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Korea in Global Value Chains: Pathways for Industrial Transformation

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Joint Project between GVCC and KIET Korea in Global Value Chains: Pathways for Industrial Transformation September 2017 Stacey Frederick, Penny Bamber, Lukas Brun, Jaehan Cho, Gary Gereffi, and Joonkoo Lee © Duke GVC Center, September 2017 Table of Contents Introduction………………………………………………………………………………………... i Chapter 1. Global Value Chains and Economic Development………………………………….1-1 Chapter 2. An Introduction to Korea’s Economy………………………………………………. 2-1 Chapter 3. Korea and the Electronics Global Value Chain…………..………………………… 3-1 Chapter 4. Korea and the Shipbuilding Global Value Chain……………………………………4-1 Chapter 5. GVCs, Industrial Transformation and Opportunities for Korea……………………. 5-1 Introduction The economic policies carried out by Korea over the past half century have transformed the country from a rural economy into an industrialized one. Gross Domestic Product (GDP) has quadrupled since the late 1990s alone, to US$1.4 trillion in 2016, making it the 11th largest economy in the world (WDI, 2017).1 In the process, Korea has become one of the world’s most important manufacturing hubs. Several of the country’s firms have risen to prominence in key global sectors including automotive, electronics and shipbuilding; today, Samsung, LG, and Hyundai are household names around the globe. This success has been built through rapid government-led industrialization and its support for a small number of large, globally competitive firms. Korea’s rise as an industrial power has occurred during a period of major reorganization of global trade and industry around global value chains (GVC). Since the mid-1960s, global firms have been slicing up their supply chains in search of low-cost and capable suppliers offshore. This process of global outsourcing and offshoring initially focused on the simple assembly of parts supplied by US manufacturers, typified by the US production-sharing with Mexico, but the pace of offshore production soon accelerated dramatically (Dicken, 2011).2 In the 1970s and 1980s, retailers and brand-name companies joined manufacturers in the search for offshore suppliers of most categories of consumer goods. The geography of these chains expanded from regional production-sharing arrangements to full-fledged global supply chains, with a growing emphasis on East Asia (Gereffi, 1996).3 In the 1990s and 2000s, the industries and activities encompassed by global supply chains grew exponentially, covering not only finished goods but also components and subassemblies, and affecting a wide range of sectors, from automotive to electronics and household appliances to infrastructure and shipbuilding. A central element of these changes has been the relocation of manufacturing sectors to a host of emerging countries, including China, Mexico and Vietnam. While this began with light manufacturing, it increasingly covers more high-tech sectors. This relocation continues to gather momentum with more and more developing economies entering GVCs. More recently, however, new disruptive technologies, such as automation, have emerged that could facilitate the return of many value chain activities to traditional centres in North America and Europe (Butollo, 2017).4 Thus, having built its economy on a strong manufacturing base, Korea must now redefine its growth drivers for the future. Its strong commitment to process and product improvement have seen steady gains in productivity and output in the past. However, as the country looks to its future, this may not be sufficient to maintain its competitiveness versus both the lower cost locations which are steadily upgrading, and those advanced industrialized countries which are rapidly innovating, defining brand-new industries, and ramping up new production technologies. While leading manufacturing bases in the US, Europe and Japan are likewise grappling with how to best confront the changing global stage, Korea’s unique past development trajectory which shaped the way it engaged with GVCs now means it must chart a distinct course forward. Where 1 World Development Indicators Database. Washington, D.C.: World Bank. 2 Global Shift: Mapping the Changing Contours of the World Economy (6th ed.). New York: Guildford. 3 Commodity Chains and Regional Divisions of Labor in East Asia. Journal of Asian Business, 12(1), 75-112. 4 Digitalization and the Future of Globalized Production: Exploring the Issues. Paper presented at the What's Next? Disruptive/Collaborative Economy or Business as Usual?, Lyon, France. i leading firms from the US, Europe and Japan used their knowledge and coordination leadership to leverage the capabilities of strong international networks to become global players, successful firms from Korea have followed a somewhat different path. Well-known global giants, such as Samsung and Hyundai, supported by the national government, have rather relied on high degrees of vertical integration and networks of smaller, local suppliers to be competitive. In doing so, these strong lead firms have maintained control over their manufacturing capabilities and driven their competitiveness through in-house productivity, product and technology improvements. This has been facilitated by investment in research and development (R&D) that outranks the rest of the world. However, in doing so, the country has focused its innovative energies on just a small set of industries. Policymakers now face the question of how to orient these tremendous resources to competitively position Korea as a global economic leader of tomorrow. As part of efforts to identify the best course forward, the Korea Institute for Industrial Economics & Trade (KIET), commissioned a global value chain study to Duke University Global Value Chains Center (Duke GVCC). The goal of this study is to analyze the country’s participation in specific global industries to identify broader lessons for Korea’s future ambitions for industrial transformation. To do so, we examine Korea’s participation in two major industrial sectors: electronics and shipbuilding. Together, these two industries comprise 30% of exports, account for over half a million semi- and skilled jobs and a substantial share of the country’s R&D spending. They provide two distinct perspectives for Korea’s participation in GVCs. On one hand, electronics products are targeted to the consumer market, technologies are rapidly changing and profits are derived from bulk production for mass consumer markets, and control over marketing and branding. Shipbuilding, on the other hand, is very capital-intensive, ships have long life cycles, and production is highly concentrated in three countries. In both industries Korea has established a global leadership position in a select number of final product categories and key component products by continually investing in process and product upgrading coupled with strong R&D investments. Report Methodology and Organization The current research project was undertaken between September 2016 and August 2017. It draws on multiple sources of information: an extensive review of the academic and business literature available for the two global value chains; in-country interviews with 17 representatives from the private sector firms, industry associations, research institutions, and regulatory bodies; national economic growth plans; aggregated international and national trade data available from United Nations Statistics Division database (UNComtrade). This report is structured as follows: The first chapter introduces the concepts of global value chains, recent trends, and industrial restructuring, and implications for future development. The second chapter introduces the policy environment and industrial structure in Korea to provide an understanding of how economic policy has been carried out in the country until now. This chapter includes an overview of key institutional stakeholders, the role of large conglomerates (chaebol), the policy environment related to industrial development, R&D, trade and investment, and human capital, and lastly a comparison of Korea’s economic plans in comparison to China. ii The third and fourth chapters use the Duke GVC framework to provide a structural and theoretical lens for understanding the global dynamics in the electronics and shipbuilding sectors, how this impacts the actors in the chain, and what a country’s status and prospects are in these industries. The fifth and final chapter provides crosscutting observations and potential future directions for Korea’s industrial transformation. iii Chapter 1. Global Value Chains and Economic Development1 Table of Contents 1. Global Value Chains and Economic Development .............................................................. 1-1 1.1. Introduction ................................................................................................................... 1-1 1.2. The Development Implications of Global Value Chains .............................................. 1-3 1.3. Current Trends in Global Value Chains ........................................................................ 1-5 1.4. Potential Impacts of Changes on GVC Participation .................................................... 1-8 References .............................................................................................................................. 1-11 Appendix ................................................................................................................................ 1-15 List of Tables Table 1-1. Upgrading Trajectories ..............................................................................................
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