Jump to content
House Price Crash Forum

A Battle For The ‘Seoul’ Of South Korea’S Economy


Recommended Posts

I saw this, thought it was interesting

http://thediplomat.com/2012/11/16/apple-samsung-and-s-koreas-growing-pains/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+the-diplomat+%28The+Diplomat+RSS%29&utm_content=Google+Reader

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 with the ‘backward’ BRICS (Brazil, Russia, China, India, South Africa) over manufacturing revenue, rather than against ‘forward’ nations like the U.S., 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.

Thoughts?

Link to comment
Share on other sites

The concept of Chaebols in Korea is similar, from a policy perspective, to the Japanese allowance of MITI dominated industrial policy, the German tolerance for regionally based cross holdings amongst banks and large corporations and China's state sponsored capitalism within a one party state.

Whilst the idea of state influenced capitalism is positive for an economy during its formative stages, a point is reached where an economy matures and it becomes detrimental.

Japan missed the crossover point in the early 1990s and is now paying the price.

Germany recognised the crossover point in the late 1990s and went from a highly centrally managed economy to a less centrally managed economy with increased free market provisions with basic worker protection and is now thriving.

Korea has a very difficult question to address and I am not sure about the way that they will answer it. They have the potential to become either Japan or Germany.

Tangentially, I think that the US has pretty much rejected the German model in the last decade and have chosen the Japanese model which will cost them dearly over the next 1 to 3 decades.

China is probably even more interesting as they are probably the most successful example of state directed capitalism ever and will probably fail even more miserably than Japan did if they miss the crossover point where the state has to withdraw and the private economy has to take over. The crossover point is about now and it doesn't look as if the next People's Congress will be in favour of more economic freedom than has existed since at least 1947.

Finally, I think that Britain and France's "peak" moment was reached when the Concorde prototype flew at Mach 2.34 (or something like that) at about 68,000 ft in the latter part of the 1960s and the CAA (at the time) and their French equivalent chose to certify the plance for Mach 2 and 60,000 ft because they couldn't quite believe the excellence that was created and "Health and Safety" overwhelmed reality for the first of many more times to come.

Edit : A Concorde rant and a few timelines were added

Edited by LuckyOne
Link to comment
Share on other sites

Thanks for that. What I am curious about are the lines between Korea and Japan. I always saw their development models as somewhat akin (albeit with Korea playing catch up) but the article seems to say that Korea is too dependent on manufacturing and their service industry is not as developed as Japan. Whilst I am willing to believe that, I am wondering how Japan has altered over the last 20 years and where Korea stands in relation to that. I have only been to Korea once briefly - I was expecting it to be like Japan but with hangul but was somewhat surprised to discover it was more like Taiwan but with hangul.

Link to comment
Share on other sites

Whilst the idea of state influenced capitalism is positive for an economy during its formative stages, a point is reached where an economy matures and it becomes detrimental.

USSR too had a brilliant start and industrialised successfully. The problem of centrally plan economy is that it is only good while it is simple enough for the bureaucrat to comprehend. Once it moved beyond that point, it would be a disaster - as you correctly described.

The best of Asian education system creates good workers (manual and professional), but are not there to create leaders and innovator. I think Asian tiger countries realise that this is the case and changes had started around year 2000. But unfortunately, this will take 20 years or so for the new generation to get through the work force.

On the other hand, the Western education system is good at creating a few leaders and geniuses while a good portion of the high school graduates have insufficient numeracy and literacy skills.

Both systems need to meet in the middle.

Link to comment
Share on other sites

The concept of Chaebols in Korea is similar, from a policy perspective, to the Japanese allowance of MITI dominated industrial policy, the German tolerance for regionally based cross holdings amongst banks and large corporations and China's state sponsored capitalism within a one party state.

Whilst the idea of state influenced capitalism is positive for an economy during its formative stages, a point is reached where an economy matures and it becomes detrimental.

Japan missed the crossover point in the early 1990s and is now paying the price.

Germany recognised the crossover point in the late 1990s and went from a highly centrally managed economy to a less centrally managed economy with increased free market provisions with basic worker protection and is now thriving.

Korea has a very difficult question to address and I am not sure about the way that they will answer it. They have the potential to become either Japan or Germany.

Tangentially, I think that the US has pretty much rejected the German model in the last decade and have chosen the Japanese model which will cost them dearly over the next 1 to 3 decades.

China is probably even more interesting as they are probably the most successful example of state directed capitalism ever and will probably fail even more miserably than Japan did if they miss the crossover point where the state has to withdraw and the private economy has to take over. The crossover point is about now and it doesn't look as if the next People's Congress will be in favour of more economic freedom than has existed since at least 1947.

Finally, I think that Britain and France's "peak" moment was reached when the Concorde prototype flew at Mach 2.34 (or something like that) at about 68,000 ft in the latter part of the 1960s and the CAA (at the time) and their French equivalent chose to certify the plance for Mach 2 and 60,000 ft because they couldn't quite believe the excellence that was created and "Health and Safety" overwhelmed reality for the first of many more times to come.

Edit : A Concorde rant and a few timelines were added

Really interesting post,and quite an eye opener.Where do you see India going forward?.I was heavily invested in South Korea but have moved last year to very heavy India.

I havent the brain power to look into all the variables but i based it on forward demographics and the chance they would industrialise fast AND built a strong consumer economy.

Link to comment
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
 Share

  • Recently Browsing   0 members

    • No registered users viewing this page.




×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.