the commercializing stage, the law financed political funds related to convergence, provided privileged loans, granted special credit guarantees and gave tax favors. In the market development stage, the law supported the opening of exhibitions for convergence products, so that the results (convergence products) of commercializing convergence projects could be widely distributed. In 2005, Japan enacted the enact the Act for the Promotion of SMEs’ New Business Activities (known as the Act for the Promotion of New Business Activities of SMEs, ) to support the establishment of SMEs, to help business activities of newly established enterprises, to renovate management of SMEs, 596 and to support the development of new businesses made by the partnerships between SMEs of different industries. Different from SME Convergence Act, this law focuses on supporting the ‘commercialization’ of businesses between SMEs of different industries. In the Act for the Promotion of SMEs’ New Business Activities, the support is focused on the ‘creation of new businesses,’ based on the ‘promotion of new partnerships.’ Here, ‘new partnership’ aims to develop new business fields by systematically combining the management resources of more than two SMEs of different enterprises and conduct activities for new businesses. On the other hand, ‘new business activities’ are activities such as developing or manufacturing new products and services, introducing new manufacturing or sales methods, introducing new ways of providing services, and other similar activities. To receive support from the government for conducting new partnership businesses, the scheduled period must be less than 3~5 years. Financially, the ‘new business activities’ must secure continuous cash flow, and loans and investments must be repaid within ten years. The new business must also generate a certain amount of profits dependent on the cost of funding the project. The Japanese government is operating a certification system for the plan to receive support for new partnership businesses. Once the plan is certified, the Executive Office of the Regional Strategic Meeting for Supporting New Partnership and the Agency for Organizing the Foundations for SMEs (former SME Project Committee) will provide systematic support; from writing business plans to conducting various projects. Facilitating a Convergence between Small-and-Medium Sized Enterprises in Different Business Sectors 597
The details of the support for new partnership businesses include: supportive funds for dealing with new partnership, business funds related to new partnership businesses (lending money for facilities & operation, providing privileges & benefits, etc.), special credit guarantees, tax favors, support for corporations that invest in and nurture SMEs, and reduction of patent fees.
2. Suggested Issues
The following is a summary of the major issues suggested by the survey of Japanese SME Convergence Support System. First, to systematically support SME convergence, legal foundations must be reinforced. Second, to effectively support SME convergence, it is necessary to review a certification system for the convergence project plans submitted for support. Third, it is necessary to install and operate an SME Convergence Support Center that can connectively support SMEs’ search for convergence projects, development of convergence technologies, etc. Fourth, a systematic and practical support system should be prepared for each promotion stage of convergence. Because SME convergence go through a long process from searching for convergence projects and developing technologies to realizing commercialization, many difficulties and problems may occur before seeing the actual performance of convergence it is necessary to create this type of multi-stage support system. 598
Chapter 6. Conclusion: Measures for the Promotion of SME Convergence
1. Basic Direction
The basic directions to promote SME convergence and improve the performance of enterprises participating in convergence are set by this research as follows; first, reinforcing legal foundation to promote convergence; second, preparing a systematic support system that can connect each stage of promotion convergence; third, constructing an infrastructure to activate SME convergence; and fourth, SMEs’ strategic correspondence to improve the performance of convergence.
2. Specific Tasks
(1) Reinforcing legal foundations to promote SME convergence
By merely supplementing the Technical Renovation of Small and Medium Enterprises Act and the Small and Medium Enterprises Promotion Act, which are laws falling under the jurisdiction of the Small and Medium Business Administration (SMBA), there are limits in systematically supporting SMEs through measures such as developing infrastructure, including SME Convergence Support Centers for the promotion of SME convergence, providing education for each stage of promoting convergence, supporting the commercialization of convergence Facilitating a Convergence between Small-and-Medium Sized Enterprises in Different Business Sectors 599 technologies, providing credit guarantees and tax favors, etc. To systematically support SME convergence in the future, it is necessary to include the details of supporting SME convergence into the enforcement ordinances and regulations of Article 24 ‘Support on Industrial Convergence of SMEs etc.’ of the Industrial Convergence Promotion Act, which falls under the jurisdiction of the Ministry of Knowledge Economy (MKE). If MKE has difficulty supporting the convergence of SMEs, the related work should be assigned to the Administrator of SMBA.
(2) Providing systematic support for SME convergence
To promote SME convergence, this research suggests that the government prepare the following support systems for each stage of convergence. First, in the stage of searching for convergence projects, the government should expand education on convergence, select & nurture catalyzers (experts of promoting exchange), find and suggest convergence tasks for SMEs through a ‘Top-down’ suggestion method based on political needs, and introduce a certification system for the plans of SME convergence businesses. At the stage of developing convergence technologies, the government should secure development funds for SME convergence technologies, and provide considerable tax exemptions for costs used by SMEs in buying facilities & instruments necessary for testing and studying convergence technologies. In addition, when the government provides funds for developing SME convergence technologies, it should not limit the participants of convergence only to SMEs of different fields, but also allow the 600 participation of universities (professors) and research agencies (research labs) in the cooperation between SMEs. At the stage of commercializing convergence technologies and developing the related market, the government should make the Small and Medium Business Corporation (SMBC) support the cost for commercializing convergence technologies, grant special credit guarantees, provide tax favors for investments made to the commercialization, reduce patent fees when patents are filed for the convergence technologies, and support the marketing & market development of the products made from convergence technologies.
(3) Developing infrastructure related to promoting SME convergence
To systematically support SME convergence and expand its performance as much as possible, the government should install and operate SME Convergence Support Centers in each region. The government should also develop SME convergence database and online platforms (portal sites), so that positive convergence can take place in cyberspace as well.
(4) Strategic measures for SMEs to improve convergence activity performance
To improve the performance of SME convergence, it is important for the enterprises to have strategic correspondence measures. SMEs should reinforce the compensation system for Facilitating a Convergence between Small-and-Medium Sized Enterprises in Different Business Sectors 601 employees who invent new ideas, select convergence partners after considering their characteristics which may change following the aims of convergence, promote activities of sharing markets to improve sales performance through convergence, and decide whether or not to promote convergence after reviewing their own growth stage, as well as how much their structure of generating profits may deteriorate by the convergence.
Research Report 2011-614
Analysis on Firm’s Strategic Behavior for Recall
Moonsoo Park, Kyung Hee Lee and Daeyoung Koh
Analysis on Firm’s Strategic Behavior for Recall 605
Chapter 1. Introduction
1. The necessity and objectives of the study
Global interest in ensuring consumer safety has been on the rise. This interest has been spurred on by a series of product recalls that could directly influence consumer safety. Such incidents have included the discovery of infant formula laced with melamine and Toyota’s recall of defective vehicles. As such, maintaining the quality and ensuring the safety of products based on active responses to defective wares has been perceived as another, along with technology level, an important factor that determines the competitiveness and reputation of a firm. Furthermore, as we can see from the series of large-scale manufacturing product recalls that have emerged over the past years, recalls occasioned by the emergence of product defects lead to a loss in firm image and reputation and cause a degradation of firm competitiveness, with firm existence even 606 called into question in some cases. Although the importance of recalls has continued to increase, Korean enterprises’ degree of interest in such measures has been much lower than that of foreign enterprises. The same has been true with regards to the laws and institutions concerning the activation of recalls. More to the point, Korea has exhibited significant differences with the advanced countries in terms of the establishment of the concept of recalls and the actual management thereof. As such, the low interest in recalls and problems associated with the related laws and institutions have negatively influenced the activation of recalls and become an obstacle to not only consumer safety but also the improvement of firm competitiveness. Product recalls damage the value of brand equity, reduce the reliability and reputation of a firm, and negatively influence its revenues and market share. Product recalls can have a negative impact on the firm. In addition, the implementation of recalls decreases investment in the firm and brings about a drop in firm value within the financial market. However, firms have chosen to implement recalls despite of these risks because the implementation of recalls when potential risks are anticipated or identified can reduce the litigation costs and damage compensation arising from any accident that may emerge as a result of the negligence of the risks emanating from defective products. Furthermore, product recalls can minimize invisible costs such as those related to firm image and reputation, and create the perception that a firm places great importance on consumer safety. As such, product recalls have been viewed as an important strategic variable associated Analysis on Firm’s Strategic Behavior for Recall 607 with firm management’s decision-making process. Although the recognition of the importance of product recalls at the firm management level has increased, few empirical studies have analyzed the impact of product recalls on the firms that produced the defective product, or the factors that have influenced a firm’s decision to make a product recall. Furthermore, although the impact of product recalls can impact industries differently, no studies have been conducted on this topic. Empirical studies addressing recall cases involving Korean enterprises have been particularly lacking. This study examines the economic phenomena occasioned by firms differing responses to product recalls. Here, product recalls are perceived as an important strategic variable for firms when product defects occur. An effort is also made herein to establish a response strategy for firms when future product recalls emerge and to suggest improvements to recall related policies. To this end, the study begins by reviewing recall related institutions in Korea and advanced countries. Second, an empirical analysis of the relationship between recalls and firm value is conducted using event analysis. Third, the differing impact of firms’ responses to product recalls on firm value is assessed, and the influence of the characteristics of firms and recalled products on the selection of a response strategy is observed. Fourth, the implications of activating recalls are introduced based on the results of the empirical analysis.
2. Points of departure from previous studies
Having identified product recalls as an important variable in 608 the decision-making process of a firm, the present study comprehensively analyzes the impact of recalls on the overall management of a firm. An effort is made herein to move beyond the traditional qualitative analysis and limitations of existing recall related studies that have simply observed consumer reactions to product recalls. This study breaks the following new grounds. First, the study analyzes the impacts of product recalls on firms listed on the stock market. The majority of domestic studies related to product recalls have consisted simply of qualitative analysis focused on the causes of recalls and consumer reactions. However, based on an examination of the product recalls made by listed companies from 2000 to 2010, the present study analyzes the impact of product recalls on the stock value of a firm. Second, this study analyzes the differing impacts of the various recall types on firm value. There has been a dearth of domestic studies analyzing the relationship between recalls and firm value. Moreover, few international studies have examined the differing impact associated with the nature of the recall, namely whether it was a voluntary or mandatory one, on firm value. In this regard, this study introduces 109 recall cases that have occurred in the automobile, industrial product, and food & pharmaceuticals industries in order to ascertain whether different types of recall have differently influenced firm value. This type of analysis can overcome the limitations of existing studies limited to qualitative analyses by empirically showing the impact of a firm’s strategic choice to make a product recall when such a step becomes necessary. Third, an analysis of the determinants of the choice of recall Analysis on Firm’s Strategic Behavior for Recall 609 types is also conducted. The recall strategy selected by firms when implementing a product recall differs depending on the characteristics of the firm and recalled product. In this regard, the identification of independent variables that determine the strategic choice of a recall is very important when it comes to establishing firm strategies and government policies designed to ensure product safety. However, few existing studies have attempted to explain the determinants related to the strategic choice of a recall. This study empirically analyzes the determinants of strategic choice for a recall based on the consideration of various variables related to recall characteristics and firm characteristics.
Chapter 2. Review of the recall system
1. Definition and types of recall systems
“Recall” refers to a system designed to prevent consumer injury through prompt measures such as the repair, exchange, and reimbursement of a product in cases where the said product’s defects cause physical damage to the consumer or his property or the possibility of such damage exists. All goods and services used by consumers are subject to a recall. A recall is implemented in cases where injuries have occurred or the possibility of such injury arising exists. Recall related laws have been established to collectively manage products such as automobiles, food, pharmaceuticals, livestock products, and industrial products that are directly related to consumer safety. 610
The recall system plays the role of a policy tool capable of mitigating the asymmetric information possessed by consumers and enterprises with regards to defective products. In other words, the recall system is a type of safety regulation designed to alleviate the asymmetric information that exists between the enterprise and consumer with regard to product safety and ensure consumer safety. It can positively influence consumer safety and improve product quality by weeding out defective products from the market, forcing producers to pay more attention to product safety, and providing inducements for investment. When classified from the standpoint of hazard factors, recall measures can be separated into pre-recall and post-recall. However, from the standpoint of the main actors implementing the recall, such mechanisms can be separated into voluntary and mandatory recalls.
2. Considerations when implementing a recall
The strategic decision made by a firm that has manufactured a defective product to carry out a product recall differs depending on the scope of the pressure or burden emanating from the variables (factors) influencing the implementation of a recall. As such, the probability of implementing a recall is heightened when a firm’s susceptibleness to these factors is high. Conversely, the probability of not implementing a recall is heightened when a firm’s susceptibleness to these factors is low. Producers consider the following factors when making the decision to implement a product recall: ① consumer risk; legal risks to the product Analysis on Firm’s Strategic Behavior for Recall 611 manufacturer; ③ uniqueness of product; ④ reasonableness of the user; ⑤ market share and firm reputation; ⑥ effectiveness of the recall; ⑦ public pressure; and ⑧ moral burden.
3. The costs and benefits of recalls
The costs associated with implementing a product recall which a firm must basically absorb can be divided into direct and indirect ones. Direct costs are composed of pre-recall costs such as the legal fees associated with the decision to engage in a product recall and the management costs related to the making of such a decision, as well as post-recall costs such as inspection costs after the implementation of the recall. Indirect costs stemming from a product recall are those associated with the worsening of the brand image of the firm, such as the loss of firm reputation and decrease in customer trust. The indirect costs of a recall are usually much larger than the direct ones. The benefits of implementing a recall include securing product safety. Viewed from the position of customers, the recall of inherently defective products constitutes an effective means of preventing any harm coming to the consumer or the worsening of any damage that has already occurred. From a long-term standpoint, the implementation of a recall of a defective product is regarded as a firm’s efforts to prevent the emergence of any risks to consumers; as such, it heightens the reliability of the product, and further, establishes a positive image of the firm as one that assumes its social and moral responsibilities. 612
4. Review of the domestic and international recall systems
The domestic recall system features three overarching elements: voluntary recall, recall advisory, and mandatory recall. The general matters related to Korea’s recall system are contained in the Framework Act on Consumers. Additional laws have been enacted to regulate matters related to the recall of products such as automobiles, food, pharmaceuticals, livestock products, and industrial products. Let us analyze the recall systems abroad. Unlike Korea where the recall system was introduced in the 1990s, advanced countries such as the United States and Japan began to implement their recall system in the 1960s~1970s. These systems have been entrenched as institutions voluntarily implemented by firms to strengthen consumer protection and safety. The recall systems in the advanced countries share the commonality that the ratio of voluntary recalls has remained high despite the fact that these systems were established based on mandatory government injunctions. While helping and inspecting firms’ voluntary recalls, governments have nevertheless focused on playing an ancillary role. Government restrictions are implemented when a firm does not implement a voluntary recall; however, this creates additional disadvantages such as the loss of firm image amongst consumers and the loss of material resources to the firm occasioned by product liability suits. As such, the recall system has been actively used as a tool to ensure consumer safety and guarantee firm profitability. Analysis on Firm’s Strategic Behavior for Recall 613
5. Domestic and international enterprises’ responses to recalls
The ever-increasing number of recalls made by domestic and international enterprises has paved the way for the emergence of cases where the risks associated with recalls have been successfully overcome; however, one also finds cases in which firms inappropriate responses to recalls have created crises. These instances of success and failure have motivated firms to adopt a strategic attitude towards recalls. First, the great difficulty predicting the need for recalls makes it necessary for firms to prepare flexible responses, including product recalls, to the risk of product defects. Second, consumer reliability should be secured through efforts to resolve the problem of asymmetric information related to recalls through the sharing of pertinent information with consumers. In conclusion, in order to regain the trust of the market, the damages caused by a recall should be minimized by transparently releasing recall information and the firm’s emphasis on consumer safety should be highlighted through active responses to the recall.
Chapter 3. Recall and firm value
1. Study background and hypotheses
The implementation of a recall caused by product defects is known to cause a drop in the equity value of the firm implementing the product recall and to result in losses by the 614 firm’s shareholders. Viewed from this standpoint, the decrease in the stock value of a firm attributed to a recall can be regarded as a kind of financial market penalty imposed by the financial markets on firms producing faulty products. The possibility exists that the impact of such market penalties may differ depending on whether firms actively (or voluntarily) respond to a recall or negatively (or mandatorily) do so. Therefore, it becomes necessary to review the impact that a firm’s strategic decision to make a recall has on firm value. The change in firm value influences the investment behavior of shareholders and can eventually have a spillover effect in terms of inducing a change in firm’s profitability and ultimately in the firm’s management environment. The four following hypotheses were established to empirically verify the impact of product recalls on firm value.
① Hypothesis 1 : The emergence of a recall influences the stock value of the firm. ② Hypothesis 2 : The impact of a recall on stock prices differs across industrial fields (automobile vs. industrial product vs. food & pharmaceuticals). ③ Hypothesis 3 : The impact of a recall on the stock value of a firm depends on the type of recall (active recall vs. negative recall). ④ Hypothesis 4 : The influence of a recall differs depending on the size of the firm (KOSPI listed-companies vs. KOSDAQ- listed companies). Analysis on Firm’s Strategic Behavior for Recall 615
2. Analytical model and data
The event analysis is a method of analyzing the influence which an unexpected event or new information about a firm have on the (expected) stock value of the firm. This method has been actively employed in various fields such as economics, accounting, finance, and strategy. By and large, the event analysis model estimates the abnormal return of a firm during a specific period, centering on a specific event date, and verifies the statistical significance of the estimated abnormal return. In the event analysis, it is assumed that the expected rate of return of a firm can be predicted based on available information related to its price-earning ratio (PER) at a certain point in time in the past, thereby making it possible to exhibit a firm’s market performance under the efficient market hypothesis. The difference between the expected rate of return and the actual price-earning ratio (PER is defined as the ‘excess PER.’ Cases in which the expected PER and actual PER are identical can be construed as meaning that only past information influencing stock value was reflected in the PER and that no actual events occurred. Meanwhile, a difference between the expected PER and actual PER occurs when a specific event unrelated to past information emerges to influence the stock price of a firm. The residue in this case can be regarded as the excess PER. This study employs the market model widely regarded as the most stable benchmark model with which to determine the excess PER of a firm. As seen in equation (1), the market model assumes that the PER (Ri,t) of a firm (i) during the event window 616
(t) exists under a first linear order relationship with the market portfolio PER (Rm,t).
(1)
After estimating the parameter value by applying a regression analysis (OLS) to equation (1), the equation used to calculate the excess PER (ARi,t) of a firm (i) during the event window (t) is derived as (2)
(2)
Based on the excess PER (ARi,t) derived from the above equations, this study calculates the ‘average excess PER’ and ‘average cumulative excess PER’ of a firm (i) during the event window (t1-t2) in which the product defects occur. Lastly, based on a t-test, the study statistically verifies the significance of the impact of unexpected events (recalls).
3. Estimation results
The analysis, which was derived from existing studies on product recalls conducted overseas, revealed that the implementation of product recalls by Korean enterprises has negatively influenced the firm value herein referred to as (cumulative) excess PER. Second, product recalls downgraded firm value in the fields of industrial product and food & pharmaceuticals, with the largest drop recorded in conjunction with food & pharmaceuticals. While Analysis on Firm’s Strategic Behavior for Recall 617 a positive (+) coefficient was uncovered in the case of automobiles, no statistical significance was exhibited. Third, with regard to the impact of the various types of product recalls, the drop in the (cumulative) excess PER was smaller in the case of active recalls than negative ones. Thus, an active recall strategy could decrease the costs incurred by a firm because of the recall. Fourth, KOSPI listed-companies, which are relatively larger sized, were less influenced by product recalls than KOSDAQ-listed ones. However, no statistical significance was recorded. This can be explained by the fact that automobile related recalls accounted for the majority of the samples of KOSDAQ-listed companies that were taken. As such, statistical significance can be seen as having been created by the impact of the automobile recalls. On the other hand, KOSDAQ-listed companies sensitively reacted to the recalls, thus implying that product recalls made by small-sized enterprises played an important role in the fluctuation of firm value.
Chapter 4. Recalls and firms’ strategic behavior
1. Background and objectives of the study
The event analysis model basically estimates the direct impact of unexpected events such as a recall on the stock value of a firm. The analysis of the influence of the strategic choice of a firm with regards to a recall on firm value based on these results must also involve an estimation analysis that encompasses (controlling) firm 618 characteristics variables and the characteristics of the recalled product. In this regard, this study searches for the strategic implications of a firms’ choice of product recall based on the results of the event analysis model. The focus is as such on the ascertaining of the differing influences of strategic choice to engage in a voluntary or mandatory recall on excess PER of the firm using recalled product characteristics and firm characteristics as control variables. In addition, an attempt to uncover whether the strategic behavior of a firm vis-a-vis the recall is an important variable influencing the excess PER of the firm is also conducted. Meanwhile, the two strategies that a firm takes when implementing the recall, namely its decision to engage in a voluntary or mandatory recall, are closely related to the firm’s basic reputation or financial situation. Furthermore, other characteristics related to the recalled product such as the amount of sales of the recalled product, price, level of risk associated with the recalled product, and the degree to which the recall becomes a social issue, can also greatly influence the firm’s strategic choice. As such, an empirical analysis that considers variables related to the type of recall selected, such as firm characteristics and the characteristics of recalled product, accounts for firms’ strategic choices in the face of product defects and hazards by objectively identifying the influence of these variables on the firm’s choice of recall type. The analysis of the choice of recall type supplements the results of the examination of the impact of recall type on excess PER of a firm. This chapter has two objectives: First, an attempt is made to review the impact of a firm’s strategic behavior (active recall Analysis on Firm’s Strategic Behavior for Recall 619 strategy vs. passive recall strategy) on the excess PER uncovered in the event study using a cross-sectional regression model. In addition, the impact of firm characteristics and the characteristics of recalled products on excess PER are also considered. Second, the influence of additional variables such as firm characteristics and the characteristics of the recalled product on the choice of recall response strategy is examined using a binomial logit model.
2. Analysis of the determinants of excess PER
This study uses the cross-sectional regression analysis seen in equation (3) to analyze whether a firm’s recall strategy influences the excess PER of the firm, and how the firm characteristics and the characteristics of the recalled product influence the excess PER. This analysis models the relations between the variables so as to identify the firm’s strategy vis-a-vis the recall (RSij), firm characteristics (Xi), the characteristics of the recalled product (Zij), and excess PER.
(3)
In equation (3), RSij, which represents the core explanatory variable receiving the most interest in this study, refers to the indicator variable used to exhibit the recall type (voluntary vs. mandatory recall) that constitutes the firm’s response strategy vis-a-vis a recall. Firm characteristics (Xi) and the characteristics of the recalled product (Zij) are also regarded as control variables along with the response strategy (RSij). Xi is the variable vector used to 620 exhibit firm characteristics such as firm size, debt level, R&D ratio, and type of listed company. Zij refers to the variable vector used to exhibit the characteristics of the recalled product such as price, sales amount, risk level, degree to which the recall has become a social issue, and whether the recalled product includes the firm name. Furthermore, the interaction term (Iij), which uses the recall type and firm characteristics variables, is employed to analyze the influence of these variables on excess PER. To clearly identify the impact of the recall type, characteristics of the recalled product, and firm characteristics, this study considered six models: ① includes only the constant term, ② Model 1 + recall type (RSij), ③ Model 2 + characteristics of recalled product (Zij) + year effect, ④ Model 3 + firm characteristics (Xi), ⑤ Model 3 + interaction term (Iij) and ⑥ Model 5 + year effect. The results of the empirical analysis can be summarized as follows. The negative influence on excess PER was relatively lower in the case of voluntary recalls than mandatory ones. Voluntary recalls resulted in a relatively smaller drop in firm value than mandatory recalls in cases where problems emerged in conjunction with the products produced by larger-sized enterprises with large sales. These results are consistent with the results of the event analysis model found in Chapter 3. In addition, heavily indebted firms that implemented a voluntary recall were more negatively influenced in terms of excess PER by a recall than firms with less debt. Furthermore, differences in the impact of the recall on firm value were exhibited depending on the level of risk associated with the recalled product and the degree to which the recall has become a social issue. Analysis on Firm’s Strategic Behavior for Recall 621
3. Analysis of the determinants of the choice of recall type
The study established the following relationship between the recall type variables (RSij) and the firm and recall characteristics variables (equation (4)) in order to analyze the influence of firm characteristics and the characteristics of the recalled product on the firm’s choice of response strategy.
(4)
Here, Xi indicates the characteristics of firm i used in the excess PER model while Zij indicates the variable vector used to exhibit the characteristics of the recalled product. Lastly, the probability (P) of a firm opting for a voluntary recall, which is derived from the binomial logit model, can be expressed as equation (5).
(5)
In order to precisely analyze the impact of recall and firm characteristics, the study established five empirical models based on equation (5): ① constant term + year effect, ② Model 1 + recall characteristics, ③ Model 2 + recall characteristics, ④ Model 3 + automobile* recall product number, and ⑤ Model 3 + automobile* recall product price. The results of the five empirical models can be summarized as 622 follows. First, voluntary recalls were generally implemented more than mandatory ones. Second, the analysis of the impact of the recalled product on the probability of opting for a voluntary recall revealed that the possibility of opting for a voluntary recall increased when the risk level associated with the recalled product declined, the firm name was clearly attached to the recalled product, a greater number of products were recalled, and the price of the recalled product was higher. Third, in terms of the relationship between the characteristics of the recalled product and the probability of opting for a voluntary recall, the study found that this possibility increased as the sales amount rose and the debt level of the firm declined. Lastly, the results of the analysis of the interaction term based on automobile recalls revealed that the possibility of opting for a voluntary recall rose along with the price of the recalled product. However, the possibility of opting for a voluntary recall increased when the price of recalled automobiles dropped.
Chapter 5. Conclusions and implications
1. Corporate management strategy
First, measures related to consumer safety should be seen as essential rather than optional. From the standpoint of enterprises, the management of consumer safety through product recalls constitutes a cost. However, firm reputation winds up being damaged in many cases where firms passively respond because Analysis on Firm’s Strategic Behavior for Recall 623 of worries of an increase in short-term costs. Therefore, the implementation of active and voluntary recalls should be regarded as an important tool or investment with which to minimize the decline in firm image and strengthen competitiveness whenever product defects are discovered, thereby guaranteeing the profitability of the firm from a long-term standpoint. Second, management strategies that identify consumer safety as the top priority should be adopted throughout the enterprise. The full-scale enforcement of product liability (PL) measures since 2002 has strengthened consumer sovereignty by rapidly increasing the number of recalls. Lawsuits are carried out under such circumstances in conjunction with defective products can result in an astronomical increase in firm costs. As such, enterprises should make efforts to establish management strategies that address both the improvement of consumer safety and quality expectations. Third, there is a need to strengthen the management of product liability (PL) measures. To this end, it is necessary to organize a product liability committee that reflects enterprises’ circumstances. The stabilization of the processes through which consumer safety is ensured at the enterprise level makes it possible for the latter to more easily respond to recall related problems and the lawsuits associated with product liability (PL). Lastly, it is necessary for enterprises to develop their firm image and gain consumer trust through corporate management that is rooted in the environment, health, and safety (EHS) system. Global enterprises have accepted the environment, morals, health of consumers, and safety of workers, as their main management 624 resources. Environment, health, and safety related issues have been regarded as more important within a corporate environment that has rapidly changed from a supplier-oriented market to a consumer-oriented one. As such, corporate management that is based on the environment, health and safety (EHS) system can positively impact the establishment of a firm’s image and consumer trust.
2. Government policy
First, the activation of the recall system requires that active use be made of the product liability (PL) measures. Product liability (PL) measures increase opportunity costs because they enforce enterprises responsibility to compensate consumers for damage to their property or physical harm caused by simple product defects; and this even regardless of intention or error. In actuality, the ratio of voluntary recalls has been much higher in advanced countries where product liability (PL) measures have been activated than in Korea. However, a change in enterprise’s perceptions and responses was recorded after product liability (PL) measures were implemented in 2002. Second, it is necessary to prepare institutional incentives for the expansion of voluntary recalls. The ratio of voluntary recalls has been relatively lower in Korea, where institutional conditions such as product liability (PL) measures and class action suits have yet to mature, than in the advanced countries. Therefore, a firm desiring to implement a voluntary recall without any official recommendation from the government must be granted access to Analysis on Firm’s Strategic Behavior for Recall 625 incentives such as a prompt voluntary recall system facilitating recall procedures so as to mitigate the administrative burden associated with such voluntary recalls. Third, it is necessary to manage recall information and to unify the information windows via the establishment of an integrated recall management system. Currently, Korea has managed recall related information on an item by item basis, and has as such failed to establish an integrated information network. As such, recall information duties are scattered across various departments, central government, and local autonomies. This results in high costs being associated with consumer access to recall information and decreased accessibility. An integrated recall information management and operating system should be created through the installation of a department in charge of recall related information; moreover the smooth sharing of recall information between the local autonomies and central government should be ensured. Fourth, it is necessary to prepare measures to improve public announcements of recalls and the recall response rate. Public announcements of recall information have mainly been carried out through mass media outlets such as newspapers and TV. However, this method has caused information provision problems because of the randomness of targets and the lack of any temporal continuance. The ability to overcome the problems associated with public announcements through the media is predicated on the active use of new types of media such as the Internet. More to the point, more salient use should be made of the firm’s homepage, e-mail, and SMS services. Lastly, efforts should be made to improve consumer 626 perceptions of product recalls. Recalls implemented under circumstances in which consumers perceive the recalled product as a defective one can cause great damage to the firm. As such, it is necessary to publically promote the positive effects of recalls and publicize the results of the measures taken to protect consumers. Research Report 2011-615
Analysis of Export Diversification Pattern in Korean Industry
Sung-Hwan Min, Hyon-Soo Shin, Jin-Myon Lee and Sang Ho Lee
A Study on the Relationship between Green Competitiveness and Productivity 629
Chapter 1. Introduction
Export diversification is becoming an important strategy for achieving steady export growth due to the drastic changes in the trade environment and the increase in market uncertainty worldwide. Export diversification is the process of multiplying the number of export items or regions. Conventionally, it was used to boost the export activities of an underdeveloped country, as part of its economic development process. After the global financial crisis, uncertainty within the world trade environment expanded greatly, and the need for an export diversification strategy to ensure steady export growth has emerged. The Korean economy in particular, which is highly dependent on foreign trade, must pay more attention to export diversification to minimize economic uncertainty, enhance its export stability, and stimulate steady export growth. This study began by determining the proper direction for Korean export strategies, with a focus on export diversification. 630
Export diversification was classified into product and regional diversification. Time-series development, along with structural changes and the correlation between export diversification and market share, was examined. Derivation of the components of export diversification and the patterns and characteristics that emerged from industrial structure changes in the major export industries of Korea were also emphasized. In the analysis, key examination points included the influence of export diversification on exports and export volatility, the routes through which export diversification takes place within the stages of economic development, and the relationship between refocusing on exports and export sales. Finally, the government’s export diversification plans were reviewed by proposing implications for future policy direction. This research is significant for several reasons. First, it used the Theil index to analyze export diversification, approaching the problem from a new perspective. Second, it analyzed changing factors of export diversification after separating them into intensive and extensive margins and classifying the forms of export diversification into product and regional diversification. Third, the dynamics of export diversification changes within and between different industries were analyzed. The characteristics and patterns of export diversification were also derived from the individual industries. The limitations of this research are centered on its lack of a structural and theoretical background. In other words, there is a limited consideration of qualitative causes of the export diversification analysis results and of previous literature on the use Analysis of Export Diversification Pattern in Korean Industry 631 of the Theil index in analyzing the relationship between export diversification and market share. Finally, it must be noted that the export statistics used in this study were unified using the 1995 HS 6 unit to carry out the time-series analysis.
Chapter 2. Review of Previous Literature and Changes in Trade Structure
Previous literature on export diversification focused on discovering how effective export diversification is in increasing revenue. Major theories begin with the Prebisch-Singer hypothesis and include the product life cycle theory, the knowledge ripple effect of reserved growth models, the export stabilization effect, etc. Very recently, the hypothesis was formulated that export diversification and revenue levels have a nonlinear relationship. Prebisch-Singer’s hypothesis states that unequal structures of developing countries that export commodities and developed countries that export industrial products perpetuate the “ackwardness” of developing countries. Therefore, the hypothesis is contrary to that of the comparative advantage theory, which emphasizes the pursuit of mutual benefits. Accordingly, Prebish-Singer states that for developing countries to achieve sustainable growth, they must actively pursue export diversification to help improve their trade conditions. Furthermore, according to the product life cycle model, developing countries enter the export market by imitating or learning foreign technologies. With the emergence of competitor nations, however, developing countries are trying to 632 discover or develop new products as a means of export diversification to achieve economic growth. One perspective emphasizes the enhanced stabilization of export demand as an advantage of export diversification. Businesses face the threat of market price volatility, which is why countries that depend heavily on exports seek export diversification methods to stabilize their exports. This perspective supports the idea that export diversification is effective in stabilizing economic results in the long term. Recent research shows that revenue levels and export diversification are non-linearly related. Export diversification has a positive effect on the economic growth of developing countries; but for developed countries, it is even better if they become export-oriented. This indicates a non-linear U-shaped relationship pattern. One explanation of this non-linear pattern is that inside- the-frontier innovation is frequent among developing countries, while developed countries strive for on-the-frontier innovation such as patent applications, indicating a stronger tendency to specialize. Moreover, there is a new and emerging concept related to export diversification: the intensive and extensive margins of export. Countries that diversify their exports with a focus on extensive margins do so by diversifying their products in existing or new markets. Countries that focus on intensive margins, however, have a stronger tendency to diversify by increasing exports of their existing products within their existing markets. The analysis of the relative importance of intensive- and extensive- margin export diversification differs according to researcher. Thus, Analysis of Export Diversification Pattern in Korean Industry 633 more in-depth research is needed to attain more accurate results. On one hand, the axis of world trade has been switching from developed countries to developing countries since the start of the 21st century. The proportion of exports of developing countries is rising fast, with China edging out the U.S. as the world’s top exporting country in 2007. This phenomenon can also be seen in regional trade patterns, where exports from developed to developing countries and vice versa are both rising. The relative emergence of developing countries signifies that diversification of export regions is progressing further. Since the year 2000, industrial trade patterns have shown gradually decreasing shares of the ICT manufactures and medium- high-technology manufactures, while shares of medium-low- technology manufactures and primary industries are increasing. Exports of industries in which developed countries have a comparative advantage are decreasing, while exports of industries in which developing countries have a comparative advantage are increasing. This phenomenon is related to the improving status of developing countries, from the perspective of world trade. With the rapid increase in exports to other Asian countries, including China, since the mid-1990s, Korean exports to developing countries have also rapidly increased. The steady decrease in the proportion of exports to the top 10 export countries indirectly implies that the regional diversification trend is on the rise. In terms of industries in 2009, medium-high- technology manufactures had the highest export shares, while the ICT and medium-low-technology manufactures had relatively high shares, reflecting the high export concentration in a few industries. 634
Chapter 3. Dynamic Analysis of Export Diversification of the Manufacturing Industry
Export diversification may be classified into product diversification and regional diversification, depending on the analysis criteria. Methods of measuring export diversification include concentration, level of dissimilarity, and level of inequality. Concentration has been the most frequently used index in recent studies, and the level of dissimilarity is used by the UN and other international organizations. This study also used the Theil index to measure the level of inequality. Alleviation of
Characteristics and Limitations of Export Diversification Indexes
Traditional and Supplementary Indexes New Indexs
Hirschman-Herfindahl Dissimilarity Index Theil Index Index (HHI) (DSI) (THI)
- Similarities with the - Method used to - Most typical index global market measure entropy - Relatively easier to - Used by UNCTAD - Possibility of factor calculate as indicator decomposition Charac- - 0 HHI 1 - 0 DSI 1 (diversification of teristic - Based on the - Based on intensive/extensive subjects under comparable margins) analysis targets(global) - 0 THI (individual countries) (analytical targets - Based on analytical comparison targets) targets (individual countries)
- Unrealistic basic - Simple assumptions comparison of the Limita- (when compared - tions with equally sum of ratio distributed differences hypothesis) - Unofficial indicators Analysis of Export Diversification Pattern in Korean Industry 635 inequality signifies progress in export diversification, while intensification of inequality signifies retrogression of export diversification. The level of inequality is measured by applying the entropy measurement method to the export statistics, which are altered partially according to the purpose of the research. Its concept is very similar to that of the level of dissimilarity, which reflects the world market and the dissimilarities in it. While the level of dissimilarity is simply calculated, the level of inequality includes all the components of the market share by adding the dissimilarities of the proportions. This enables the correlation of export diversification to market share to be inferred. In addition, it allows factor decomposition, which not only makes export diversification factors easy to observe but also relatively easy to approach from an industrial perspective. The first key implication of the analysis of export diversification
Analytical Structure of Export Diversification: Intensive and Extensive Margins (Example)
World Exports AB C D E
Non-export Export product (regions) products (regions) Country Exports A BC DE
Intensive Margin Extensive Margin
Export Diversification 636 of Korea’s manufacturing industries was that the level of inequality with all standards has been decreasing since the 1990s, reflecting the positive performance of export diversification. The level of inequality increased before and after the global financial crisis, indicating a temporary retrogression in export diversification. The flows of the levels of dissimilarity and inequality were similar to those of existing indices, whereas concentration has been continuously increasing since the year 2000. Second, the results showed that export diversification in Korea’s manufacturing industries was mainly caused by the expansion of the number of export products and regions. This indicates new products and regions (extensive-margin export diversification) instead of a structural change in existing products and regions (intensive-margin export diversification). Third, if export diversification is observed in an industry from the perspective of the industrial structure, it will be seen that export diversification within the same industry occurs relatively less compared to industries with the same technology level. Fourth, a comparison of the level of inequality in export products with that in export regions showed that product diversification occurred faster than regional diversification. The results of the pattern analysis of the export diversification patterns of manufacturing industries are summarized as follows. First, export diversification and market share are positively related. Thus, the decrease in the inequality levels, along with the increase in the market share, can be verified. This is especially true in export regions, where a high level of inequality is highly related to the market share. Second, with an increase in the market share, Analysis of Export Diversification Pattern in Korean Industry 637 extensive-margin export diversification occurs faster. At a certain level of extensive-margin export diversification, however, intensive-margin export diversification becomes more important. The analysis results showed that the Korean manufacturing industries have performed well in extensive-margin export diversification. Third, the comparison of product diversification and regional diversification showed that an increasing market share leads to relatively faster product diversification, but that at a certain level of product diversification, regional diversification becomes more important. Export diversification in Korea’s manufacturing industries since the mid-1990s has been relatively successful in terms of product diversification. Finally, it can be said that the market concentration, level of dissimilarity, and other existing indices complement each other in the analysis of export diversification. These data should be useful in analyzing export diversification. Implications of the results of analysis are as follows. First, Korea’s viewpoint on export diversification must be changed and must focus on a direction that matches the world’s market structure. From this standpoint, the level of inequality, which is highly related to the market share, is more useful than the market concentration or the levels of dissimilarity. Second, for Korea’s manufacturing industries to advance, they must pursue export diversification within the same industry. To achieve this, the export diversification patterns in one industry as exercised by export powers with low export inequality levels must be observed. Third, although the export diversification patterns of Korea’s manufacturing industries have been remarkably successful 638 in extensive-margin export diversification (expansion of new products or regions), intensive-margin export diversification (expansion of existing products and regions) must be stepped up. Finally, although it is desirable to advance product diversification and regional diversification at the same time, it is important to realize that it is relatively advantageous for production diversification to lead to regional diversification and ultimately, to export diversification as a whole.
Chapter 4. Export Diversification Patterns of Major Industries
After the export diversification status of Korea’s major industries was analyzed, it was discovered that all of the country’s major industries, except for its textile industry, were performing well in export diversification. While the level of inequality in the textile industry was aggravated and led to retrogression in export diversification, the level of inequality in other industries improved over time. The level of inequality in the late 2000s was much less than that in the mid-1990s. The levels of inequality in the ICT and automobile industries are very low by all standards (products and regions) and show that product diversification has occurred fast. The other industries had relatively high levels of inequality and were experiencing rapid regional diversification. The machine industry showed the emergence of a large gap between product diversification and regional diversification. The comparison of Korea with the world’s major export countries using the levels of Analysis of Export Diversification Pattern in Korean Industry 639 inequality of export regions showed that Korea’s ICT and automobile industries as well as chemical and steel industries have had smaller gaps with competitor nations since the 1990s. On the other hand, the level of inequality in the machine industry remains consistently higher than in competitor nations, and the gap in the textile industry has even increased. The levels of inequality within the same industry, a measure of the level of export diversification in one industry, for the ICT and automobile industries are relatively low, but are relatively high in the machine and textile industries. An examination of the change in the component factors of export diversification showed that the textile and automobile industries had relatively marked changes in their intensive margins. Other industries showed relatively marked changes in their extensive margins. The results of the analysis of the industrial export diversification patterns are summarized as follows. First, export diversification and market share were found to be related, even from an industrial perspective. Progress in export diversification was found to signify a reduction in inequality, so the closer the level of inequality was to the starting point, the greater the market share was, as seen in the matrix analysis. Second, Korea’s major export industries have progressed much in their extensive margins until now, and industries that carried out intensive-margin export diversification at the same time showed remarkably enhanced exports (market share). The ICT and automobile industries, which had high levels of extensive- and intensive-margin export diversification, also showed remarkable export achievements. Third, looking at export diversification from the perspectives of 640 product and regional diversification, it was proven that industries with faster product diversification experienced relatively greater export achievements. Industries such as the ICT, automobile, and chemical industries experienced faster product rather than regional diversification, which improved their performance levels. In the machine industry, product diversification was delayed compared to regional diversification, a factor that slowed export improvement. The distribution of countries worldwide also showed that countries with a high market share share a common characteristic: significant levels of ongoing product diversification. The implications of the results are as follows. First, as export diversification differs depending on the industry, differentiated policies that consider the industrial characteristics must be sought. Second, to advance export industries, exports within the same industry must be focused on to stimulate combined growth and develop export diversification within industries and intensive margins. Third, among the major export industries, those who are relatively behind in diversifying products must be given more political support and attention so that they can achieve regional diversification through product diversification.
Chapter 5. Export Diversification and Exports
The analysis of the effect of export diversification on exports using an econometric model showed that a decrease in inequality (an increase in export diversification) expands exports. When export productivity was considered with export diversification Analysis of Export Diversification Pattern in Korean Industry 641 from a dynamic viewpoint, the influence of export diversification on exports was further magnified. The results showed export productivity that occurred during export diversification was also enhanced. The empirical analysis of the relationship of export diversification to export variability showed that export diversification reduces or stabilizes export variability. In contrast, export market concentration showed a strong tendency to magnify export variability in terms of both the export products and regions. This implies that for a country that seeks stable export growth, export diversification is a valid strategy. On the contrary, it was again verified in this study that export diversification has a nonlinear U-shaped relationship to income levels, which supports the results of this research. Thus, although export diversification occurs according to the different stages of economic development, at a certain level of economic development, an export concentration phenomenon occurs. According to the results, Korea’s GDP per person is approximately $25,525 (according to the 2009 PPP). Therefore, it is in the path of export diversification in terms of economic development. This U-shaped pattern argument is a temporary phenomenon that is seen in a transition from export diversification in existing industries to new industries. Such argument is supported by the logic that in time industries with competitive disadvantages will decline, leading to a balanced state of convergence, a re-concentration of the market. The financial market risk diversification function and development index - a factor that induces re-concentration of exports - must be noted. In addition, the critical level of the 642 economic development stages for the U-shaped pattern’s inflection point is raised. The substantiation analysis results showed that concentration magnifies variability, suggesting a low chance of re-concentration leading to the convergence of balance. Among recent researches on the relationship between export concentration and exports, there was one viewpoint that Big Hit exports generally have a significant impact on exports. The results of the substantiation analysis in this research showed, however, that Big Hit exports cannot validly explain the gap in the export levels of different countries. One major variable that was used to explain the gap between countries is export productivity based on comparative advantages. It was proven that previous export productivity significantly affects current export productivity, further reflecting the path-dependent characteristic of export productivity and exports. These substantiation analysis results imply that export diversification expands exports and reduces export variability. Therefore, the government must continuously attempt to diversify exports. Even from the perspective of Korea’s economic development stage, the country can be seen to be on the road to export diversification, with the implication that political efforts to achieve export diversification must be hiked up. To achieve this, the government must play a key role in verifying sectors with comparative advantages, which may determine future export performance levels. In addition, the government should minimize possible market failures while developing new industries. Analysis of Export Diversification Pattern in Korean Industry 643
Chapter 6. Policy Implications
In order to diversify exports, the government is pursuing a ‘policy for discovering and supporting world-leading products’ in relation to product diversification and a ‘policy for supporting foreign marketing activities’, which is also related to regional diversification. However, the government still needs to further enhance its policy to achieve export diversification. This study proposes the following policy implications, based on research results. First, the government must seek export diversification in line with global demand. The concept of export diversification will be based on inequality, and the structures of export products and export regions can be drawn to approach the structures of the global market. A shift in a country’s export structure to relatively focus more on products or regions with high demand has a positive effect on inequality. Therefore, from an export diversification perspective (related to intensive margins), this is a positive action. Although such country may have a relatively increasing share in the global market, the country itself is not included in the world market’s export target list. This may become a negative factor for inequality and thus, become a negative factor (in terms of extensive margins) of export diversification. Similarly, the concept of export diversification must be observed in relation to changes in global demand. It would also be more efficient to direct export diversification to match such demand. Second, export diversification is being pursued as part of the 644 advancement of export structures. As seen in the results of an earlier research, export diversification is strongly related to market share and export competitiveness. Thus, a policy is needed that would enable export diversification to contribute to increasing export competitiveness. By boosting export diversification in the same or related industries, it can be made to strengthen the export competitiveness of major industries. It must be noted that export power nations have export product and region structures that are very similar to the global market structure. For other countries to achieve this, mid- to long-term plans for supporting and nurturing major export industries as well as their forward and backward supporting industries must be developed. Before pursuing regional diversification, policies must be put in place to achieve export diversification founded on product diversification. Thus, it can be said that export power nations have a structural characteristic that is very similar to the global market in terms of product diversification. In conclusion, it is significantly implied that strengthening product competitiveness to induce sufficient levels of product diversification is a good strategy for export development. In this context, greater effort is needed to actively support and nurture small and medium-sized companies. Third, various aspects of export diversification policies must be strengthened. Especially, for export diversification to promote continuous economic development, parallel development of the financial market must be pursued. To achieve this, industrial financing of public financial institutions must prioritize businesses that focus on social benefits rather than risk factors. Furthermore, it must be recognized that the strategic execution of industrial Analysis of Export Diversification Pattern in Korean Industry 645 policies may boost economic performance through export diversification. Considering critical aspects such as potential failure and the diffusion of information, maximum civilian participation must be encouraged.
Policy Study 2011-155
An Analysis of the Effects of FTAs on the Direct Investment to and from Korea
Jongchol Moon and Jung Hyun Yoon
An Analysis of the Effects of FTAs on the Direct Investment to and from Korea 649
Chapter 1. Introduction
This study analyzes the effects of FTAs on direct investment between Korea and its FTA partners in the aftermath of the relevant FTAs taking effect based on the correlation between FTAs and direct investment flows. It also examines the relationship between FTAs and direct investment flows to and from Korea as pertains to new FTA partners with whom Korea is currently at the negotiation or ratification stage, with the aim of deriving policy implications. In lieu of suggesting a new analytical framework, the present study applies a framework consisting of theoretical and empirical analyses introduced in the existing literature. The policy contributions made by this study can be summarized as follows. First, FTA performance is assessed by measuring the effects of agreements that have already taken effect. Second, based on an examination of the effect of previously ratified FTAs, a review of the impact of such agreements on investment and trade between 650
Korea and its FTA partners is also carried out. Finally, relevant countermeasures are also drawn up.
Chapter 2. Review of previous studies and analysis of the current state
Review of previous studies
Blomstrom and Kokko (1997) maintained that the biggest factor determining the impact of an FTA on foreign direct investment (FDI) is the relationship between trade and FDI. Based on this relationship, foreign direct investment (FDI) can either be negatively or positively influenced by an FTA. Blomstrom, Kokko and Gloverman (2000) have suggested that regardless of the relationship between foreign direct investment (FDI) and trade, the conclusion of an FTA heightens the possibility of an increase in mutual direct investment. The biggest limitation in applying a theoretical approach to an empirical analysis is the ambiguity surrounding the standards used to determine investment types. This limitation can be overcome by processing or interpreting existing materials. An example of such an empirical analysis can be found in Levi-Yeyati, Stein, and Daude (2003). The main implication of this previous study is that the effect of FTAs on foreign direct investment (FDI) may differ depending on the type of investment. Moreover, in terms of specific variables between trade partners, FTAs have a positive effect on foreign direct investment (FDI) due to the factors as An Analysis of the Effects of FTAs on the Direct Investment to and from Korea 651 follows: (1) the size of the market gained through such an agreement is expanded; (2) the trade dependence of the FTA partner becomes greater; and (3) the gap in the factor endowment ratio between the partners enlarges. Kim Gwan-ho (1998) has concluded that the investment treaty plays little more than a supportive role in attracting foreign direct investment (FDI); rather, the important factor is the change in the investment environment that accompanies such a treaty. Egger and Pfaffermayr (2004) and OECD (2006) revealed that regional trade agreements (RTA) that included bilateral investment treaties had a positive effect in terms of increasing foreign direct investment (FDI). They attributed this positive effect to the expansion of investment liberalization and the strengthening of investment protection. The present study can be distinguished from these previous studies by the fact that it specifically focuses on Korea’s overseas and foreign direct investment, and that it attempts to conduct an analysis of overseas and foreign direct investment at the industry level.
Current state of FTAs and overseas investment and foreign direct investment
Korea’s FTA partners as of 2011 include Chile, Singapore, EFTA members, ASEAN members, and India. There are two types of relationships between investment treaties and FTAs: while in some instances an investment treaty is included as a part of an FTA, in others it is treated as a separate 652 entity. While Korea’s FTAs with Chile, Singapore, ASEAN, India and Peru include investment treaties, those with the EFTA and EU do not. Korea has however inked separate investment treaties with EFTA members, namely Iceland, Liechtenstein, and Switzerland. Moreover, it has also concluded bilateral investment treaties with individual EU members. As such, the bilateral investment treaties signed with these countries have been regarded as part of the FTA. Overseas investment in Chile exhibited an increase after the FTA between the two countries took effect in 2004. However, a comparison with investment in neighboring countries reveals that such expansion has in fact not been exceptional. A similar comparison of Singapore and the other ASEAN members also yielded few signs of any outstanding differences between overseas investment in Singapore and the other ASEAN members with whom Korea has yet to conclude an FTA. Korean investment in EFTA member Norway has rapidly increased since 2006 when the Korea-EFTA FTA took effect. This result is outstanding when compared with those of neighboring Scandinavian nations characterized by the presence of similar conditions. Although Chile enjoyed a large-scale increase in foreign direct investment (FDI) during the period that immediately followed the going into effect of the FTA, the scale of such investment subsequently decreased. Direct investment from Singapore in Korea was significantly greater than that emanating from neighboring countries. However, it was difficult to ascertain whether this increase really deviated from the general trend based solely on graphs. While foreign direct investment (FDI) from An Analysis of the Effects of FTAs on the Direct Investment to and from Korea 653
Norway exhibited a slight increase after the FTA took effect, Swiss direct investment in Korea began to increase from the point in time the FTA went into effect.
Chapter 3. Empirical analysis using statistical data
Models used for the empirical analysis and the sources of statistical data
This study employed a regression equation (3.1.1) to ascertain whether a particular FTA had a statistically significant correlation with overseas investment even when factors such as the size of the economy of the recipient country and physical distance were taken into consideration. Equation (3.1.1) constitutes an application of the gravity equation used to analyze the effect of FTAs on direct investment to and from Korea.
(3.1.1.)
In the equation (3.1.1), (FDI)kj,t indicates Korea’s overseas investment in j country in t year. (FDI)jk,t indicates j country’s foreign direct investment (FDI) in Korea. (GDP)j,t indicates the
GDP of the host j country in t year while (GDP)k,t indicates the
GDP of Korea in t year. (dist)jk indicates the geographical distance between Korea and j country. (FTA)jk,t is a dummy variable 654 indicating that Korea has concluded the FTA with j country in t year and the FTA has currently taken effect. indicates the error term. The inclusion of GDP and physical distance as variables was designed to filter out the influence of Korea’s overseas investment based on the economic size of the host country and the geographical distance from the host country.
In addition, another regression equation to which (prep)jk,t has been added is also introduced to address a situation in which enterprises engage in preemptive investment during the preparatory stages of the FTA. Here, (prep)jk,t is a variable that has a value of 1 at the point in time when joint research on an FTA is being conducted and of 0 at all other points in time.
(3.1.2)
In addition to the gravity equation, the difference-in-difference model was also employed in the analysis. This model was included in order to ascertain whether FTA partners were influenced by an FTA in a manner that deviated from the general trend associated with the countries with whom Korea has yet to reach an FTA. The regression equation used for the difference-in- difference model is found in equation (3.2.1)
(3.2.1)
Here, indicates the initial value, and indicating the amount An Analysis of the Effects of FTAs on the Direct Investment to and from Korea 655 of direct investment during t period is expressed as (t = 1, 2, 3, …, T, =0). In addition, based on a consideration of the influence of the FTA preparatory period accounted for in equation (3.1.2), a regression equation (3.2.2) that includes a variable for the FTA preparatory period was also derived.
(3.2.2)
The empirical analysis employed statistical data for the period spanning from 1991 to 2010. While the statistical data related to overseas direct investment was extracted from the panel data compiled as part of the Export-Import Bank of Korea’s Overseas Direct Investment Statistics, the data pertaining to foreign direct investment was taken from the panel data compiled as part of the Ministry of Knowledge Economy’s Foreign Direct Investment Statistics. Dummy variables such as GDP, distance between countries, and FTA conclusion were based on data obtained from the World Bank, CIA Factbook, and the Ministry of Foreign Affairs and Trade.
Analysis of the effect of FTAs on overseas investment and foreign direct investment (FDI)
The analysis based on the gravity equation model revealed that overseas and foreign direct investment exhibited a statistically significant correlation with the FTA dummy variable even when the economic size and geographical distance variables were taken into consideration. Moreover, a statistically significant correlation 656 was also uncovered with the dummy variable introduced to denote the FTA preparatory period. The results of the regression analysis imply that Korean investment began to be influenced as early as the FTA preparatory stage. Moreover, Korea engaged in preemptive investment in anticipation of an FTA going into effect, and investment in FTA partners continued to be greater than in other countries even after the FTA went into effect. From a time-series standpoint, the FTA dummy and FTA preparatory period variables also exhibited a statistically significant positive correlation under the difference-in-difference model. In addition, a statistical significance was also evidenced in the model incorporating the economic size of the host country and the geographical distance between Korea and the host county as economic variables. The impact of FTAs on overseas and foreign direct investment was also reviewed based on a comparison of a group of countries boasting similar-sized economies and physical distance. The sub- sample consisted of Singapore and ASEAN members, Chile and other South American countries, and Norway and other Scandinavian nations. FTAs were found to have a statistically significant positive relationship in the cases of Singapore and Norway. Meanwhile, the FTA had a positive, albeit not statistically significant, relationship in the case of Chile. This result can be attributed to the inclusion of Peru in the sub-sample, and more specifically to the fact that Peru was a more popular destination for investment than Chile. The direct influence of an FTA is most evident in the trade sector. Based on this reality, the present study separated industries An Analysis of the Effects of FTAs on the Direct Investment to and from Korea 657 in those belonging to the tradable sector closely related to trade and the industries in the non-tradable sector. While the manufacturing field was regarded as representative of the tradable sector, the wholesale and retail fields were established as the representatives of the non-tradable sector. The conclusion of an FTA was found to have a statistically significant positive correlation with overseas investment in the manufacturing field. In addition, a statistically significant relationship between FTAs and investment in the wholesale and retail fields, typical non-tradable sectors, was also uncovered. Thus, even when high possibility of a substitutive relationship between trade and overseas investment in the manufacturing field is accounted for, this negative impact is offset by the positive impact of other factors that lead to a positive relationship between overseas investment and FTAs. A comparison of the correlation between FTAs and overseas investment revealed that the correlation is larger with the wholesale & retail fields than with the manufacturing field. The less significant positive impact exercised by FTAs on overseas investment in the manufacturing field than in the wholesale and retail fields implies that FTAs may have a more negative impact on manufacturing fields because of the substitutive relationship between trade and overseas investment. The analysis of foreign direct investment (FDI) brought to light the existence of a positive correlation between the activation of FTA and FDI. However, there were a number of instances where a statistically insignificant correlation was recorded. This can be attributed to the fact that Korea has been more actively engaged in overseas investment than its FTA partners. The FTA preparatory 658 period was one of those factors that did not exhibit a statistically significant correlation. This result implies that in the case of FDI, foreign investors reviewed the possibility of increasing their investment in Korea following the activation of the FTA. The regression analysis conducted at the country level found that foreign direct investment (FDI) from Chile and Singapore was greater following the conclusion of their respective FTAs with Korea than that from other neighboring countries with similar conditions such as geographical distance. This implies that FTAs may have positively influenced the increase of FDI from these countries. In the case of foreign direct investment (FDI), both the manufacturing and wholesale and retail fields were found to have a statistically significant correlation with FTAs. However, the statistical significance of FDI was lower in wholesale and retail than in the manufacturing field. This can be attributed to the fact that the ratio of FDI in the wholesale and retail fields was smaller than in the manufacturing field. Furthermore, this also implies that Korea’s wholesale & retail field has not been perceived as an important investment destination.
The case of foreign countries that have concluded an FTA with the United States
A comparative analysis also conducted to study the annual average rate of increase of U.S. direct investment following its conclusion of FTAs with five countries (Chile, Australia, Singapore, Canada, and Mexico). With the exception of Singapore, all An Analysis of the Effects of FTAs on the Direct Investment to and from Korea 659 countries exhibited an increase in direct investment from the United States after their respective FTAs with the latter went into effect. However, it is noticeable that Singapore enjoyed an increase in direct investment already during the FTA negotiations. Thus, preemptive investment from the United States increased prior to the activation of the FTA. While a decline was recorded in the cases of Canada and Australia, the rate of American direct investment in the other countries under analysis actually increased following the conclusion of an FTA with the U.S.
Chapter 4. Conclusion and policy implications
The statistical analysis conducted as part of this study confirmed that FTAs have had a statistically significant positive correlation with overseas and foreign direct investment. The comparative analysis of countries neighboring Korea’s FTA partners that exhibited a similar geographical distance from Korea, as well as the comparison with the manufacturing and wholesale and retail industries also wielded similar results. FTAs had an impact on overseas investment from the preparatory stage onwards. The enhancement of the efficiency of the FTAs reached with Korea’s major trade partners such as the United States and the EU is predicated on the establishment of an investment inducement policy which favors investment in the non-tradable sector represented by the services industry rather than the tradable 660 sector. Special attention should also be paid to the identification of fields where problems cannot be resolved with a bilateral investment treaty alone, and to the improvement of the investment environment in these fields. As far as the FTAs with ASEAN and India are concerned, a thorough review of aspects which previous investment treaties included in FTAs have failed to address should be conducted as part of efforts to establish measures to protect the Korean enterprises that have entered these overseas markets. In addition, the FTAs with these countries must be perceived as an opportunity to broaden the scope of human resource exchanges and as a tool to widen exchanges in the non-tradable sector. The activation of direct investment will in all likelihood lead to the establishment of a complementary relationship between Korea and Japan. As such, a Korea-Japan FTA is expected to further activate direct investment between the two countries. The improvement of income levels and productivity in China is expected to result in market expansion and an increase in the demand for skilled human resources. Viewed from this standpoint, there is a strong likelihood that a Korea-China FTA would result in direct investment from China inducing an exodus of Korea’s highly-advanced technologies and in the subsequent redistribution of investment by Korean enterprises heightening the risk of capital flight. As a result, implementation of the Korea-China FTA should be addressed with more caution than the cautiousness put in place during the FTA agreement process with other countries. Based on quantitative analyses, the present study does not introduce any concrete policy implications. This is due to a lack An Analysis of the Effects of FTAs on the Direct Investment to and from Korea 661 of institutional and qualitative analyses as well as case studies. In addition, the biggest limitation of this study is the quantitative and temporal limits inherent in the collected data. Future tasks include the conduct of an empirical analysis of the FTA effects on direct investment to and from Korea after an appropriate period of time has elapsed to actually ascertain the effects. Such an examination should also include institutional and qualitative studies on FTA and investment. The conclusion of such studies is expected to facilitate identifying policy implications of FTAs, overseas investment and foreign direct investment (FDI).
Policy Study 2011-156
Policy Issues for Promoting New Businesses and Strengthening Sustainability in Green Industry Focusing on Renewable Energy and Green Cars
Dae Jong Gwak, Young-Joo Lee and Hyejin Jin
Policy Issues for Promoting New Businesses and Strengthening Sustainability in the Green Industry 665
Chapter 1. Introduction
1. Necessity, Purpose, and Originality of This Research
Most of the Korean government’s policies regarding the nurturing of green technologies and industries are currently focused on R&D activities aimed at securing competitive, cutting- edge technologies. Such focus is well placed given that the development of green technologies plays a crucial role as a starting point and a key factor in solving various issues that we encounter. However, promoting new green businesses is a different issue deserving our attention, as it requires a market- driven development of a variety of business models to commercialize R&D activities. Compared to the general market-driven development of new businesses, green industries that include new and renewable energy require a different set of perspectives. The reason behind this is that their market demand is generated by government 666 regulations while their supply base is established by government support. Therefore, it is timely and essential to present new policy measures upon analyzing the status of green industries from the perspective of promoting new businesses and strengthening sustainability. The purpose of this research is to draw new policy tasks aimed at promoting new businesses in green industries based on the analysis of existing research papers and case studies. The conclusions of the existing research reports may have been limited to suggesting general development strategies of green industries or presenting some case studies. However, this research attempts to perform a comprehensive analysis using a business management methodology called the green canvas and ecosystem. This method enables the study to present specific policy tasks designed to generate new businesses effectively and strengthen sustainability in green industries.
2. Scope and Methodology
The new and renewable energy sector covering photovoltaic power and wind power as well as the green car sector, among various green industries defined in Article 2(4) of the Framework Act of Low Carbon, Green Growth, were chosen as the target of the research analysis. The two sectors were selected because of their global market size and growth potential; significant linkage effect to other domestic industries from a supply and value chain perspective; and the urgent need to strengthen the competitiveness of Korea’s small and medium businesses at home and abroad. Policy Issues for Promoting New Businesses and Strengthening Sustainability in Green Industry 667
Research Overview
Status Drawing Establishing Models Analysis Policy Tasks
Existing Green Policy tasks Business business Case Models models studies: domestic, Efficient international supply/ Green business canvas Promote demand BM support Generate factors for different business develop policies stages/different business segments ment Generate Establish various Key BM Implement Value BMs Segment (internal/ BM proposition external (strategies) (customer) Build resources) green Fact business Support Innovative capacity finding ecosystem (survey Segment Finances Guarantee Expand and and analysis) sustainable growth strengthen green Business ecosystem business, (including funding, infrastructure, internal/ and government policies) external resources
Since the concept of the green industry business models is new and yet to be established, the lack of relevant research and data limits the economic analysis of the models. This research thus attempts to analyze the business models related to green industries and the surrounding business ecosystems, from a business management perspective. This study also draws some policy implications from examining international/domestic case studies as well as comparative policy analyses and verifies the research findings through a survey of domestic firms. 668
Chapter 2. Theoretical Background and Analytical Framework of Business Models in the Green Industry
1. Concept and Characteristics of Business Models
A business model is a blueprint for strategy implemented through organizational structures, processes, and systems (Hamel, 2000; Lee Dong-hyeon, 2007). A business model is a superordinate concept to a strategy, and it involves the process of a company generating value for its stakeholders in a competitive market environment. The main components of a business model differ by research; however, they generally include the concept of revenue, strategies of value propositions, customer relationships, resources, capability, and financial factors. A company generally needs to challenge the established ways of doing business to achieve business innovation in an industry. Such ways are achieved by redefining the final product-service the firm is offering (“what”); the customers is the firm trying to satisfy (“who”); and the key resources and capabilities (“how”). Nowadays, the pattern of competition is gradually shifting from the products and services competition to the business model competition. The following attributes are taken into account when evaluating business models (IBM BCS, 2005): value network that includes value propositions, revenue, and internal attributes; participating segments; internal and external environmental factors; and performance attributes such as profitability, growth potential, sustainability, and risks. Osterwalder and Pigneur (2009), on the other hand, propose a Policy Issues for Promoting New Businesses and Strengthening Sustainability in Green Industry 669
Business Model Canvas
Field of Business (Infrastructure) Implementation Customers
Customer Key activities Value relationship Customer Key partners propositions segments Key resources Channel Finances Source : Osterwalder and Pigneur (2009) concept of a business model based on the tool they call “the business model canvas,” which is also a basis for the analysis framework of this research.
2. Business Models in the Green Industry
(1) Background, Concept, and Components of the Green Business Models
Unlike the existing business models based on a company’s internal innovation in terms of customers, products/services, and operating capacity, the green business models are largely determined by the company’s external policy conditions, given that the models need to respond to new policies and regulations, commercialize the core technologies promptly, and secure economic feasibility. Business models in the green industry refers to industrial activities aimed at efficiently producing and supplying products that meet the customers’ needs by maximizing the use of inherent 670
Green Canvas to Analyze Business Models in the Green Industry
resources found in the green industry. Given that, the industry with its short history cannot generate business models using internal resources alone; it also requires other intangible resources such as the government’s support policies, cooperation with partnering companies, and a network with various external entities. The business models in the green industry thus create value, as strategies is necessary to minimize cost-generating factors and effectively target customers (for whom the company can maximize product value) through an optimal combination of resources. With the green canvas of internal and external resources, customers and strategies as segments were used to be the main framework of the research analysis. More specifically, this paper presents a research model which demonstrates that business models are generated using diverse combinations of segments. Their values can be delivered effectively to customers by means of optimal implementation strategies. The components of the four segments making up the business models in the green industry are as follows: Policy Issues for Promoting New Businesses and Strengthening Sustainability in Green Industry 671
Components of Segments Making Up Business Models in the Green Industry
Segments Components of BM Segments Components of BM Targeting strategic Source technology markets (e.g., developed nations) Targeting niche Commercializing markets through capability market segmentation Professional human Improving product resources quality and reliability Internal Resources Strategies Stable and timely Advanced production procurement of parts facilities and materials Pricing that reflects Cost advantage market changes Company-wide cooperation for Monitoring and development of new responding to strategic competitive edge changes of competitors
Innovation-related analysis data from Monitoring of market universities and opportunities and research institutes changing needs
Policy loans for Planning and designing technology future products with development major customers
Developing products External Customers that reflect the Resources Policy fund loans demands of major customers
Incentive system to create demand for Joint R&D with major green products customers
SMEs professional in Contributing to growth the green industry of major customers
Cooperation with large Continue to discover companies new customers 672
(2) Characteristics of Business Models in the Green Industry
Business models in the green industry are somewhat different from those of other industries. The differences are summarized as follows: - Public vs. market itself - Growth of demand is limited as it is generated by government regulations - Growth of supply is limited as it is generated by government support - Lack of entrepreneurship - Insufficient development and growth of innovative firms
(3) Ecosystems Surrounding Business Models in the Green Industry
Business models in the green industry are greatly affected by how the ecosystem of the green industry is established. The reason for this is that the components of the four segments making up the business models in the green industry are determined by the industry’s ecosystem. Those business models are generated based on the optimal combination of business segments and the corporate growth pipeline consisting of three steps: protecting the core, changing the game, and creating the new. The success of the business model generation and its sustainability is determined by the soundness of the industrial ecosystem. A clear difference exists between the scope of a business ecosystem and that of a cluster or value network in terms of Policy Issues for Promoting New Businesses and Strengthening Sustainability in Green Industry 673 region; competition and cooperation; industry; knowledge; and management. Therefore, producing policy alternatives for the government to promote new businesses and strengthen sustainability in the green industry requires such a business ecosystem-based approach.
Chapter 3. Analysis of the Business Model Status in the Green Industry
1. Purpose and Method of Analysis
This research uses the analysis tool of green canvas to consider carefully what forms the foundation in promoting new businesses and strengthening sustainability amidst the green industry. Another purpose of this analysis is to examine the effects of support policies for the growth of the green industry. Data were gathered through a survey conducted among manufacturing firms in green industries, particularly those engaged in the photovoltaic and wind power businesses. Various quantitative analysis methods used for this research include the two-step least square methods, the principal component analysis, and the regression analysis.
2. Analysis of Business Models in the Green Industry through the Green Canvas
The green canvas has four different segments that comprise the main components of the green business models: internal 674 resources, customers, strategies, and external resources. Diverse green business models can be generated depending on how these segments are combined. Seeking effective ways to utilize these four segments of the green canvas in terms of policy and strategy can therefore help lay the foundation for promoting new businesses and strengthening sustainability in the green industry. Such a conclusion has been proven by the empirical analysis of this research that uses the two-step least square methods. The results indicate that the green canvas has some connection with innovative capacity and performance which are key factors to sustainable growth. This finding implies that the green canvas is built on sound business ecosystems. However, the survey results show that the degree of utilizing the four segments of the green canvas on the part of green companies is very low. The degree is even lower for external resources that include the general support system for the green industry. In addition, the internal and external environments of the green firms are not favorable in facilitating the use of the green canvas. The green companies point out that problems lie in the lack of innovative capacity and readiness for growth strategies, as well as the inadequacy of private loans that are supposed to complement policy loans. Given that scenario, generating new business models will be difficult, as they will be based on a sound business ecosystem. Strengthening their sustainability in the green industry if current trends continue is also necessary to prepare some measures to similar concerns. In addition, green firms are asking support in the areas of creating demand, especially when they enter the global market. Policy Issues for Promoting New Businesses and Strengthening Sustainability in Green Industry 675
However, the analysis results indicate that only a small percentage of green companies have experienced receiving policy loans and that government support is concentrated mainly in R&D activities. This means that the government’s current support system does not sufficiently reflect the green companies’ support demand. These problems need to be addressed, as they may limit the future development of diverse business models in the green industry. The analysis results lead to the following policy implications. First, since the green canvas is built upon a sound business ecosystem, the analysis framework with its four segments can serve as a useful tool for developing measures that will facilitate green businesses in terms of policy and strategy. In addition, promoting the utilization of different segments by green companies is necessary; this is achieved through diverse support policies designed to strengthen the segments of the green canvas. Second, the utilization rate of the government support system needs to be increased. Very few green companies are aware of the benefits of support system which they have used before. To promote further the use of the support system, the government needs to improve it in a way that is more business-oriented. Third, the problem of support concentrated in particular areas needs to be addressed. Green companies need support not only in R&D activities that strengthen their innovative capacity, but also in other areas such as creating a new customer base or marketing when they enter overseas markets. Providing such multi-faceted support will ensure the development of effective business models. These will combine the strengths of different stakeholders 676 engaged in different fields, such as the manufacturing and services sectors, project-based consortiums, as well as the private and public sectors, among others. Fourth, improving the business environment is necessary so that it can facilitate the development of business models built upon cooperation with public institutions, partner companies, and global customers with which green companies are willing to work collaborate. To this end, factors that hamper cooperation should be identified and institutional support should be provided to address such concern. Fifth, strengthening the business ecosystem by means of revitalizing private loans is crucial. Hastening the commercialization of new technologies is therefore urgent to dominate the green market that currently undergoes a growth phase. Institutional support to promote participation of private loans in the process of commercialization is also needed. The government specifically needs to lead in creating a sound business ecosystem by not only encouraging the private loan support for blue-chip companies but also by promoting restructuring of marginal companies.
Chapter 4. Analysis of the Business Ecosystem in the Green Industry, and Domestic/International Corporate Case Studies
1. Overview of the Business Ecosystem in the Green Industry
One of the characteristics that differentiate the green industry from other industries is that in such industry, the market demand Policy Issues for Promoting New Businesses and Strengthening Sustainability in Green Industry 677 is generated by the government. Therefore, the green industry as a whole is greatly influenced by the government policies. This research paper attempts to draw implications from an examination of some domestic and international case studies of firms engaging in major fields of the green industry (i.e., photovoltaic power, wind power, and fuel cells). In addition, unlike the new/renewable- energy industry (i.e., the equipment and green-car industries), the business-to-consumer (B2C) industry sells products directly to the consumers. Thus, this paper analyzes case studies focusing on products, to draw implications. For the business ecosystem surrounding the new/renewable- energy industry, the ecosystem for the photovoltaic and wind power sectors is currently going through the stage of development. As for the fuel cells sector, new business models are being introduced, thanks to the participation of SMEs in the parts/components/peripherals businesses, but tangible results have not been attained so far because the sector has not yet reached the full commercialization stage. Among the various new/renewable-energy businesses, the photovoltaic-power business is engaged in by the biggest number of companies, and some have already achieved vertical integration. In the case of wind power, the industrial ecosystem is currently being formed, with large firms taking the lead, but the firms have not yet accumulated much business experience. 678
Structure of the Business Ecosystem of New/Renewable-Energy Industry
Financial Institution Fund New/Renewable-Energy Fund
Photovoltaic Power Wind Power Fuel cells Polycrystalline Gear box, silicon Cell SystemEquip bearing, System System ingot/wafer ment blade
Materials Components System Photovoltaic power Equipment
Materials Components System Fuel cells
Materials Components System Wind power Electri city Marine Energy Smart gener Superspecies Optjmal culture conversion /suitability module Marine bio grid ation system system busin ess Design/ Operation/ Ocean Energy construction of maintenance Marine properties offshore power of power energy conversion generation generation evaluation structures system
Supply raw Design/ Scaling Wastes bio materials/ System Utilize preproce build up of operation products ssing systems systems
Upgrading Coal gasification Gas Clean coal low-rank coal clean-up energy
Associations, research institutes/ universities (project support, network, human resources) INFRA MARKET STRUCTURE Government Government (R&D projects, standards support, (expanding market): clusters) by means of RPS, etc.
Source : KIET Policy Issues for Promoting New Businesses and Strengthening Sustainability in Green Industry 679
2. Corporate Case Studies
(1) Photovoltaic-power generation
The photovoltaic-power industry has a great linkage effect along the value chain, consisting of materials suppliers (polycrystalline silicon, glass, metal, etc.), parts and components suppliers, module system, the installation industry, and manufacturing equipment suppliers. Also, vertical integration and organic cooperation within the industry are vital to secure competitiveness. In South Korea, Hyundai Heavy Industries, LG Electronics, and Samsung Electronics are currently pushing ahead with projects focusing on vertical integration. Moreover, OCI, Shinsung Holdings, and Woongjin Holdings are engaged in the polycrystalline silicon, ingot, and wafer businesses. KCC has also begun producing polycrystalline silicon and completed its vertical integration through its strategic partnership with Hyundai Heavy Industries. By far, Europe has the most advanced photovoltaic- power generation industry in the world, with numerous specialized firms and service providers. Lastly, China is rapidly increasing its global-market share in the photovoltaic-power industry based on the strong domestic demand, aggressive policy support, and price competitiveness. While vertical integration is effective for swift market entry at the initial stage, it does not seem to contribute greatly to the development of diverse business models as it internalizes all business activities. 680
Summary of Case Studies in the Photovoltaic-Power Industry
KCC (South Korea) LDK Solar (China) OPDE Group (Spain) Solar tracker and Main Polycrystalline Wafer fixed PV power businesses silicon generation system
- Crucial to achieve - Selected a niche - Importance of economy of scale market in China engineering and quickly through and nurtured technological cooperation for private development in new-growth companies industrial industries requiring through development: large-scale government Need to nurture Implications infrastructure support manufacturing- based service - R&D support to - Global M&A firms secure global support policy: competitiveness Expand financial - Nurturing small infrastructure yet powerful companies to target a niche market
(2) Wind power generation
The wind power industry requires a stable supply of highly reliable systems. Also, the factors that must be considered when selecting the main equipment are the prices, commercial- operation track record, power generation capacity, and whether or not the equipment are internationally certified. The purchaser of the system usually considers the price and performance and pays particular attention to the system’s reliable performance against diverse external conditions. Vestas and Suzlon, wind turbine manufacturers, are engaged in the wind systems business while 3M supplies the various consumables, parts, components, and materials needed to build wind farms. As these cases Policy Issues for Promoting New Businesses and Strengthening Sustainability in Green Industry 681
Summary of Case Studies in the Wind Power Industry
Vestas (Denmank) Suzlon (India) 3M (USA) Materials/ Main Wind turbines Wind turbines parts related to wind businesses power generation
- Consistency - To faciliate - Organizational in project domesstic firms’ agility, implementation global market efforts to and cooperation entry, a testbed build a between is needed to cooperative policymakers accumulate relationship and companies experience. with various - Support for customer - Focus on the groups, and to building development Implications cooperation develop of a power- solutions channels and generation- export promotion related so that domestic solution using firms can South Korea’s participate in the strength in IT, large-scale and develop installation a monitoring project in the system global market
Summary of Case Studies in the Green-Car Industry
Volt Betterplace Tesla Main Electric-car businesses Hybrid vehicles charge network Electric vehicles - Need to - Need support for - In the case of maximize the the development new alternative technological of an electric-car vehicles, utilize a reliability operation system high-tech - Very important marketing - Consider a technique of to establish an strategic effective brand initially targeting Implications partnership with early adopters, strategy even for global companies eco-friendly cars and progressively for the early expanding the - Need to develop adoption of customer base green cars global cuztomized to standards the country’s lifestyle pattern 682 illustrate, the business models in the wind power industry can be actively developed by combining the strengths of firms specializing in their respective field as the industry is dominated by the systems business. Such business model development, however, is not actively happening in South Korea due to the limited size of the domestic market and the poor performance of the local firms.
(3) Green-car industry
Green cars, in a broad sense, refer to vehicles equipped with a system that reduces the emissions of harmful gases and carbon dioxide, or to a clean power system that does not release harmful gases. Examples include clean-diesel, hybrid, plug-in, electric, and hydrogen and fuel-cell vehicles. To promote the development of the business models in the green-car industry, domestic companies will need to expand their customer base based on technological reliability, and to strengthen their business areas.
(4) Summary of case studies and implications
The implications related to the internal resources in the green industry are not particularly different from those in other industries, except for the point that the green industry requires key resources and accumulation of experience as preconditions for entering a new business. In the segments of the customers and external resources, however, a completely different perspective is needed. Being an infrastructure-based industry, the Policy Issues for Promoting New Businesses and Strengthening Sustainability in Green Industry 683
Summary of Case Studies by Business Model Segment
Business Model Implications Segment - R&D investment with a long-term perspective, thereby securing high technological strength and key patents - Quick commercialization capability, and capability to realign the existing resources (products and services) Internal - M&A capability (selection, integration, operation, etc.) resources - Selection and establishment of appropriate business models and systems specialized for infrastructure - Accumulation of experience, thereby securing key human resources
- Build a stable growth structure and secure demand through joint business - Global-market entry facilitated by M&A and strategic partnerships with overseas companies - Provide a comprehensive solution and set a long warranty Customer - Establish a close relationship with political stakeholders and civic groups - Play a leading role in transnational projects - Operate a 24hr monitoring center and identify the customers’ needs
- Select a complementary strategic partner in terms of value chain, and achive quick vertical integration - Reinvest profits in facility expansion, thereby building low-cost mass production facilities - Select a strategic market and device strategies to target the market Strategy - Seek to secure economic feasibility of new/renewable energy through continuous technological development - Enter a new business area by expanding the existing products, thereby reducing the initial investment cost - Make an active effort to set up and manage a good brand image
- Joint R&D and technological exchange with partner companies, universities, and research institutes - Government’s large-scale R&D support and nurturing policies - Utilize each country’s green-growth policies, certification system, and regulations External - Actively support government policy development, suggest resources policy alternatives to create demand - Efficiently manage the value chain through vertical integration - Strategic partnership with global firms for the early adoption of global standards - Utilize the environment-related venture network, investment, and funds 684 green industry requires building a long-term trust relationship with the customers, setting a long warranty period, and continuous monitoring. Also, due to the large number of transnational projects, it is important to establish a favorable relationship with the local government, local stakeholders, and companies, and to actively make policy suggestions to play a leading role in those projects. Therefore, it is essential, in the aspect of external resources as well, to effectively utilize the government’s policies and regulations, and to make active use of strategic partnerships and external R&D resources. From a strategic perspective, the most important factors to achieve are securing economic feasibility, selecting an appropriate market, and establishing strategies focused on the market. Towards these ends, M&As and diversification of facility investment strategies may be considered. Furthermore, given that the green industry receives attention from a variety of stakeholders and has a potential to introduce innovative products to the world, it is necessary to make an active effort to set up and manage a good brand image even though the products do not target general consumers, like the B2C products. In terms of technology, the cases of advanced companies show that it is crucial to enhance the quality of the existing products through progressive technological innovation, and at the same time, to carry out the development of next-generation technologies that will enable radical innovation, maximizing the efficiency and economic feasibility, to ultimately gain first-mover advantage and to accumulate experience. Such case studies can be linked to the aforementioned theories Policy Issues for Promoting New Businesses and Strengthening Sustainability in Green Industry 685
Summary of Case Studies and Implications
Related Corporate Case Studies and Implications
Nurturing - Companies engaged in the development business need to secure companies expertise and improve their project management capability specializing - e.g., Typhoon offshore (engaged in the development of offshore wind in the farms) raised the efficiency of its project management by streamlining its develo complicated contract procedures and administrative processes, and led pment the participating firms based on its experience of installing complex business wind farms in many parts of the world
- The problems pointed out by South Korean firms leading in the local wind power industry include the absence of a single window for licensing procedures, and lack of cooperation among the local governments. - As site selection is very important for the new/renewable-enegry Creating industry, which is an installation industry, frequent administrative an efficient contact occurs among local governments during the wind farm admini development process. strative - The number of preliminary documents in the Cape wind project (USA) infrastru amounted to over 100,000. cture - In contrast, China created an efficient, quick administrative infrastructure, speeding up the process of wind farm development. - Therefore, establishing an infrastructure that can maximize the administrative efficiency, and coming up with a flexible response, are needed.
- Germany has an efficient R&D network based on industry-university- institute collaboration, which contirbuted greatly to building the renewable-energy industry ecosystem as a global leading player. Joint - In South Korea, large companies would do well to invite key partner companies R&D with to participate in technological development so that they can contribute to the large establishment of a value chain and to cost reduction in the future. companies - The government should encourage SMEs to participate in government- driven projects as a supplier of parts and components, so that SMEs can obtain the necessary certification by building up their track records.
- Due to the short history of South Korea’s renewable-energy industry and Securing the many trials and errors experienced by the industry, the manpower and experienced in SMEs tend to move to large companies. training - Although this phenomenon may simply be interpreted as a personal more choice or a natural transition, such a gap in manpower should be human addressed by an effective job training system and a system for resources maintaining a pool of reserve manpower.
- Suzlon, after achieving rapid growth under strong government support, obtained the necessary technology and experience by acquiring Supporting advanced firms. global - Similarly, South Korean firms attempted global M&As to achieve fast M&As entry into the overseas market, and to acquire the necessary technology (Daewoo Shipbuilding & Marine Engineening acquired DeWind; STX Heavy Industries acquired Harakosan Europe) 686 and to the current-status survey results to produce the following implications. First, it is necessary to nurture companies specializing in the development business. Second, creating an efficient administrative infrastructure is crucial. Third, given the need to strengthen the joint R&D network with large companies, those large firms will benefit from inviting their key partner companies to participate in technological development so that they can contribute to the establishment of a value chain and to cost reduction in the future. Securing more human resources and supporting global M&As are also important.
Chapter 5. Analysis of the Domestic/International Support System for the Green Industry, and its Implications
Developed countries are currently gradually transitioning from promoting the Renewables Portfolio Standard (RPS) system to the Feed-in Tariff (FIT) scheme to increase the share of new/renewable energy. It seems that such transition is aimed at strengthening the demand side, which forms the foundation for developing business models. These schemes, however, generally require complementary measures as they do not necessarily have a direct supporting effect on companies that are generators of business models. Regarding the export support, it is noteworthy that many advanced nations have come up with various support policies. South Korea is also implementing diverse export support policies Policy Issues for Promoting New Businesses and Strengthening Sustainability in Green Industry 687 through such agencies as KOTRA (Korea Trade-Investment Promotion Agency), but the efficiency of such policy instruments is not necessarily high compared to those of the advanced nations, without specific tools to support the industry. Therefore, to nurture the local green industry, one of the important tasks facing South Korea is to raise the efficiency of the export support policies for the industry. The domestic support systems that are currently in place include support for the establishment of indirect infrastructure, support related to external resources (e.g., green-company certification, R&D policy fund support), support related to internal resources (e.g., establishment of cutting-edge production facilities, securing of commercialization capabilities and source technologies), support related to customers (e.g., for the continuous identification of new customers), and support related to strategies (e.g., for product quality, reliability enhancement, market targeting {advanced nations}, and stable supply of components and materials). Until now, the domestic support in the new/renewable-energy industry has centered on the R&D of unit technologies, and there has been a serious lack of R&D activities related to technology commercialization to expand the use of new/renewable energy sources. Furthermore, the effect of the policy support for commercializing new/renewable energy is quite insignificant. Although several government institutions, such as the Presidential Committee on Green Growth, have announced various support policies on numerous occasions, their effectiveness is assessed to be lower than the expectations. Experts point out the following reasons for such low effectiveness: new policies being produced 688 without an objective assessment of performance, and the small scale of those policies devised at the ministry level. Various regulations have also been found to have some flaws. Based on the examination of the domestic support system, the following is a brief assessment of each segment of the green canvas. In terms of internal resources, the R&D budget for new/renewable energy is very low, being only 4.8% of the total R&D budget. In terms of strategies, the export-financing support for companies entering developing nations through such means as ODA and EDCF is not being carried out effectively, signifying insufficient support for overseas market entry. In terms of customers, the encouragement for the residents and local governments to participate has not been active, and some residents even show hostility to the installation of renewable- energy facilities, seeing them as dangerous or unpleasant facilities.
Chapter 6. Policy Direction for Developing New Businesses in the Green Industry
1. Basic Direction
To facilitate the development of various business models in the green industry, it is important to create a favorable policy environment where a variety of stakeholders and service providers in the relevant industries can merge together based on the green industry. Furthermore, policy efforts to create a sound ecosystem of green businesses are needed, and in this regard, the Policy Issues for Promoting New Businesses and Strengthening Sustainability in Green Industry 689 government and the private sector should share the responsibility. The government should focus on expanding the resources through such means as R&D support, and at the same time, it should create a favorable environment where such resources can be easily utilized by the private sector. The active development of business models should be driven by cooperation between large companies and SMEs, focused on value proposition. Support should be given to promote cooperation between green companies and their external resources, especially large firms equipped with innovative capabilities, global client companies, and public institutions, so that such cooperation will lead to the development of various business models. In other words, complementing the lack of internal resources of the green industry through cooperation is a starting point to diversifying green business models and to achieving sustainable growth.
2. Policy Tasks and Action Plans
The policy tasks drawn from the current-status survey, case studies, and policy analysis include the aspects of increasing the efficiency of the supply/demand support policies, providing diverse support for creating green businesses, establishing a green-industry ecosystem, and reinforcing the internal/external resources. Specific action plans for implementing each policy task were devised. First, to raise the efficiency of the supply/demand support policies, integrated support needs to be sought for the 690 manufacturing/services firms in the green industry. Towards this end, companies engaged in either manufacturing or services should be able to apply for support projects without distinction, and the government should provide the necessary assistance so that large companies’ experience of carrying out the manufacturing- based services business can be effectively transferred to SMEs. Supporting the installation of small-scale facilities can be an effective way to overcome the fundamental restrictions imposed by the regulations on the growth of the demand side. Also, since the new/renewable-energy industry has a long gestation period of capital. and requires a large amount of initial investment imposes serious constraints on financing assistance, the option of introducing and promoting the use of a lease system may be carefully explored. It is also necessary to expand the public demand by establishing a public green-business information- sharing system. Project managers in the public sector can share information related to their green projects in real time, and can exchange ideas and details, which can facilitate the expansion of green projects in the public sector. It is also necessary to pursue the installation of new/renewable- energy power generation facilities by making good use of unused or publicly owned lands. Continuing to identify potential sites for installation is an essential task for strengthening the demand side. Therefore, installing such power generation facilities on unused, state-owned, or publicly owned lands is being considered and carried out as an alternative. In fact, to promote such installation more actively, the related laws and regulations need to be improved. In particular, the affairs of the green industry are being Policy Issues for Promoting New Businesses and Strengthening Sustainability in Green Industry 691 handled by so many government ministries, including the Ministry of Strategy and Finance, the Ministry of Knowledge Economy, the Ministry of Environment, the Ministry of Food, Agriculture, Forestry, and Fisheries, and the Ministry of Land, Transport, and Maritime Affairs, making the implementation of policies quite inefficient. To avoid such a problem and to nurture the green industry further in the future, more effective policy procedures should be introduced in the aspect of the policy integration. Also, support should be given to develop diverse green business models. Towards this end, based on the existing capacity, a more favorable environment for policy support to facilitate the diversification of the related businesses needs to be created. It is also necessary to introduce a support policy to utilize the expertise and knowledge of the private sector in the area of green business models. In other words, it would be useful to establish an online space where companies with expertise and professional knowledge related to business models can make suggestions, and where the green manufacturers can search for and utilize appropriate business models to suit their circumstances. With regard to the support system for global-market entry, the current system, focusing on a single-type product, is not appropriate for the green industry, which produces complex products based on the combination of multiple manufacturing systems and of many parts and components. Therefore, it is necessary to determine if the existing policies have really been helpful in the overseas expansion of the green companies. The South Korean government needs to come up with measures to facilitate the joint participation of large firms and SMEs in the 692 new/renewable-energy projects of developing nations through ODA and EDCF. Also, it needs to strengthen the marketing support for the overseas market entry of products that have been developed from the initial stage of product development to reflect and meet the global customers’ needs. Along with that, overseas public institutions should also strengthen their support system so that they can offer integrated support from the technological development stage to the marketing stage. The government will also do well to support the communication between large companies and SMEs to promote cooperation through the sharing of responsibility. Along with such effort, it may consider introducing a loan program with a collateral green-business model. To be more specific, the credit guarantee institution can offer guarantees based on its assessment and review of the green- business model, enabling the green companies to obtain private financing. To establish the ecosystem for the green industry in South Korea, the localization of parts, components, and equipment is required to first lay a firm basis for a sound ecosystem. Also, by providing support for new-network establishment, the government should create an environment where companies engaged in green businesses can make optimal use of soft infrastructure such as funds and information. This will promote the development of business models that combine the resources of the private sector and public science institutions, complementing the lack of internal resources on the part of the green firms. To expand and reinforce the internal and external resources of Policy Issues for Promoting New Businesses and Strengthening Sustainability in Green Industry 693 the green industry, a special information support center first needs to be established. This center should go beyond simply providing business incubation services, and should serve as a “network broker” between different industries (promoting exchanges) and different technologies (promoting convergence). In addition, it is necessary to support the nurturing of customized human resources to address the serious shortage of manpower being experienced by SMEs. Towards this end, the government may consider connecting SMEs with specialized local graduate schools and local evening colleges, and providing financial support to these academic institutions so that they can be used as training (or retraining) centers for the human resources hired by SMEs.
Policy Study 2011-157
Finance Mechanisms to Catalyze the Development of Newly Growing Sectors Green Finance, Energy & Mineral Resources Development Finance and Large-scale Project Finance
Soo-Dong Kim, Won-Bok Lee, Geun-ju Jung and Yongmong Kim
Research on How to Activate Finances in the New-Growth-Engine Fields 697
Chapter 1. Introduction
In the new-growth-engine fields, as in other fields, the connection between finances and industries is becoming stronger, and financial procurement is getting to have a greater effect on business activities. As such, the promotion of new industrial policies will be limited when there is no expertise on finances. This is why competing countries are consolidating their financial support for the new-growth-engine fields, which include the green industries, overseas resources development projects, and large-scale overseas projects. Recently, it became urgent for South Korea to set up countermeasures against competing countries that would strengthen the capacity of South Korean enterprises to procure finance. Achieving this objective would require such enterprises that are receiving orders from other countries to obtain financial support from the South Korean government. This research is aimed at coming up with policy schemes for consolidating the 698 connection between finance and industries, which is becoming more important in the process of turning the major new-growth- engine fields into export industries, and in the process of project financing. This research was conducted on such new-growth-engine fields as the green industries, overseas resources development, and atomic-power generation plants, generation facilities, and rapid transit railways. Financing is particularly an issue in the new-industry fields because the finances cannot rely on the market functions alone due to the many characteristics of such fields. In new-industry financing, market failure generally occurs for the following reasons: (1) information asymmetry, in which each trader has a different amount of information, especially on a new-industry field; (2) the uncertainties of the new-industry field (i.e., financial institutions evaluate and manage financial risks but tend to evade financial uncertainties); (3) the poorer ability of the enterprises in a new industry, which do not have sufficient tangible assets, to procure funds compared to formal players who have sufficient assets; (4) the inseparability of the investments in technology development; and (5) the external effects, in which the social benefits of technological development are greater than the private benefits. In new-industry finance, market failure is mainly caused by the tendency of commercial banks that try to evade the above mentioned reasons. For example commercial bankers try to avoid the risk of providing long-term finance service to enterprises whose market is not easy to verify. Therefore, it is desirable to Finance Mechanisms to Catalyze the Development of Newly Growing Sectors 699 develop financial policy for new-industries to allow the effective complementation of those spheres in which there is structurally little or a non-transparent room for the improvement of the market functions. In essence, a financial policy for new-industries will improve the supply-and-demand mismatch in the market, and will distribute resources in the market in a way that is friendly to the medium-sized and small enterprises in new industries. To ensure this,it is necessary to exert policy efforts in the direction of amplifying the relevant systems to supply funds to new-industry enterprises through various patterns and channels, and of ensuring that the changes in the conditions of the finance market and new-industry finances will not contradict each other.
Chapter 2. Financing Methods and Domestic and Global Tendencies in Each New-Growth-Engine Field
There is a need to establish and operate a customized financial-support system at each growth step to suit the characteristics of the new-growth-engine fields. According to the growth steps of an enterprise, its goals/organization/structure, products and market nature, major expenditures, and financial resources should be changed. Thus, the financial demands and financial procurement methods must correspond to the growth steps of an enterprise. As each step requires a corresponding management goal, strategy, budget, and others, each step also has a corresponding financing method. Figure 2-1 shows the financial 700 procurement method required at each growth step of an enterprise. This pattern is applicable to the enterprises in new- growth-engine fields. The financing of the three steps (technological development, pre-commercialization, and commercialization) of green industries starts with the government’s R&D funds. The commercialization step needs financial support the most and is decisive for the success of a business. At this step, the government provides investment funds whose nature is different from that of R&D funds. Angel investors from the private sector also participate through investment funds. At the pre-commercialization step, there are convertible loans, which pursue both public benefits and stable private benefits, and for which the interest rate is low
Financing method at each growth step of an enterprise
GROWTH MATURITY EXPANSION IPO/SPAC Banks Profit INCUBATION PERIOD GROWTH (Loan) Merger Private Equity Venture Capital Project (Growth Capital) Financing IDEA Mezzanine Banks START-UP ROLL-OUT Venture Capital PILOT (Early Stage) Founders Governmental Angel Investors Grants TIME Source : Industrial Financing Forum (October 2010), cited from “Schemes for Expanding the Private-Fund Flow into the New-Growth-Engine Fields”, a presentation material suggested by KB Investment and Securities Co., Ltd. Finance Mechanisms to Catalyze the Development of Newly Growing Sectors 701 and the repayment conditions are favorable. Venture capital can be provided when the possibility of the commercialization of an enterprise is somewhat high. Venture capital will participate in a business when the prospects for the commercialization and successfulness of the business are increasing, and the business will attract more investment when more profits than expected are guaranteed. The weaknesses are to be supplemented by private sector-government joint venture capital. The stepwise financing method for a resources development project is somewhat different from that for green industries. First of all, the expedition step includes such urgent processes as follows: securing mining rights; geologic survey; geophysic expedition; understanding a promising structure in which the possibility for resources to be deposited is high; and identifying the probability of resources being buried through exploration and drilling. Considering high risks of the expedition step (the expedition success rate is 10-15% on average), in general, an enterprise procures the required funds by itself (equity, a loan in the form of debenture) or utilizes the government’s special budget accounts. At the development step, the funds of the enterprise developing the resources, project finance (PF), and reserve-based financing (RBF) are necessary to comprehensively analyze the acquired information, evaluate oil and gas fields, set up a development plan, construct production facilities, and execute productivity drilling. At the production step, it is possible to utilize RBF, which provides “finances based on a future flow of cash” to oil and gas fields in operation, as part of managing reservoirs, pursuing enhanced oil recovery (EOR)1), and maintaining and 702 managing production facilities for the purpose of optimum production. The financing method for a large-scale project is also differentiated. In large-scale projects such as nuclear-power generation and plants, a financial gap occurs at the project development and construction steps. The funds required at the project development step consist of those for the project feasibility (F/S), project approval and registration, and financial- structuralization expenses, and the finance needed for preparing the project mainly includimg the developers’ investment funds, private finance, capital market (stocks, bonds, etc.) finance, venture capitals, private equity funds, success-based supportive loans, and strategic investor funds. In general, the financing at the construction step consist of equity investment and loan or mezzanine finances.2) Equity investment is usually made by strategic investors, which are private equity funds or investment financial institutions, and a loan is made through business or project financing by commercial banks. The financial tools for mitigating the risks at the construction and operation steps are insurance and guarantee. CAR (Construction All Risk; EAR: Erection All Risk)Meanwhile, performance guarantee and liquidation damages can mitigate the risks on the part of the other party in a contract. As discussed above, the government plays an important role in the new-growth-engine sector. The South Korean government
1) Water flooding, gas injection, and others are applied to promote the recovery of crude oil and natural gas from the reservoirs. 2) A kind of indirect fund invested in stock-related bonds like bonds with warrant, convertible bonds, and subordinated bonds. Finance Mechanisms to Catalyze the Development of Newly Growing Sectors 703 also has a plan to invest 24,500 billion won in this field over five years, from 2009 to 2013. According to a detailed plan (action plan) for the promotion of new growth engines, schemes shall be set up to provide advice on technological strategies, cultivate relevant manpower, and support medium-sized and small enterprises, and the relevant roles shall be shared by the private sector and the government. The role of the government is focused on the creation of investment environments and on the development of high-risk original technologies, the improvement of the related laws and systems, and the development of model projects. The role of enterprises, on the other hand, is focused on technological development and facility investment, mainly to develop initial and commercialization technologies, expand investment in production facilities, and create new jobs. Meanwhile, a new-growth-engine fund was initially established by the Ministry of Knowledge Economy in July 2009. At the end of September 2010, 1.47 billion won was invested in 16 funds totaling 687.1 billion won. From the time of the initial investment from the new-growth-engine fund until the end of September 2010, 83.2 billion won (12% of the total fund amount) was invested in 34 enterprises in diverse new-growth-engine fields. In the new-growth-engine fields, private finance consists mainly of fund-of-funds and venture capital. Promises were made to invest a total of 1.2678 trillion won from fund-of-funds in 179 funds until the end of September 2010, so that a total of 4.7118 trillion won may be raised for venture investment funds, and a total of 2.5048 trillion won may be invested in 1,136 medium- sized and small enterprises (excluding the overlapping ones). 704
After the launch of fund-of-funds, the forming of new funds and the scale of investments increased by 59% and 33%, respectively, and investments had been made in a total of 1,136 enterprises by the end of September 2010, opening 58 enterprises (IPO) and nurturing 14 enterprises with sales amounting to more than 1,000 billion won. As for venture capital, promises were made to create a new fund amounting to 1.2 trillion won, and 106 venture capitals are in operation as of September 2010. The largest investor is Korea Finance Corporation, whose investment accounts for 30.3%. As of September 2010, the amount of its new investment has been 728.1 billion won, and 25 investment recoveries (exits) have been made through initial public offering. The investment targets in industries are shifting from the IT industries to the service and general manufacturing industries.
Chapter 3. Cases of Green Finance and Schemes for Procuring Funds
In “Schemes for Activating the Inflow of Funds for the Promotion of Green Investments”3) released in 2009 by the Presidential Committee on Green Growth, the directions for the major policies being promoted by the government to improve the country’s green-investment conditions are largely summarized in
3) 4th Meeting of the Presidential Committee on Green Growth, “Schemes for Activating the Inflow of Funds for the Promotion of Green Investments”, jointly released by the related government departments and agencies (July 2009). Finance Mechanisms to Catalyze the Development of Newly Growing Sectors 705 the following three items:
(1) Introduction of a green certification system and a system to confirm green enterprises
The certification of green technologies and projects refers to a system of certifying if a technology or project is in the green field, with a view of smoothly promoting support for green industries. What is to be certified includes the green-technology fields, which comprise new/renewable energies, making energies and resources more effective, circulation of resources, and technologies for reducing the environmental pollution. It also includes the green-project fields, which comprise new/renewable energy facilities, facilities that turn wasted resources into energy, and bicycle paths. A system of confirming green enterprises refers to that which confirms enterprises with green technologies, or that carry out green projects and satisfy certain requirements as green businesses. In this case, the requirements have to be specified to distinguish between a case where the green technologies are the core technologies of the appropriate enterprises and a case where a green project is the main project.
(2) Selection and nurturing of a core green industry
The related government departments, in cooperation with the Ministry of Knowledge Economy and the Ministry of Environment, have selected those fields that satisfy the following criteria as core green industries: ① those that are at the commercialization step or 706 that can be commercialized in the next two or three years; ② those where the technologies are preoccupied and where it is thus expected that the parts, materials, and equipment will be leading export items; ③ those that have great forward and backward linkage effects, such as the activation of medium-sized and small enterprises and the creation of jobs; and ④ those in which a rapid fall of prices is anticipated due to bold initial investments. What have been chosen for consideration include the LED application, wind power, photovoltaic, green-car, energy-saving, synthetic- natural-gas, and other green-industry fields suggested during the joint conference of the private sector and the government.
(3) Expansion of the investments in green SOCs and facilities
Bicycle paths, new/renewable energy facilities, and others were added to the projects in which private investments can be made, so that the private sector would actively invest in green infra projects. When businesses are included in private-funded projects, they will be given such benefits as the application of a zero-value-added tax rate, the provision of a right to expropriate the site concerned to the project executioners, the use of state- owned and/or public properties free of charge before the completion of the construction, and a 50% reduction in surcharges for the conservation of agricultural lands.
1. Schemes for Procuring Funds at Each Step of Green Financing
At the research and development (R&D) step, it is necessary to Finance Mechanisms to Catalyze the Development of Newly Growing Sectors 707 utilize the expansion of private-capital participation while the financial support is expanding, so as to secure marketability and to raise the potential of commercialization. The scale of financial support for the R&D of green technologies has to be extensively expanded, and a system has to be introduced to provide ex-post- facto rewards when major difficult problems have been successfully identified and resolved. It is also necessary for Korea Development Bank and others to create a “research and business development (R&BD) matching fund” so as to support the connection of the development of green technologies with their commercialization. In the meantime, the financial support should be expanded for investment-connected-type R&D and for R&D with the condition of purchase, to encourage the participation of private funds in green R&D projects being promoted by medium- sized and small enterprises.4) At the commercialization step, private-fund participation should be encouraged through investment from fund-of-funds, credit guarantee, and others, and policy fund loaning from the national finances should be expanded. It is also necessary to utilize fund-of-funds to expand the scale of “funds for the exclusive use of green medium-sized and small enterprises.”5) In particular, to reduce the investment risks and to facilitate the inflow of private venture funds, there is a need to increase the
4) Shin Min-sik, Kim Su-eun, and Jeong Dae-ho (2009), “Relationship between the internal finance and R&D investment of innovation-type medium-sized and small enterprises”, Venture Management Research, Vol. 12, Book 1, pp. 27-54. 5) Green initiation business fund, green M&A fund, and others. 708 investment from fund-of-funds in “funds for the exclusive use of green medium-sized and small enterprises.” Moreover, the credit guarantee for green businesses and projects should be expanded. Lastly, the scale of policy fund loaning should be greatly expanded to provide funds for green start-ups of medium-sized and small enterprises. According to a report released by the Presidential Committee on Green Growth (2009), the schemes for procuring funds at the growth step include, first and foremost, the construction of a mechanism to procure long-term funds from the capital market. If needed, incentives to reduce the investment risks should be prepared by means of investment from public financing enterprises, credit reinforcement, tax benefits, and others. The detailed schemes include (1) activating green funds — i.e., funds that are mainly invested in technologies and projects that receive green certification, or in bonds of enterprises identified as green businesses (the activation of green funds can be facilitated as follows: ① providing tax benefits to individual investors to expand the base of investment in public-offered funds; ② offering advantage points considering the investment results when “public aspects” are evaluated to assess the operation of pension fund assets for green-fund investment; ③ allowing private equity funds {PEF} to be directly invested in social infrastructure so that they may be directly invested in green infra projects6)); (2) encouraging banks and others to issue long-term deposits or bonds so that green industries may procure long-term investment
6) It may be necessary to limit the direct investment to within 50% of PEF properties. Finance Mechanisms to Catalyze the Development of Newly Growing Sectors 709 funds at a low interest rate, and so that the people may be enticed to participate in green finances; (3) activating green-facility project financing (PF); and (4) fluidizing green-business bonds and project-financing bonds. At the maturity step, the private sector needs to focus on voluntary green finance, and the government on the construction of infra, which is needed for the activation of green finance. First, infra should be constructed for the activation of private green-finance commodities. Second, the distribution of green insurance commodities should be expanded. Third, the finances for supporting the overseas advancement of green industries and the related projects should be expanded. Green-business export financing (project financing) has to be greatly expanded, and consideration should be given to expanding the limit of credit grants for the export of nuclear-power plants, which requires large-scale funds.
2. Policy Schemes and Tasks to Activate Finances
The first policy scheme for activating green finance is expanding the scope of commodities, consolidating tax benefits for them, and amplifying a systematic base for encouraging pension funds to invest in new growth engines. The tasks that need to be carried out to promote this include (1) expanding the scope of technologies and projectsthat are to receive green certification; (2) improving the criteria for green-certification examination; (3) increasing the tax benefits for green-finance commodities; (4) expanding what is to be invested with funds raised from green-finance commodities; and (5) inducing the 710 investment of pension funds in green finance. The second policy scheme is further activating the cultivation of green-finance manpower, and creating an environment in which they can accomplish their duties according to their convictions. The tasks that need to be carried out to promote this are (1) cultivating green-finance professional manpower; (2) expanding the scope of the utilization of an active administrative exemption system during auditing; and (3) concretizing the exemption provisions. The third policy scheme is consolidating various fund procurement commodities and recovery systems so as to activate green finances in the capital market. The tasks that need to be carried out to promote this are (1) inviting green industries to expand their issuance of P-CBO7); (2) enhancing the access of medium-sized and small enterprises to the capital market; (3) using market M&A, free board, and others to intensify a system for recovering the funds invested in steps before the listing on the stock market; and (4) providing support for the recovery of investment funds through the listing on the stock market, by utilizing an exception system for the listing on KOSDAQ in the green-industry field. The fourth policy scheme is expanding the demand for the evaluation of technologies, consolidating the foundation for the
7) CBO (collateralized bond obligations) refer to asset-backed securities (ABS), which are issued based on bonds as basic assets. A CBO issued based on existing bonds in circulation is a secondary CBO (circulation market CBO), and a CBO issued based on newly issued bonds is a primary CBO (issue market CBO). P- CBO was introduced to support the conversion issuance or new issuance of debentures of firms that cannot personally issue debentures in the bond market because their credit rating is low. Finance Mechanisms to Catalyze the Development of Newly Growing Sectors 711 activation of credit loans based on technology evaluation by offering technology evaluation funds, and helping advance technology evaluation techniques by developing new evaluation techniques to meet the tendencies of industrial fusion and the emergence of new green industries. The major tasks that need to be carried out to promote this are (1) amplifying the demand of financial institutions for technology evaluation through the preferential allotment of funds to loans with a technology evaluation certification statement; (2) providing technology evaluation funds to consolidate the incentives for enterprises to receive technology evaluation; and (3) improving technology evaluation techniques and technology-evaluation-related qualification systems to enhance the reliability of technology evaluation.
Chapter 4. Domestic and Foreign Cases and Systems for Supporting Finances of Overseas Resources Development
The first system for supporting overseas resources development finance is an oil development project fund loaning system. This is aimed at meeting energy crises by stably securing domestic and foreign oil and gas and other energies, and at helping firms secure the ability to stand on their own by strengthening their overseas resources development capacity and by enabling private entities to acquire technologies and to accumulate their experiences in foreign countries that are needed for overseas resources development projects. The second system is an overseas mineral resources development project fund loaning system. This system 712 is intended to loan out the support funds needed for constructing the foundation for a long-term and stable supply of the energies, industrial materials, and mineral resources for which South Korea depends much on other countries due to its poor domestic supply. The third is a resources development policy finance system being promoted by Export-Import Bank of Korea. Export- Import Bank of Korea supports all the aspects (e.g., expedition, development, and production) of the projects being executed by domestic enterprises that implement overseas resources development projects, foreign enterprises that invest in domestic firms, and foreign corporations in which domestic corporations have invested. The fourth is a financial support system being promoted by Korea Export Insurance Corporation. The insurance system related to overseas resources development, which is being promoted by Korea Export Insurance Corporation, is aimed at supporting the fund-raising needed for overseas resources development, and at making up for investment loss, with an objective offacilitating enterprises’ development of foreign resources. The fifth is a financial support system being promoted by Korea Finance Corporation. It supplied a USD 1 billion fund in 2011, considering the realities of domestic resources development finance, which lacks fund supply compared to fund demand, so as to share the financial risks. Conventional resources development finances like loans and guarantees are continually being promoted while such financial services as PF participation and investment in funds are being expanded to meet the needs of each financial demander. In the meantime, the overseas resources development fund is Finance Mechanisms to Catalyze the Development of Newly Growing Sectors 713 a type of indirect investments introduced in 2006 so as to no longer center on the government and public enterprises; but rather actively utilize the private floating funds, which are abundant in the market, for overseas resources development projects; and to accumulate investment experiences. Moreover, it consists of overseas resources development investment professional firms (PEFs) and overseas resources development investment firms (mutual funds). At present, the scale of the overseas resources development fund market remains small and amounts to only about 340 billion won. In addition, the scale8) of object assets or what is to be invested with resources9) is very much limited because the resources development fund lacks investment experiences, and the assets are limited to investments in raw-material-derived securities and other stock-type investments. In this situation, in 2010, two public-enterprise-invested funds were created because public enterprises specializing in resources development partially participated in the investment (Korea National Oil Corporation: 100 billion won; Korea Resources Corporation: 10 billion won). The two funds started making practical investments in the early part of 2011, and their investment resulted in total of USD 0.13 billion as of May 2011.10)
8) Most of them are small-scale investments amounting to less than 200 billion won, and it is difficult for them to participate in superior big deals. 9) Investment is mainly made in a limited number of minerals, like oil and gas fields, nonferrous metals, and coalmines, whose business profitability can be easily evaluated. 10) In February 2011, Global Dynasty Fund concluded a contract to invest US$30 million in two projects: East European oil and gas fields (US$10 million) and a Southeast Asian marine mining area (US$20 million). In April 2011, Troika Fund agreed to invest US$100 million in a U.S.-based oil- and gas-producing firm (Patara Company). 714
As for RBF (reserve-based finance), the reliability of technology evaluation plays an important role in successful loaning because RBF is based on underground natural resources, which are commodities that are mainly circulated in the markets of the U.S. and of the OECD countries. It is a kind of asset-based finance that provides development and operation funds after holding a mortgage on underground crude oil and gas. Also, it is a loan technique in which the possessed mining area or mining area outcome are sold out to repay a loan. The current value of a future cash flow is evaluated considering the identified deposits, anticipated oil prices, discount rate, project expenses, taxes, and others. The major characteristics of RBF are (1) “cash flow finance,” a structured finance technique with which the current value of the products from oil and gas fields are evaluated as a base for financing; (2) “revolving credit finance,” which makes loaning, repayment, and re-loaning possible within the scope of the loan limits; and (3) the fact that loaning can be made with favorable conditions due to the portfolio effects, with which the deposit risks are dispersed over the loaned assets because funds are procured based on a number of production assets, including development step assets. The business obstacles in relation to the introduction of RBF include (1) the time difference; (2) the fact that the loan amount is less than the money for purchasing the assets; (3) the expenses; (4) the introduction of international accounting criteria (IFRS); and (5) whether the city banks activate RBF or not. First, the “loan to be repaid when successful” is to be systematically complemented in such a way that the repayment from an already-invested-in project or the added values of a Finance Mechanisms to Catalyze the Development of Newly Growing Sectors 715 successful development project may be reinvested in an overseas resources development project, and that positive results may facilitate the progress of the same project. Second, schemes for amplifying resources development investment finances should be actively implemented. The government’s 4th Basic Plan to Develop Overseas Resources (2010~2019) needs to be executed without fail to activate resources development finance and to consolidate the support for taxation and financing. Third, the old financial-support system should be supplemented, and new finance commodities should be introduced. In other words, it is necessary to mitigate the finance and insurance conditions for the existing financial-support system, and to actively consider the introduction of a new method, like JOGMEC (Japan Oil, Gas, and Metals National Corp.), which provides support in the form of investment. Fourth, the interests of SI and FI should be coordinated, and the funds should be activated to induce investment from private funds. The positive aim of the establishment of the overseas resources development fund is to increase the autonomous development rate. To do this, consideration should be preferentially given to the views and positions of both the SI (strategic investor) and FI (fund investor), and to the investment environment of each. Fifth, financial-support schemes for resources play11) need to be adopted. In fact, there is no clear policy to provide funds to
11 ) Resources play is a resource development method with which to investigate and excavate underground resources whose source and reservoir are formed on the same bedrock or stratum. 716 resources play, which has been actively traded of late. At this juncture, reasonable and effective criteria and guidelines need to be prepared so that funds can be smoothly procured in accordance with the characteristics of resources play assets. Sixth, resources-development-related service industries should be nurtured to activate financial support. Resources development service industries should go forward in the direction of overcoming the present situation, in which the self-reliance of technologies is delayed and domestic information is drained out, after examining all the aspects related to the development of resources, like the relay of overseas resources assets, the evaluation of business profitability, and advice on contracts. Seventh, it is necessary to coordinate the interests of overseas resources development businesses, the financial circles, and the government. Demanders require mortgage requirements to be alleviated on policy financing, while suppliers ask for a supplementary mechanism because the investment period is longer than the risk of failure and other risks are high. The government should set up win-win strategies that are consistent with the government policies, after considering the positions of the demanders and suppliers. Eighth, the strengths of an overseas resources development project are that it is a national agenda that the government has a strong will to support with policies, and that it has a short history but has grown so much that it is catching the attention of private investment. Its weaknesses are that it started later and thus lacks relevant experiences, that it has a poor professional manpower pool, and that its resource development technology service sector Finance Mechanisms to Catalyze the Development of Newly Growing Sectors 717 is mostly dependent on foreign countries. Its threatening factors are that BRIC, including China, have increased their consumption of resources and have made efforts to secure resources, and that the whole world has been fiercely competing of late to secure resources. Japan is actively investing in the development of overseas resources and energies to break through a rise in the value of its currency (yen). Its opportunity factors include the facts that the South Korean government is actively supporting an overseas resources development project and has set up and implemented a basic plan so that South Korea’s gain more autonomy in development. Due to the global economic crisis, advanced countries, when developing their resources, are faced with difficulties to procure internal funds, and to find business partners.
Chapter 5. Domestic and Overseas Cases of Large- Scale Project Finance and Suggestions
1. Policy Schemes and Tasks for Finance Activation12)
First, systematically evaluating commercial, irresistible-force, and political risks and securing a system of managing such risks
12 ) Part of the policy schemes or tasks that need to be carried out in this field was already reflected in “Preparing Schemes for Improving the Conditions to Procure Finances for the Expansion of Orders for Overseas Projects”, an agenda item taken up in the Conference of Overseas Economic Ministers on August 9, 2011, released by Export-Import Bank, which participated in the preparation of this report. 718 ensure that strategic decisions are made on projects, and that the management effectiveness is raised, contributing to the successfulness of projects and the maximization of the profits of the project executioners. Second, it is necessary to activate mergers or strategic coalitions with enterprises in other countries, share risks with credit institutions (ECA) in other countries, and procure finance in cooperation with them. It is also necessary to promote strategic coalitions or mergers to diversify the financial sources and to expand cooperative financing with such overseas export credit institutions (ECA) or private financial institutions that have good financial conditions and abundant experiences, so as to share with them the financial risks and financial support. There is a need to establish MOUs or agreements with export credit institutions in advanced countries, like JBIC (Japan), Hermes (Germany), SACE (Italy), and ECGD (UK), to expand cooperative financing with such overseas export credit institutions. Moreover, efforts must be made to jointly provide support to South Korean entities, along with Islam development banks or Middle East financial institutions, to help them advance into the Middle East considering the peculiarities of the region. Third, the policy tasks to consolidate the functions and capacities of export credit institutions are as follows. There is an increasing need for the expansion of capital to improve the conditions for export credit institutions to procure foreign currencies. When an increasing number of orders is received for large-scale projects, it is highly probable that overseas loans will reach their limits, and it is necessary to prepare countermeasures Finance Mechanisms to Catalyze the Development of Newly Growing Sectors 719 against the emergencies that may take place during the project period, such as a financial crisis. Moreover, consideration may be given to government support, including the strategic utilization of foreign currencies possessed by the government, to supply fluidity and to enhance the competitiveness in interest rates. A system also needs to be established for Export-Import Bank, Korea Export Insurance Corporation, Korea Finance Corporation, and Korea Development Bank to share the role of supporting enterprises. In addition, it is necessary to abolish or alleviate the credit limit imposed on an enterprise or corporation by export credit institutions. If emergencies occur, it is also necessary to set up schemes of procuring foreign currencies at a low interest rate, or to give the same consideration when the management of public enterprises is evaluated. Fourth, the capacities of commercial financial institutions should be consolidated. To identify foreign-currency procurement sources, the foreign-currency reserves should be strategically utilized over a short span of time while overseas networks should be amplified to expand the base for inducing foreign-currency deposits over a moderate or long span of time. There is a need to alleviate the burden of large-scale, long-term loans by ensuring that commercial banks can recover their loans when a certain initial period of time has passed, and consideration must be given to schemes that ensure that commercial financial institutions will secure stable profits, that public financial institutions are relieved of the burden of their direct loan, and that when commercial banks procure funds at a variable rate and the profits are paid at a fixed rate, public financial institutions will convert the profits into 720 variable rate profits. On the other hand, to strengthen the overseas project support capacity, the ties with domestic and foreign export credit institutions should be strengthened, and an exclusive organization should be established to consolidate their business capacities. The ties with domestic and foreign export credit institutions, international organizations, and international commercial financial institutions should be intensified to expand the opportunities for participating in cooperative financing, and trainees should be dispatched overseas to acquire relevant know-how. Fifth, the burden of procuring raw materials and the exchange risks should be mitigated. Financial services should be provided in such a way as to alleviate the risks in export finances not only for nuclear-power stations and plants but also for the exchange rate for the purchase of raw materials for product manufacturing. It is also necessary to consider hedge commodities so as to make preparations for medium-sized and small enterprises, which are weak and can cope with neither the rising prices of raw materials nor the changes in the exchange rate. Lastly, professional manpower should be cultivated. Manpower exchange should be conducted with financial policy institutions, commercial banks, overseas project promotion businesses, and others so as to share experiences with them in overseas projects. On the other hand, it is urgent for export support institutions to dispatch their manpower to Islamic financial-professional-cultivation institutions in South Korea and other countries, and/or to their branches to nurture Islamic financial professionals. There is also a need to construct a manpower cultivation roadmap for nurturing risk management professionals while inviting experts from abroad.
