Nov 20, 2012

South Korea – A Battle for the ‘Seoul’ of South Korea’s Economy

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S. Korea's transformation into a service and information-driven economy will require change - away from copying towards innovation.

The bruising Apple-Samsung fight raises major intellectual property rights (IPR) issues that South Korea and Asian economies generally are ill-prepared for. Unless the concerns raised by the Samsung-Apple dispute are resolved, Korea should expect regular trade friction with major partners and frequent accusations of copying and cheating. As wealthy countries like Korea move away from manufacturing and further into services and information, the need for innovative Korean firms will only grow. Neither Korea’s corporate structure –  dominated by mega-oligopolies with strong disincentives to innovate –  nor education system – overwhelmed by rote learning and plagiarism – position Korea well for the future.

Korea’s traditional export strengths are in manufacturing – cars, ships, electronics, and heavy industries. These generate about 40% of GDP and much of Korea’s foreign exchange. However, unless Korea strengthens its service economy, it will increasingly compete ‘backward’ against the BRICS (Brazil, Russia, China, India, South Africa) over manufacturing, rather than ‘forward’ against the US, EU, and Japan over innovative services. The Korean business media generally ignore this to focus on chaebol—Korea’s large, international often family owned business conglomerates– but the costs of doing so are already apparent: Korea’s late arrival to smart phones (some five years after the U.S.) led directly to Samsung’s desperation and Apple’s retaliation in the courts.

Industrial skills diffuse easily. Just as Korean companies were able to attract American manufacturing jobs in the 1980s and 1990s, the BRICS and Southeast Asia now draw manufacturing jobs away from Korea. As South Korea grows richer, fewer Koreans are willing to work in a factory. Of the hundreds of Korean undergraduates I have taught, less than 5% tell me they expect to work in manufacturing. And Korea’s chaebol have scarcely invested locally in the last two decades; new capacity is built either closer to markets to prevent local protectionist backlashes (as in the U.S.), or elsewhere in Asia where labor costs are lower.

These trends are not uncommon. As globalization spreads, more and more people enter the global labor force, pushing down wages. Given that service jobs usually require more education than manufacturing ones, the latter more easily cede ground to foreign competition. The U.S. too had to shift, painfully, from an industrial economy manufacturing “stuff,” to a service economy producing useful information. Manufacturing now accounts for about 15% of the U.S. labor force. But American services – including education, research, film, music, video games, health care, banking, and software design – have become global leaders and, crucially, sit atop the value chain generating massive revenue through innovative “first movement” into new areas (tech giants like Google or Apple being obvious examples). By contrast, Korea’s biggest companies face competition from dozens of other firms (whether old rivals like Sony, or new ones from China) in well-established areas. These firms are successful, of course, but will not lead the future nor generate the long-term innovation Korea needs to fend off rising BRICS competition.

Moving Korea toward more innovative production will require two major changes, perhaps so enormous they should be called cultural. First, Korean education needs to emphasize creativity and free-thinking more. Far too much pre-college training focuses on the rote recitation of answers with little underlying comprehension. Math and science may be conducive to this kind of learning, but it is disastrous when applied to the humanities and social sciences. It encourages an intense “copying culture” in which the instructor’s thoughts are treated like ideal answers to open-ended questions and parroted back. This is the single most challenging part of my job as a professor in South Korea.  Ask any foreigner instructor in Asia what her biggest challenge is, and she is likely to say plagiarism. Plagiarism extends to the highest levels of Korean academia and is the biggest reason why Korea still lacks a globally ranked university. Its therefore hardly surprising that Apple accused Samsung of plagiarism.

More generally, Korea needs to develop much greater respect for IPR. Mimicry may be the highest form of flattery, but in post-industrial economies, it is also increasingly a crime. Because industrial production is moving to BRIC-like countries, companies in wealthy states increasingly generate their revenue from innovative services and useful information. Because Korea has not yet fully moved into the information economy, the costs of e-piracy feel invisible. But there already has been one major casualty: gaming-obsessed Korea lacks a video game industry. What should be a vibrant, creative, and high-profit industry was stopped dead in its tracks because domestic downloading pirated profits away. The Korean penchant to download almost everything will generate increasing trade friction, particularly under new free trade agreements (FTAs) with the U.S. and EU. And Asian firms that engage in egregious copyright infringement will increasingly become litigation targets, just as Napster was eventually shut down for copyright infringement.

The second big shift Korea needs to avoid more IPR litigation is greater decentralization of its economy. The extreme oligopolization of Korea’s economy by chaebol is destructive in many ways – it encourages rent-seeking, facilitates political corruption, generates a too-big-to-fail mentality, and inhibits a proper currency float. It also discourages innovation. Large firms that permanently and effortlessly dominate their markets become complacent, bloated winners with obvious incentives to keep competitors out and prevent changes that might damage secure revenue streams. A very obvious example is Microsoft, whose operating software monopoly led to the complacency that generated the awful Vista. Microsoft attempted to keep out competitors with gimmicks like purposefully making Windows difficult to use with non-Microsoft software.

Korea’s biggest companies are in a similar position, which is why innovation, even in Korea’s strongest sectors, rarely comes from Korean firms. Chaebol may perfect extant technologies, but they lag at pioneering innovations, largely because disruption does not benefit these gigantic established winners. Rising challengers shake-up markets with clever innovations, but the extreme concentration of Korea’s economy almost deliberately quashes local “animal spirits.” The cell phone industry is an excellent example. Dominated for years by KT and SK, the market was stagnant, with dull flip-phones whose primary innovations were gimmicky colors and lights, while the U.S. phone industry had already entered the smartphone era with products like Blackberry. When the iPhone hit and Koreans learned of it, Korea’s telecom oligopolists panicked. They pressed the Korean government to maintain a protectionist security standard to prevent the iPhone’s arrival for two years, while Samsung effectively reverse-engineered the iPhone to create a competitor. In the end Samsung’s reputation was tarnished and Korea’s consumers spent almost five years without smart phones that Westerners had long taken for granted.

Samsung-Apple is just the beginning of Korea’s troubles as it enters into the mature world of OECD competition, where information is frequently a copyrighted product. The media’s nationalist response that the lawsuits are anti-Korean protectionism ignores both the long history of Korean mercantilism and the importance of patent protection in modern economies. Korea’s non-existence video game industry is a case in point. Koreans are no less creative than anyone else, but their education system and economic structure strongly encourage copying over innovation. If this does not change, expect more lawsuits.

Robert E. Kelly

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