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
Business & Investment Opportunities
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