Korea s Industries in the World Market (Shares and Ranking)

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4 The Industrial Leader from an Unknown LDC in the 1960s Many think that HCI policies in the 70s established the basis of current Manufacturing-strong economy and HCI industries. Korea s Industries in the World Market (Shares and Ranking) Shipbuilding 21.8%(2) 26.2%(2) 39.1%(1) 38.0%(1) 32.9%(2) 32.9%(2) Automobile 2.7%(10) 5.0%(5) 5.3%(5) 5.5%(5) 7.7%(5) 8.7%(5) Machinery 0.9%(18) 1.6%(14) 1.9%(11) 2.5%(10) 3.0%(9) 3.4%(8) Steel 3.0%(7) 4.9%(6) 5.1%(6) 4.3%(5) 4.2%(6) 4.6%(6) Petrochemical 1.8%(14) 5.0%(5) 5.2%(4) 4.9%(5) 5.5%(5) 5.2%(5) Textile 6.6%(3) 5.6%(3) 5.0%(4) 2.7%(6) 2.1%(8) 2.0%(8) Semiconductor 3.1%(3) 10.4%(3) 7.4%(3) 10.5%(3) 14.1%(3) 14.6%(3) DRAM 38(1) 44.7(1) 59(1) 65.6(1) Mobile Phone 1.0%(-) 5.0%(4) 19.4%(3) 29.9%(2) 29.6%(1) DTV 15.8%(2) 20.1%(2) 36.0%(1) 42.7%(1) Display 38.0%(1) 40.7%(1) 45.6%(1) 49.1%(1) 3

5 Pursuing Industrial Policies for Enhancing Competitiveness Change in Ways from Industry Targeting to Market mechanism and Innovation according to the level of economic and market development. Most strategies under title of Developing, Structural Reform and Enhancing Competitiveness are related with diversification to some degree. Special Attention on HCI policies in the 1970s But all the policies before and after this period have been interacted. Still Seeking Knowledge economy, Green economy, Creative economy now Regulatory Reform pursued since the financial crisis in

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7 1. Background and Objectives Escaping from Poverty to Higher Income Korea, the least developing country, was so poor that in the spring people barely got food for a living-so called spring poverty. To cope with poverty, industrialization was needed. Ex-President Park implemented 5-year economic development plans with can-do spirit Export promotion became the first priority in economic policy with various measures to achieve this end. Sold every thing that Korea could produce or gain for earning foreign exchange Switched from import substitution due to difficulties of obtaining fund for machinery and equipment

8 2.1. Major Policies Export promotion policies Favorable toward exporting firms in tax, tariffs and import controls The state-controlled banks provided financial support for exporters at preferential rates. The government set export targets each year, which influenced firm behavior. Successful exporters received awards from the president. Monthly Meeting for Export Promotion - Presided by the president - Related ministers and business leaders participated. - Checked monthly exports and solved problems brought up within a limited time by the order of the president - 7 -

9 3. The Change of Export Structure Dramatic Change of Export Structure From a traditional agriculture-based economy to a manufacturing-led economy Agricultural products Fishery products Mining products Manufacturing products Source: Song, B. (2009) Total From 1961 to 1973, Korea's exports boosted its share of world exports from zero to about 0.5%. Exports increased from 0.2 billion dollars in 1965 to 0.8 in 1970 and 17.5 billion dollars in 1980: 34.7% annual growth rate between 1965 and The growth of trade fuelled output growth at an average annual rate of 9%

10 4. Implications Building Numerical Targets The government set export targets each year, which influenced firm behavior. In establishing 5-year plans, social consensus built by participation of not only government official but also private sectors Detailed action plans Can-do-sprit and Virtuous Cycle Completion of Targets Gaining confidence Higher Targets: can-do sprit with patriotism - 9 -

11 첫째수준 둘째수준 셋째수준 Source : O Won-chol, The Korea Story, p. 70.

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13 1. Background and Objectives Political Reason Korea needed basic defense industries such as machinery to avoid absolute dependency on US in front of rising conflict with North Korea. Economic Reason Needed to reduce high dependency of intermediate goods, especially import from Japan Increase in exports brought about more imports, which led to problem of structural trade deficit Importance of Sequencing in the Process of Industrialization Labor-intensive industries started to demand materials produced by heavy and chemical industries. Apparel and textile for petrochemicals, electronic appliances for steel and nonferrous metals, and all light industries for industrial machinery etc

14 2.1. Selective Interventions Favoring HCI Government policy targeted heavy and chemical industries (HCI): iron and steel, metal product, machinery, electronics, ship-building, and chemicals. Special laws to promote the targeted industries provided them with extensive benefits. The key element of the program was to provide credit to the favored industries. In addition, targeted industries were granted preferential tax treatment, through investment tax credits and accelerated depreciation. State-owned enterprises were also established in steel and petrochemicals. Micro-Targeting in the early stage Company Targeting where an industry did not exist

15 Mobilization of Investment Funds Policy loans and the government s role for investments Credit allocation by the government through the banking system was the most powerful means of supporting selected industries. Banks, practically owned by the government, were directed to allocate loans to targeted industries on a preferential basis. During the latter half of the 1970s, the share of policy loans in domestic credit rose steadily from 40 percent to over 50 percent. Regulated and Market Interest Rates(%) Year Rates General bank loan rate Curb rate Average borrowing cost(manufacturing) Consumer price inflation (source: Bank of Korea)

16 2.2. Establishment of Industrial Complexes Industrial complexes were established to locate targeted industries. The first industrial complex was established in Ulsan city in 1962, famous for a HCI complex. There were 941 industrial complexes established in 2010 as Korean industrial clusters. What has been provided in industrial complexes? Land provided by the Ministry of Construction and Transportation(MOCT) or local government. Access roads, industrial water supply, electricity, communication system, pollution control, land scraping and other facilities(e.g. schools, housing, recreation, medical centers) provided by MOCT and/or public utility corporations such as Korea Land Development Corporation, Water Resource Development Corporation, and Agriculture Promotion Corporation Financial support by central or local governments

17 2.3 Policies for SMEs The government established an SME Department inside the Ministry of Commerce in 1968 to go ahead with SME policies more efficiently. The Industrial Bank of Korea (IB) established in 1961 as a bank for SMEs. The Korea Trade Investment Promotion Agency (KOTRA) in 1962, which dedicated to exploring overseas markets SME Technology Instructing Center in 1967 for training engineers and overall guidelines to upgrade the technology used by SMEs Designation of Business proper for SME(1979-) As the HC industries have developed since the mid-1970s, the subcontract relationships between large companies and SMEs were established. The large firms assembled and produced finished products, SMEs produced parts and materials. The Bank of Korea raised the mandatory ratio of loans extended to SMEs in 1980: for commercial banks from 30% to 35%, for regional banks from 40% to 55%

18 2.4. Some Institutions General Trading Companies contributed to export promotion of HCI Played a leading role in exports and especially contributed to the exports of plants and heavy chemicals. Developed new markets through completing requirements in the number of overseas branches and target countries for exports. Contributed in improving the information and technologies of domestic companies and training professional manpower. Strategies for technology development related to industrial development In 1960s, industrial bases for absorbing imported technologies In 1970s, strategies for developing heavy & chemical industries demanded new technologies Many public research centers such as KIST established for developing newly demanded industrial technologies

19 3. Change in Structure A New Jump in Export Structure Fast growth in heavy and chemical products Primary products Light Industries Heavy & Chemicals Total Negative effects HCI drive Seen as a Policy Failure Structural imbalances, such as excess capacity and low profitability in targeted sectors, became apparent. The extension of credit to strategic industries led to an acceleration of inflation. The political uncertainty following the death of Ex-president Park in 1979 and the second oil shock contributed to amplify the negative effects.

20 4. Implications Restructuring due to negative effects of HCI drive: Facing high inflation, excess capacity, and low profitability in some targeted heavy-chemical industries, the new government in 1980 undertook massive industrial restructuring. Switch policy direction to Stabilization from Growth Almost Failure of HCI drive with overcapacity and inefficiency turned out to be the basis of Korean success story with continuous corrections. No Failure, but Trials(Difficulties): The title of Juyung Chung s Autobiography Korea took advantage of the boom(so-called 3 lows, in currency, oil &interest rate) in manufactured exports and showed trade surpluses in the mid-1980s ( turn-around from deficit trend )

21 4. Implications Negative Effects inevitable from Excessive Government Interventions Negative effects, in particular in Financial sectors Policies and negative effects inevitable?: Depend heavily upon what you wanted Results of Long-term and overall policies(dynamic and intergovernment Policies) Industrial policies hade been the core of government policies, but policies of other areas also important: Building infrastructure, New village Movement and so on Technology and Humane Resource development, long-term objectives, indirectly, contributes to the performances of industrial policies by improving economic fundamentals

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23 1. Background and Objective Parts and Materials are core of National Competitiveness Industries in Parts and Materials have big upward and downward effects, thereby contributing to knowledge intensification and value added Parts and Materials have been a weakness in Korean economy Future Depends on Materials and Components(Parts) Introducing the summary of MCT-2010 MCT-2020, new version of the plan, has started

24 st Vision for Material and Component Industry(MCT 2010) Global Supply Base by Trade Surplus 50 billion dollars in Promoting specialized companies World-class companies in 2010 Establishing own technology base of next-generation core component-material - Developing more than 50 technologies of next-generation core component-material every year Joining Global Supply Network - Increasing export share from 43%(2000) to 50% (2010)

25 2.2. Core Tasks and Implementing System Three Stages of Development Establishing Development Base( ), Joining Global Supply( ), Establishing Global Supply Base( ) 5 Core Tasks Specialization and Enlargement of Companies, Enhancing Technology Capacity of Companies, Enhancing Confidence of Developed Component and Material, Promoting Export and FDI, Supporting Systematic Informatization Each tasks and related industries have action plans Implementing System Operating Integrated Research Group, investment association and Development Committee and so on Evaluating implementation and performance every year

26 3.1. Evaluation - Competitiveness 25

27 3.2. Evaluation - Technology 26

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29 1. Try Do not afraid of Failure. Good Performance is a series of Failures. 2. Mind of People: Necessity, Patriotism, Pride Confidence Embracing Change of Mentality is very important to building Virtuous Cycle. 3. Benchmarking(Imitation) Policies and Technologies 4. Clear Directions and Sharing Vision Focus on Supplementing weakness and Utilizing Strong Points Share Vision and Objective with Privates

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