Technology and Korea’s Business Systems in Action(Revised 1999 -forthcoming in Continuity and Change in Asia’s Business

Systems)

Linsu Kim, Korea University D. Eleanor Westney, MIT Sloan School of Management

1. Introduction

2. Conceptual Frameworks of Technology and Business Systems:International market/technology environmentNational technology systemBusiness systemFirm-level organization and management

3. Technology and Business System in Action in the Electronics IndustryThe BeginningsTelevisionsThe role of the governmentColor televisionsMicrowave ovensSemiconductorsTFT-LCD DevelopmentMedison Company: A rapidly growing high-technology firm

4. The Asian Crisis and Korea’s Business System in TransitionThe role of the governmentThe restructuring of the financial sectorThe reorientation and restructuring of technology infrastructureThe restructuring of chaebolSMEs in transitionForeign Alliances on rise

5. Conclusion

1. INTRODUCTION:

From an economic point of view, South Korea provides one of the most dramatic cases of

growth in the post-World War II era. As late as 1961, South Korea’s per capita GNP was lower

than that of the Sudan and less than one-third that of Mexico. By 1995, South Korea (hereafter

referred to simply as Korea) had a GNP that exceeded $10,000 per capita, placing it eleventh in

the world in terms of total GNP and seventh in terms of manufacturing value added. The Asian

crisis had hit Korea in November 1997, but it bounced back in one year, expecting to grow at

about 7% in 1999. Korea accomplished this feat without significant natural resources (such as

Mexico’s oil or Singapore’s deep-water port) and with a legacy of exploitative colonization and a

devastating war.

The magnitude of Korea’s achievement can be understood even more clearly from two

other indicators. The first is the number of Korean firms to rank among the world’s largest

companies. In 1995, Korea had twelve firms in the Fortune Global 500, tying it with Italy for 7th

place among the 24 countries represented. The only other non-Triad countries to have more than

one company on the list were Brazil with four and China with two. Even after the Asian crisis,

nine Korean firms remained in the Fortune Global 500 in 1999 (Fortune, 1999). The second

indicator on which Korea stands out among the non-Triad countries is R&D spending: Korea is

the only non-OECD country to exceed 2% of its GNP in spending on research and development.

These three patterns – Korea’s economic growth, the scale and scope of its leading firms,

and its aggressive investment in technology -- are inextricably linked. Indeed, we cannot begin to

understand Korea’s remarkable growth rates (nearly 9% on average from 1962 through 1994)

without close attention to their underpinnings in technological change in its industries. The key

actors in this process were the chaebol firms. A chaebol can be defined as a business group

consisting of varied corporate enterprises engaged in diversified business areas and typically

owned in significant part of one or two interrelated family groups, members of which are active

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in management. They drew on more advanced countries for technology, first in industries that

were already seen as mature and technologically stable in the highly industrialized countries,

then, as their technological capabilities grew, increasingly in industries where the technology

was still evolving. In this advance from outright imitation to increasing capacity for

improvement and innovation, the government also played a key role, one that has changed and

evolved over time.

The challenge to Korea’s business system today is to continue upgrading its technological

capabilities, which will only be possible with the continued evolution of key institutions, not

only the chaebol firms themselves but also government, the universities, and Korea’s small and

medium-sized firms. This paper analyses the Korea’s business system from a technological

perspective and discusses the prospects for the future.

2. TECHNOLOGY AND BUSINESS SYSTEMS

The term “technology” refers both to a collection of physical processes, which transform

inputs into outputs, and the knowledge and skills that structure the activities involved in carrying

out these transformations. That is, technology is the practical application of knowledge and skills

to the establishment, operation, improvement, and expansion of facilities for such transformation

and to the designing and improving of outputs from those facilities.

The term “technological capability”, therefore, refers to the ability to make effective use of

technological knowledge in efforts to assimilate, use, adapt, and change existing technologies. It

also makes possible the creation of new technologies and the development of new products and

processes in response to changing economic environments. Technological capability has three

elements: production (capabilities for operating and maintaining production facilities),

investment (capabilities involved in establishing new production facilities and expanding

capacities), and innovation (capabilities involved in creating and commercializing new

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technological possibilities, including incremental improvements in process as well as product).

For Korea, as for many Asian countries, the challenge of catching up with the highly

industrialized countries in economic terms has been seen by government policy-makers and

industrial managers alike as overwhelmingly a matter of technological assimilation and learning

in order to improve the technological capabilities of its own firms. We much prefer the term

“catching-up countries” to the widely used terms NIEs (Newly Industrializing Economies) or

NICs (Newly Industrializing Countries), which seem problematic applied to countries that have

been industrializing for decades. The term “catching-up country” signals two important vectors:

the focus on technological catching up and the existence of what institutional theorists (e.g.,

Evans 1995) call a “national project” -- a widely shared goal across government and the private

sector -- to narrow the technological gap with the world’s technologically most advanced

countries. In Asia, Japan was the first “catching-up country.” Its success in joining the ranks of

the world’s first tier countries in terms of technology defines what is possible for other countries.

Korea, Taiwan, and Singapore are today’s first-tier catching-up countries in Asia; the next tier

consists of the Southeast Asian economies. Hong Kong is problematic in this context, given the

virtual absence of an identifiable “project” to bring Hong Kong as an economy up to the

technological level of the advanced countries.

The term “business system” refers to [Eleanor, please kindly fill this part. I remember

seeing a very good definition of BS somewhere, but I cannot locate it].

The process of building technological capability at the firm level in catching-up countries

requires a wide array of interactions with the government, public institutions, suppliers, buyers,

and competitors at home and abroad over time. In other words, it can be an important source of

dynamism in the evolution of business system in these countries. For this reason, we introduce

technology as a mechanism to understand Korea’s business system in action.

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Analyzing the role of technology in the evolution of the business system of “catching-up”

countries involves three levels of analysis: the international technology and market environment;

the national technology system; and firm-level organization and management.

The International Technology Environment:

According to a widely accepted model developed by Utterback and Abernathy, industries

and firms in advanced countries develop along a technology trajectory made up of three stages:

fluid, transition, and specific (Abernathy and Utterback, 1978; Utterback, 1994). The fluid stage

characterizes firms in a new technology, a new industry. The rate of radical (as opposed to

incremental) innovation is high and production technology is often crude, expensive, and

unreliable. Technical entrepreneurs form new, small firms and new venture divisions within

existing firms, competing on the basis of product innovations. Product changes are frequent, so

the production system remains fluid. The organization needs a flexible structure to respond

quickly and effectively. Failure rates among firms are high.

As market needs are better understood and alternative product technologies converge or

drop out, a transition begins toward a dominant design and mass production methods, adding

cost competition to product performance competition and giving greater importance to

production capability and scale economies. Strong, large firms take advantage of their

capabilities in production, marketing, and management as well as R&D. In some cases, some of

the original innovating firms can build up these resources; in other cases, larger firms absorb the

smaller innovators.

As the industry matures and price competition grows more intense, the production process

becomes more automated, integrated, system-like, and specific -- even rigid -- to turn out a

highly standardized product. The focus of innovation shifts to incremental improvements in

search of greater efficiency. At this stage, firms are less likely to undertake R&D oriented to

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radical innovations. In some cases, radical innovations may be introduced by new entrants,

challenging the dominant design or production technology and putting the industry back into an

earlier stage (Utterback and Kim, 1985); in other industries, firms successfully extend the life of

their product with a series of incremental innovations (Baba, 1985). It is in this specific stage that

industries typically re-locate to catching-up countries (Vernon 1966).

In catching-up countries like Korea, firms usually acquire specific-stage (i.e. mature)

foreign technologies from industrially more advanced countries. Often lacking local capabilities

for establishing real production operations, they begin through the acquisition of “packaged”

foreign technology, which included assembly processes, product specifications, production

knowhow, technical personnel, and components and parts. Production at this stage is merely an

assembly operation, requiring engineering effort to implement the transferred technology to turn

out products whose technology and market have been tested and proved elsewhere. Foreign

technical assistance is most significant in debugging the problems in the early production runs,

but its utility diminishes rapidly as the local technicians acquire experience (Kim, 1980).

Once the acquisition task is accomplished, production technologies are quickly diffused

within the country, especially if later entrants can hire experienced technical personnel from the

early acquirers. Increased competition spurs indigenous efforts in the assimilation of foreign

technologies in order to produce differentiated products. Development capabilities are added to

engineering (D&E) in order to develop related products by reverse engineering. Finally, the

relatively successful assimilation of general production technology and increased emphasis on

export promotion, together with the growing capabilities of local scientific and engineering

personnel, lead to the gradual improvement of process and product technologies through local

efforts in research, development, and engineering (R,D, &E). In proceeding along this trajectory

of acquisition, assimilation, and improvement, firms in catching-up countries reverse the

conventional sequence of R,D, &E in advanced countries.

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They also reverse the sequence of the technology trajectory. Once firms have successfully

acquired, assimilated, and sometimes improved mature foreign technologies in the Specific

stage, they may aim to repeat the process with higher-level technologies that are still in the

Transition stage in the advanced countries. Many industries in the first tier catching-up countries

(e.g. Korea and Taiwan) have arrived at this stage. As they progress, they may eventually

accumulate enough indigenous technological capability to generate emerging technologies in the

Fluid stage and challenge firms in the advanced countries. When a substantial number of

industries reach this state, the country may be seen as having joined the ranks of the advanced

countries (Lee, Choi, and Bae, 1988). So far, Japan is the only catching-up country in the

twentieth century to reach this stage.

This framework provides a way to think about “international time” or period effects (Dore

1973; Cole 1976) in the technological and economic development of catching-up countries.

Which industries were in the specific stage, where intensifying competition over mature products

increases the willingness of firms in the advanced countries to look for lower-cost locations for

production? How stable were those industries (in terms of an innovation-induced return to the

transition or even the fluid stage, so that technologies acquired by the catching-up country

became rapidly outmoded)? Moreover, the modes, by which technologies at various stages are

transferred to catching-up countries, have often been shaped by the structure of those industries

in the advanced countries and the nature of competition among the firms in those countries. But

they have also been strongly influenced by the national technology system of a catching-up

country and by the speed at which its firms could develop and enhance their technological

capabilities.

National Technology System:

A national technology system includes those institutions that shape and constrain the stock

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and the flow of technology in that country. In all societies the government is a key actor in the

technology system, in terms of shaping the demand and supply sides of technology

development. The demand side policies allocate resources to technology development, both

through industrial policy and through its role as a customer in a wide range of industries. The

supply side policies shape the level and kind of technical resources available, through policies

affecting technology transfer, foreign direct investment, intellectual property regimes,

dissemination policies, and R&D infrastructure, including government research institutes,

research programs in universities, etc. There are also policies linking demand and supply in

fostering specific industries (for example, in Korea’s Heavy and Chemical Industries Program

1973-1979, discussed in more detail below). Technical education and training institutions are

also a major element of the stock and flow of technology in all societies, producing technical

graduates and generating new knowledge through research. In some societies, professional and

industrial associations also play a key role, as has been very much the case in Korea.

Government technology policies have, deservedly, received most of the attention in

analyses of national technology systems (see for example the various chapters in Nelson 1993).

In Korea, there has been a notable shift over time in the kind of policies used as well as the

sectors towards which they have been directed. From the 1960s (the beginning of Korea’s

catching-up project), the “demand side” industrial policies took the following form:

(a) Deliberate promotion of big business (the chaebols) as an engine of technological learning,

through an array of subsidies and incentives;

(b) Ambitious export-oriented industrialization programs, reinforced by a combination of

“carrots” -- the provision of low-interest loans, tariff-free access to imported intermediate inputs,

favorable access to bank loans (banking being a state-controlled sector), and unrestricted access

to imports of foreign capital goods -- and “sticks”, such as rigorous tax audits of firms that failed

to follow “administrative guidance” and denial of bank loans (Kim, 1997).

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(c) The targeted promotion of technologically advanced heavy and chemical industries (for a

detailed analysis, see Stern, Kim, Perkins, and Yoo 1995);

(d) Market-creating import substitution policies (particularly in the computer industry in the

early 1980s).

During the same period supply-side policies included:

(a) Technology transfer policies: The government gave priority to technology imports through

imports of capital goods and turnkey plants, in which control over technology remained in the

hands of Korean firms. The acquisition of turnkey plants and foreign machinery was the major

means of entry into the chemical, cement, steel, and paper industries in the 1960s and early

1970s. In terms of total value the import of capital goods has consistently far outweighed either

foreign direct investment or foreign licensing (Kim, 1997: 40-41). The government’s intellectual

property policy favored reverse engineering over licensing, and licensing over foreign direct

investment, especially in the 1970s. As a result, Korea had a comparatively low level of FDI: in

1983, Korea’s stock of FDI was 23% of that of Singapore and less than half that of Taiwan and

Hong Kong (KEB, 1987).

(b) Government R&D Institutes (GRIs): In 1966 the government established the Korea Institute

of Science and Technology (KIST) as an integrated technical center, and over the years spun off

several additional GRIs in specific areas. Given the low level of research activity at universities,

GRIs have served as the backbone of advanced R&D in Korea, and accounted for a large share

of the nation’s total R&D funding for many years (see Exhibit 1).

By the second half of the 1980s, as both the world economic situation and the domestic

political system in Korea changed, as Korea’s technological capabilities expanded, and as

Korea’s economic growth made it increasingly the target of pressures from foreign governments

for liberalization of its domestic market, the government changed course in several key aspects

of its policies. These changes are summarized in Exhibit 1.

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[Exhibit 1 about here]

The most noteworthy from the viewpoint of technology development and the business system

were the following:

(a) After two decades of very restrictive policies toward FDI and only slightly less restrictive

policies toward licensing, Korea liberalized its policies toward investment and technology

transfer in the 1980s and 1990s. In technology-intensive sectors Korea began to encourage

foreign direct investment and foreign licensing agreements (on terms that were, in contrast to

some earlier agreements, much more favorable to the foreign firms). The proportion of industrial

sectors open to FDI rose from 44% in the 1970s to 66% in 1984 and to 90.6% in 1994.

(b) In the 1980s and 1990s the government introduced an extensive network of government,

public, and non-profit technical support systems to promote technology diffusion in the economy

among and beyond the chaebols, particularly to the SMEs (Kim and Nugent, 1999). This

included the Industrial Advancement Agency, the National Industrial Technology Institute, and

eleven Regional Industrial Technology Institutes, together with the Small and Medium Industry

Promotion Corporation. These provided a national network of technology extension services,

while the Korea Academy of Industrial Technology, together with other public R&D institutes

and trade association-linked institutes, comprise a core R&D network for technology diffusion.

The Korea Standards Association and the Korea Productivity Center promote technology

diffusion among firms through training programs on quality control, value engineering,

distribution, and factory automation.

A key element of any national technology system is the system of higher education. In

Korea, these institutions have focused overwhelmingly on education and very little on research.

Nevertheless, the educated human resources provided by the basic educational system and the

large numbers of engineers graduated from Korean universities provided an important source of

technical talent. As important was the strong tradition of overseas training, particularly in the

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United States, dating from the early post-Korean War assistance programs. The tradition of

overseas training continues to the present: the ratio of Koreans studying in the US per population

is the second highest after Taiwan. In 1993 31,076 Koreans were studying in the U.S. and 13,000

in Japan. Many of these students stayed in the United States after graduation, especially in

science and engineering, joining American university faculties and top U.S. companies. In recent

years, both Korean firms and Korean GRIs have targeted these individuals (and Korean-

Americans) for both long-term jobs and short-tern visiting assignments, resulting in the return to

Korea of a high proportion of Koreans who have work experience abroad. They bring both their

expertise and their networks into the North American technological community. Moreover, over

90% of the faculty at Korean universities have PhDs from U.S. universities, and often maintain

their professional networks with the North American academic community.

Not strictly part of the national technology system, but a crucially important element in

the evolution of technological capabilities, is the quality of human resources, more broadly

defined. These are shaped by the general educational system and by a more diffuse set of values

and attitudes that for want of a better term we can call “national culture,” a particularly important

concept for understanding the economic and social development of a relatively homogeneous

society like Korea.

In terms of general education, Korea from the very early stages of its postwar economic

development has invested an unusually high proportion of its GNP in general education (see for

example, Harbison and Myers 1964). By 1980 the illiteracy rate was virtually insignificant, and

by 1995 Korea had one of the highest rates of tertiary education in the world, with 54.6% of the

eligible age group enrolled at junior colleges or universities. Of the university enrolment, nearly

half a million students (43.5%) were in science and engineering. At a lower level of technical

training, the government in 1974 enacted a law making in-plant training compulsory for all

industrial enterprises with 300 or more workers.

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The high levels of education are not the only labor force factor influencing the rapid

development of technological capabilities in Korea. Another factor is one that both reflects and

contributes to “national culture”: a strong emphasis on discipline and effort, and a willingness to

work extremely hard to achieve goals. Even the Japanese, who are regarded as chronic

workaholics by Americans and Europeans, marvel at the long work hours and dedicated effort of

Koreans (Vogel, 1991: 48). There are several explanations for this work ethic, and until we see

some major changes in it we cannot begin to weigh their relative importance. One set of

explanations stresses the combination of a harsh physical environment (with a scarcity of natural

resources, a severe climate, and a large population in a relatively small area, only one-third of

which is arable) with the recent historical experience of hardship and deprivation. The emphasis

of the school system on discipline and effort is another explanatory factor, reinforced for every

male Korean by three years of compulsory military service in a context where the threat of

invasion is by no means illusory. And there is a strong national sense of wanting to beat the

Japanese, the former (and much-resented) colonial power. Japan provides both an example of

what can be accomplished and a target for Korean competitiveness. Finally, and most elusive,

Korean scholars have identified what they call the “han psyche”. Literally this means

“resentment” or “grudges.” It is rooted in a Confucian-based status system requiring children in

the family, employees in the company, and people in society generally to behave with outward

respect towards fathers, superiors, and rulers, regardless of any feelings of unfairness or

frustration. This inability to change the context of action, and the need to excel in order to win

approval from authority figures, produces enormous energy that is directed towards tenacious

efforts to strive for the betterment of one’s family and one’s country. The image of the tenacious,

almost driven Korean, is grounded in reality, as we shall see when we turn to Section 3 below.

National technology systems, of course, also include the technology development

organization at the level of the business enterprise, to which we now turn.

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Firm-level organization and management:

At the firm level, two organizational subsystems are of critical importance in the

development of technology: the production site (the factory or plant), and the R&D laboratory.

In catching-up countries, the enhancement of technology capabilities usually focuses at first on

the production site, as mature technologies are adopted from more advanced countries and the

development of capabilities focuses on production technology (the assimilation stage). Formal

in-house training programs and on-the-job training are of critical importance in expanding

capabilities at this level.

As capabilities expand, larger firms often build up substantial engineering departments in

their production sites, whose growing technological strength leads to the gradual improvement

of the assimilated technology. Over time, firms invest in full-scale R&D laboratories that have

the mandate of original technology development.

In Korea’s technological development the firms in the large diversified enterprises, the

chaebols, have been the most significant actors in technology development at the level of the

business enterprise.

The government played a key role in their early development, because large

organizations were considered necessary to marshal the scale economies inherent in the “mature

technologies” which were the target of the government’s plans for economic growth. In the early

postwar years, the government sold Japanese colonial properties and state-owned enterprises to

selected local entrepreneurs on favorable terms. The government then provided these

entrepreneurs with scarce foreign exchange and preferential access to financial capital; it also

handed them the responsibility for large import-substitution projects, for which these

entrepreneurs imported production technology on a turnkey basis, using foreign loans guaranteed

by the government. As a result of government support and their own efforts in building on this

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base to expand their competitive capabilities, the chaebols have come to dominate Korea’s

industrial scene and to stand out as world class multinational companies. By 1995, Korea stood

alone among Third World countries in having privately-owned, non-petroleum industrial

corporations listed in the Fortune Global 500. All six of the largest chaebols had firms on the list:

Daewoo, Samsung (3 firms – Samsung Inc., Samsung Electronics, and Samsung Life),

Ssangyong, Sunkyong, Hyundai (with 2 firms, Hyundai International and Hyundai Motor), and

LG (2 firms -- LG International and LG Electronics).

The government has managed the chaebols relatively effectively compared with other

catching-up countries: good performers were rewarded by further opportunities for expansion,

and poor performers were allowed to flounder and even go under, being taken over by better-

managed groups. As a result, only three of the ten largest chaebols in 1965 -- Samsung, LG,

Ssangyong -- remained on the same list ten years later; in 1985, 3 of the 1975 list were no longer

among the top ten.

The chaebols played a crucial role in the rapid enhancement of technological capability

in Korea. They were well positioned to attract the best university graduates; they had the

resources to identify, negotiate, and finance the acquisition of foreign technology and its

subsequent improvement. And they played a major role in expanding and deepening R&D

activities in Korea in the 1980s and 1990s, setting up R&D laboratories and luring some of the

best Korean and Korean-American scientists and engineers from the U.S. back to Korea. As late

as 1980, government expenditures on R&D dwarfed those of Korean industrial firms, accounting

for 64% of the country’s R&D spending. By 1993, 83% of R&D expenditures were coming from

the private sector, and Korean R&D spending had reached 2.33% of GNP, putting it into the

ranks of the highly industrialized countries in terms of R&D spending. For this rapid evolution,

the chaebols were largely responsible.

[Exhibit 2 about here]

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The chaebols played a key role in the technical labor markets in Korea, especially in their

willingness to hire technical experts from each other. This is a marked contrast to the Japanese

firms, whose unwillingness to hire mid-career personnel with experience at competing firms

remains one of the major sources of immobility in Japanese technical labor markets. Particularly

in fast-moving arenas of technology, the chaebol firms showed no compunction about poaching

technical talent from their competitors in order to speed up their absorption of externally

developed technology.

An abstract description of these different levels of analysis has much less immediacy than

a detailed examination of the interplay across the levels in the context of technology

development over time in a specific sector. The following section looks at technological change

in one of the sectors in which Korean firms have become major international competitors, the

electronics industry.

3. TECHNOLOGICAL EVOLUTION IN THE ELECTRONICS INDUSTRY

The first electronics product actually made in Korea was a vacuum tube AM radio

assembled in 1958 from imported components for the domestic market. Just over three decades

later, by 1990, Korea had become the world’s second largest producer of consumer electronics

after Japan, and by 1994 it ranked fourth in the world as a producer of electronics more broadly

defined, after the U.S., Japan, and Germany. Although small and medium sized firms have

grown enormously in numbers in recent years, the industry’s growth has been driven by the

leading Korean chaebol s , four of which -- LG, Samsung, Daewoo, and Hyundai -- have

dominated production and exports.

The Beginnings

Korea’s first electronics producer was GoldStar (now LG Electronics, the name that will

be used somewhat anachronistically throughout this narrative, to avoid confusion). The owner of

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Lucky GoldStar, a small face cream and plastic houseware company, sensed an attractive

business opportunity in this sector, which was protected from foreign-built imports. He took an

observation tour of several leading electronics firms in Japan, Europe, and the United States, and

virtually simultaneously hired an experienced German engineer to provide the technical

knowhow to begin production. The initial operation was the small-scale assembly of foreign

components into the country’s first vacuum tube AM radio, largely through imitative reverse

engineering of a Japanese model. The German engineer played a key role in this early stage,

ordering the necessary production equipment and training Korean technicians and assembly line

workers. Within a year, relatively well-educated Korean engineers were able to replace the

German, in part because assimilating the product design and assembly operations was relatively

simple (Goldstar, 1993). Goldstar, as the company was then known, followed the same pattern of

reverse engineering and gradual accumulation of knowhow to produce other home appliances,

such as electric fans and refrigerators, without foreign assistance or formal technology transfer

processes.

Televisions

However, when the company imported several black and white television receivers in

order to see if TV sets could also be reverse engineered, they found that the significantly larger

number of components required and the greater technological complexity of the product put it

beyond their capabilities to imitate. Therefore in 1965 the company turned to one of Japan’s

largest electronics firm, Hitachi, for a licensing agreement that included not only technology

transfer in assembly processes but also product specifications, production knowhow,

parts/components, training, and the support of expatriate Japanese engineers. All of them

transferred a significant amount of explicit and tacit knowledge to the company. LG Electronics

also sent seven experienced Korean engineers and technicians to Hitachi for intensive training.

Intense commitment and shared learning were common in the early days to raise technological

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capabilities as quickly as possible. This group of engineers rented an apartment and had group

sessions every evening, reviewing and sharing the literature they collected, their observations,

and their training. They played a pivotal role in enhancing the company’s capabilities on their

return home.

Japanese expatriate engineers supervised the installation and start-up of the TV

production line in order to minimize time lost in trial and error. But within a year the local

technical personnel trained at Hitachi had acquired enough tacit knowledge through production

and product design experience to take over from them. When the company turned to later

consumer electronics products, such as cassette recorders and audio systems, they were able to

move into assembly without foreign assistance.

Three other firms entered TV production at about the same time, and acquired and

assimilated production capabilities through much the same process. Instead of drawing on

foreign expatriates for experience-based knowhow, however, subsequent entrants hired

experienced engineers and technicians away from existing firms. LG Electronics, as the first and

largest producer, was a major source of experienced personnel for new entrants (Kim, 1980).

The role of the state

The eagerness of these other firms to enter the electronics industry owed much to

government policy. In the first decade, the state’s role in electronics was the relatively limited

one of tightly controlling imports, contraband goods in the black market, and foreign direct

investment, opening an opportunity for local firms to meet the needs of the domestic market. But

1969, when the government designated electronics as a strategic export industry, marked a major

change in the government’s role.

In that year, the government promulgated the Electronics Industry Promotion Act and

released an ambitious Long-Term Electronics Industry Promotion Plan. It also created the

Electronic Industry Promotion Fund, which offered preferential financing to build up scale

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economies in production. The Plan also provided grants to develop and upgrade public support

systems for industry standards and R&D. The government specifically identified 95 products for

promotion, offering preferential financing and other incentives to their producers. Yearly

production targets were established, and progressive local content requirements were set in order

to promote the parts and components industry. End products for the local market were

completely protected from foreign competitors, and foreign investment allowed only for the

production of key parts and components and for re-export. The government also created an

electronics industrial park in order to give rise to inter-firm learning and scope economies.

A key element of the Plan was promoting the industry as a leading exporter. In 1969,

when the industry exported a mere $42 million worth of products, the government set an

ambitious export goal of $400 million for 1976 (the last year of the plan). The government not

only set specific export goals and directives, forcing local firms to be competitive both in price

and quality in international markets; it also provided incentives. Preferential financing, tax

concessions, foreign loan guarantees, and the control of entry of new firms formed the heart of

the export drive. That is, this ambitious program induced a crisis, compelling local firms to

acquire technological capabilities quickly, and at the same time it provided the support to make

the crisis creative rather than destructive. Since marketing of exports was largely in the hands of

foreign OEM buyers, local firms concentrated on the acquisition of product design and

production capabilities. In 1976, exports exceeded $1 billion, more than twice the target,

indicating the rapid expansion of the industry’s capabilities.

Color Televisions

Black and white televisions were the first major product to be exported in volume. As

black and white sets reached at the declining stage in the major export markets, the color TV

became the next target for development. With black and white TVs, the Korean companies had

moved up the production learning curve on the strength of the protected domestic market, prior

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to competing internationally. However, Korea did not broadcast in color, so export markets were

the target from the beginning. None of the foreign color TV producers were willing to license

technology to Korean producers, who had so convincingly demonstrated their ability to invade

what was the largest and most important market, the United States. LG Electronics and two other

major producers turned to domestic sources of technology, embarking on a joint research

contract with KIST in order to expand their knowledge base in color TV technology. The

combined experience from these efforts and their earlier learning in black and white televisions

strengthened their bargaining power in the eyes of foreign technology sources, and RCA licensed

its core patents to LG Electronics in 1974.

This was a common experience in the success of Korean firms. They have often found it

easier and less expensive to license a new technology if they reverse-engineer the technology

beforehand. For instance, Korea’s reverse engineering of the VCR virtually forced the Japanese

firms to change their policy and license VCR technology to Korea, in order to have a return on

their technology investments. In these cases, the purpose of technology licensing was less to gain

technology than to pave the way into the export market. In 1999, Korea is the second largest

producer of color televisions with 20 percent share of the global market.

Microwave Ovens

The video cassette recorder and the microwave oven were the next targets for

development. In both cases, Korean firms were faced with the reluctance of Japanese firms to

transfer their technology to Korean firms, who were increasingly seen as potential competitors.

Rebuffed by foreign firms in their attempts to license the technology, the Korean firms reverse-

engineered the product. Only after they produced successful commercial models were they able

to persuade foreign firms to license the technologies, thereby opening the paths for export.

Reverse engineering the microwave oven, however, was a formidable task. After its

unsuccessful attempts in 1976 to license microwave technology, it took the industry’s first major

18

producer, Samsung, two years of intensive work, with teams of engineers putting in 80-hour

weeks of redesigning, readjusting, and trial-and-error, to produce a successful commercial

prototype. The complexity of the components, particularly the magnetron tubes, posed serious

problems. There were only three producers of magnetrons in the world, two in Japan and one in

the US. Samsung sourced its magnetrons from Japan.

Even after it finally developed the commercial prototype, Samsung still faced problems

in volume production. Although it had worked with local bakeries in field tests of the new

product, microwave ovens were too expensive to find a significant domestic market. At a time

when more than 5 million ovens were being sold worldwide, Samsung’s first major order came

from Panama in 1980, for 1,000 microwave ovens. That year, however, proved to be the turning

point for Samsung: J.C. Penney asked Samsung if it could produce a low-priced microwave oven

for the U.S. market. This order meant a completely new design and heavy losses (because

Samsung had yet to develop the production scale economies that would bring its costs down).

But it would give Samsung a foothold in the largest and most sophisticated market in the world

and the opportunity to turn a primitive assembly line into an efficient high volume operation.

Penney provided technical assistance to the Samsung team to ensure that its ovens met Penney’s

technical specifications.

Samsung’s engineers and technicians worked around the clock, manufacturing by day

and tuning the line at night to fill the order. It was successful enough for Penney to more than

triple its order within three months. However, to bring its costs down as other producers

developed even greater scale economies, Samsung decided to develop its own magnetron tube,

which was still sourced from Japan. After being turned down in its requests for technical

assistance by both Japanese producers, Samsung in 1982 bought and transported to Korea the

only U.S. factory producing magnetron tubes (it was going out of business because of the

Japanese competition). Samsung also invested heavily in improving productivity by automating

19

its production processes.

Samsung’s rapid assimilation of the design and production technology for microwaves

was rooted in the quantity and quality of those critically important human resources. Samsung

hired Korean engineers who had graduated from leading U.S. engineering schools, as well as

from Korean universities. It soon built a microwave technical group that outnumbered their

counterparts in GE Appliances, which began providing technical support for sourcing microwave

ovens from Samsung. This gave the Korean engineers further opportunities to absorb world-class

skills (Magaziner and Patimkin, 1989, 88-89). These engineers and technicians were willing to

work long hours and with intense commitment to succeed.

Samsung’s R&D activities have led to 74 local patents and 6 overseas patents related in

microwave oven technology, enabling Samsung to become one of the leading producers of

microwaves in the world. By 1994 Samsung was the world’s second largest producer,

manufacturing four million ovens in Korea and 0.8 million more abroad each year and

accounting for 17% of the global market.

Samsung’s success prompted LG and Daewoo to follow suit. They too were turned down

in their efforts to enter the field by licensing Japanese technology. The later entrants were able to

poach experienced engineers and technicians from Samsung, thereby spreading microwave oven

technology throughout the rest of the electronics industry in Korea. While it took Samsung four

years to develop its first successful prototype, it took LG only eight months when it set up its

own task force in 1980. Then LG Electronics acquired the licenses necessary to open up export

markets. Samsung’s development of magnetron technology even helped LG to license the

magnetron tube technology from Hitachi, which had previously refused to license it to Samsung.

Now LG produces nearly as many microwave ovens as Samsung, and in 1999 Korea accounts

for 40 percent of the global market.

Semiconductors

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Korea’s semiconductor industry, now one of the country’s most dynamic industries, had

its beginnings in the mid-1960s, when several multinational semiconductor firms – Signetics,

Fairchild, Motorola, Control Data, AMI, and Toshiba -- began assembling discrete devices in

Korea to take advantage of its low labor costs. These operations involved only simple packaging

processes: parts and components were imported from the parent companies, assembled in

wholly-owned subsidiaries by relatively unskilled workers, and re-exported. Little design or

engineering capability was transferred to Korea.

In 1975, as part of its drive for rapid industrial transformation, the government

formulated a six-year plan to promote the semiconductor industry. However, the initial

enthusiasm of Korean companies crumbled in the face of difficulties in obtaining technology

from the more advanced countries and the accelerating risks of shortening product life cycles in

this far-moving industry. Most of the firms chose to pursue consumer electronics instead.

Korea’s first semiconductor firm was actually established before this government

initiative: in 1974, a Korean-American scientist with a Ph.D. from Ohio State University and

semiconductor design experience at Motorola, Dr. Ki-Dong Kang, established the Korea

Semiconductor Company. It experienced financial problems almost immediately, and Samsung

acquired it during its first year of operations, as a source of semiconductor knowhow for its

growing consumer electronics business. By 1983, however, the critical role of semiconductor

technology in a range of industries was becoming increasingly clear, and the four largest

chaebols -- Samsung, Hyundai, LG, and Daewoo -- each decided to enter VLSI production.

Samsung was the first to succeed in producing the 64K DRAM. It assembled a task force

in 1982 to formulate an entry strategy for the company. The team members spent one of their

allotted six months of work in the United States, meeting experts in the industry, particularly

Korean-American scientists and engineers working in American semiconductors firms or

teaching at American universities. Samsung licensed 64K DRAM design from financially

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troubled Micron Technologies of Boise, Idaho, and paid $2.1 million for a high speed MOS

process from Zytrex of California. Samsung sent engineers to these technology suppliers for

training as part of the technology transfer agreement. In 1983 Samsung established an R&D

facility in Silicon Valley and hired five Korean-American Ph.D.s in electronics engineering from

Stanford, Michigan, and Notre Dame Universities with semiconductor design experience at some

of America’s leading firms, including IBM, Honeywell, Zilog, Intel, and National

Semiconductor. These scientists, plus about 300 American engineers (including several designers

who left Mostek), provided not only a high level of capabilities and a window into the

technological networks of Silicon Valley, but also an opportunity for Korean engineers in

participate in training and research in the U.S.. Simultaneously Samsung organized a team in

Korea to work collaboratively with the California team. It included two Korean-American

scientists (both with experience in 64K DRAM development in American companies) and

Samsung engineers trained at technology suppliers. Intense interactions between the Silicon

Valley group and the team in Korea through training, joint research, and joint problem solving

significantly raised the Korean team’s capacity to absorb the VLSI technologies acquired from

Micron Technology and Zytrex.

With eight years of experience in assembling LSI chips, Samsung found the VLSI

assembly process relatively easy to assimilate: its production operations easily reached a 92

percent yield ratio, on a par with Japanese producers. Its mass production plant was designed and

its construction supervised by a Japanese firm that had previously built a Sharp semiconductor

plant in Japan. Samsung was able to market 64K DRAM chips early in 1984, about 40 months

after the American pioneer and some 18 months after the first Japanese commercial entrant.

Korea became the third country in the world to produce DRAMs, and had significantly narrowed

the technological gap with the United States and Japan.

Hyundai was the second Korean entrant to this market, despite its lack of previous

22

experience in electronics. Aware of the increasing importance of electronics in its core

automobile, shipbuilding, and heavy machinery businesses, Hyundai decided in 1983 to develop

an electronics capability in order to strengthen its competitiveness in those businesses. Hyundai

first contacted Dr. Kang, the founder of Korea’s first semiconductor firm, who had by then

returned to Silicon Valley, to get his help in formulating an entry strategy. Based on this plan,

Hyundai recruited four Korean-American PhDs with work experience in semiconductors and

computers at Xerox, System Control, Fairchild, and Ford. It also planned to expand its Korean-

based capabilities by recruiting an additional 75 Korean-American scientists from the US and 35

high-caliber scientists and engineers within Korea, many from Samsung, to form the core of its

new electronics business and its Semiconductor R&D Laboratory in Korea. But in addition, like

Samsung, it set up an R&D center in California, staffed by Korean-American scientists and local

American engineers.

Despite considerable success on the design side, Hyundai, without previous production

experience in electronics, had serious troubles moving into mass production. To raise its yield

rate, it pursued two strategies. First, it entered an OEM agreement to assemble 64K DRAMs for

Texas Instruments, gaining assembly knowhow from TI’s technical assistance. Second, it

purchased designs from Vitelic in the United States. In 1986, two years after Samsung, Hyundai

became the second Korean chaebol to mass produce 64K DRAMs.

Despite its longer experience in electronics, LG took a rather cautious approach, focusing

primarily on non-memory chips for use in its in-house consumer electronics business. In an

attempt to enter VLSI production, LG acquired the R&D and production facilities operated by

the government’s KIET (the Korea Institute of Electronics Technology) in 1984, but these had

been rendered obsolete by the rapidity of developments in the industry. It then licensed chip

designs from Advanced Micron Devices and Zilog in the U.S. and entered a joint venture with

A.T.&T.’s Western Electric, but it was far behind Samsung and Hyundai in launching 64K

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DRAMs.

Daewoo, which had acquired consumer electronics and modest semiconductor

production, also attempted to enter VLSI production through acquisition. In 1985 it invested

about $13.4 million in the ailing Zymos Corporation, acquiring 51% equity. Daewoo

transplanted Zymos’ wafer fabrication equipment to Korea, but drastically scaled back its

semiconductor project and eventually gave up the idea of producing memory chips. It focused

instead on semiconductors needed in the telecommunications industry, on a small scale.

Samsung was also the first to begin production of the next generation of VLSI chips: the

256K DRAM. Its top Management gave different assignments to local and Silicon Valley teams.

To reduce the lead in commercialization held by the U.S. and Japanese firms, Samsung’s local

team was to source circuit design from Micron Technology. Although it had enough process

experience to avoid having to license process technology, the design and production challenges

in taking the purchased designs into volume production were substantial. As before, Samsung

involved the local team in the (by now familiar) pattern of intensive, round-the-clock efforts for

eight months, resulting in the “working good die” by October 1984, which trailed the first

introduction of the 256K DRAM only by two years, compared to four years for the 64K DRAM.

Mass production began in early 1986, only 18 months after the first volume production in the

advanced countries.

The Samsung team in Silicon Valley, however, was given the mission of developing a

new 256K DRAM from circuit design through process design on its own, to enable Samsung to

become independent of foreign design suppliers. Intensive efforts produced a circuit design in

April 1985 and a “working good die” in July. The quality of this die was superior to the design

licensed from Micron Technology on several important performance measures, and Samsung

adopted it as the dominant design for mass production. Through training and relocation of

personnel, Samsung was able to transfer the growing design capabilities of its California center

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to its Semiconductor R&D Center in Korea.

Hyundai, faced with the same challenge of speeding up development, tried to set up its

production process and acquire design technology concurrently. Hyundai had few problems

purchasing state-of-the-art manufacturing equipment from Japan. However, the Japanese

semiconductor firms refused to give Hyundai access to their design technology, making it

difficult for the company to find a design compatible with the Japanese equipment. Hyundai

entered a licensing agreement with Inmos of the US, whose 256K DRAM technology was the

fastest available but was not production tested, and when Inmos failed to supply the technology

on time, Hyundai canceled the agreement and again turned to purchasing a design from Vitelic in

June 1985. But it was not able to get the critically important yield ratio above 30% throughout

1986. Again, it turned to an OEM agreement with Texas Instruments to assemble the latter’s

production-tested 256K DRAM, enabling Hyundai to improve its own production technology to

achieve a profitable yield rate and allowing TI to move into the more profitable 1M DRAM.

Faced with the Korean chaebols’ entry into 64K and 256K DRAMs, Japanese producers

moved quickly to sell their own chips at a fraction of the Korean producers’ cost. This strategy

had been successful earlier against their American competitors, but the diversified chaebols were

able to subsidize their semiconductor subsidiaries during the financial crisis generated by the

Japanese. Then the chaebols encountered a stroke of luck: the US-Japan semiconductor

agreement that retrained Japanese exports to the US. This and the subsequent move to the 1M

DRAM by Japanese firms opened up new opportunities for the Korean firms in the US market,

allowing them to emerge as dominant suppliers of 64K and 256K chips. Increasing demand and

short supply also pushed up prices for the 256K DRAM, enabling the Korean firms to generate

profits and firmly establishing them in the industry.

Samsung began work on the next generation, the 1M DRAM, in September 1985. This

time the company committed both its Silicon Valley team and its Korean center to working on

25

original designs, in a “collaborative competition” involving exchanges of information, personnel,

and research results, but two parallel projects. This time, the Korean center completed the task

first, by three months, indicating that the locus of R&D capability had shifted to the R&D center

in Korea. The company produced a working good die in July 1986, narrowing the gap with the

Japanese pioneer to one year. It began mass production in late 1987, one year after the Japanese

firms but in time to catch the rapid rise in demand.

Hyundai was a late entrant in 1M DRAM, again acquiring design and process technology

from Vitelic. But by 1988, its design and process capabilities were rapidly catching up with

Samsung. In contrast, LG turned to Hitachi for 1M DRAM technology: Hitachi provided LG

with the technical assistance for the production of 1M DRAMs to secure a reliable OEM source,

allowing Hitachi to devote its resources to the next generation DRAMs.

The enormous investments in production facilities and R&D made by the Korean firms

attracted several foreign firms to set up design houses in Korea. LSI Logic, for example, set up a

design center in Korea to help Korean firms design ASICs. Texas Instruments built a facility to

produce bipolar MOS and ASICs. These foreign subsidiaries provided the Korean chaebols with

additional sources of expertise.

The road ahead was, however, becoming bumpier. In 1986 Texas Instruments filed a suit

against Samsung and eight Japanese chipmakers, charging infringements of patents for DRAM

designs, while Intel filed a similar suit against Hyundai and its American design suppliers. Both

Samsung and Hyundai ended up paying royalties on past and future sales of their memory

products.

Moreover, work on the next generation of chips -- the 4M DRAM -- meant competing

neck-and-neck with Japanese and U.S. companies in exploring the frontiers of semiconductor

technology. Anticipating the consequent difficulties in acquiring foreign technology, and seeking

to avoid costly duplication in research and investment, the government stepped in and designated

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R&D on 4M DRAMs a national project in October 1986. ETRI, a public R&D institute, served

as the coordinator in a consortium of the three chaebol semiconductor makers -- Samsung, LG,

and Hyundai -- and six universities. The objective was to develop and mass produce 4M DRAMs

by 1989 and completely close the technological gap with the Japanese firms. The consortium

spent $110 million for R&D over three years, 57% provided by the government (much higher

than in most national projects).

ETRI invited researchers from the three chaebols to participate in developing core

technologies jointly at ETRI facilities. However, the three companies were unwilling to work

together, and each pursued their own path: Samsung working on a stack structure, Hyundai on a

trench structure, LG on a hybrid structure. Samsung was the first to complete the design of a 4M

DRAM in 1988, only six months after Japan. LG was the second. Hyundai had to switch its

research to the stack structure.

The government also designated the development of the next generations, the 64M and

256M DRAMs, as national projects, but again, although an ETRI-based consortium was

organized, the three companies refused to share their knowledge with each other and the

consortium basically became a distributor of funds. In contrast to earlier efforts in HCIs, in

which the state played a major role in directing the development of technology in the chaebols,

Korea’s success in the semiconductor industry should be attributed to business rather than state

initiatives.

In the next generation of semiconductors, Samsung was again the first, becoming the

world’s first supplier of commercial samples of 64M DRAMs in the second half of 1994 to such

giant users as Hewlett Packard, IBM, and Sun Microsystems. And Samsung was the first to

develop the world’s first fully working sample of 256M DRAM, after investing $150 million in

R&D over 30 months. In August 1994, Samsung was ahead of the Japanese in using its own

patented technology to design a new architecture that overcame operating speed limitations,

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making major improvements in the capacity to process vast amounts of data. Samsung had also

completed product development of a 1-gigabit DRAM in 1996, nearly one year ahead of its

rivals. In semiconductors, Korean firms had reached the innovation frontier.

In March 1999, Samsung began mass-producing 256M DRAM for the first time in the

world, about two years before industry watchers predicted. LG became the world’s first

chipmaker to develop a functional sample of 64M direct Rambus DRAM chip, which is expected

to become the next primary memory for high-performance personal computers by 2001. Under

the restructuring pressure from the government, Hyundai acquired LG, making Hyundai the

second largest memory chipmaker after Samsung. In 1999, Korea is the largest memory chip

producing country, accounting for 41% of the global market.

TFT-LCD Development

The development of TFT-LCD or flat panel display (active matrix display) illustrates

further how Korean firms have strengthened their technology capabilities to emerge as

innovators in world markets. Their move into the TFT-LCD industry in the 1990s resembles the

development of the semiconductor memory chip industry in the 1980s. When Korean firms

decided to invest in memory chips, Japanese firms dominated the burgeoning semiconductor

market. In ten years, Korean firms, led by Samsung, were challenging the Japanese at the leading

edge of the market. Korea was determined to repeat that success in TFT-LCDs, where Japan

currently dominated.

The development of TFT-LCD is based about 30% on passive matrix LCD technology

and about 70% on semiconductor technology. The leading chaebol, with strong technological

bases in both, were able to build quickly on those strengths and on their experience in acquiring

and assimilating leading edge technology from foreign sources. For instance, Hyundai

Electronics’ involvement in passive matrix LCD began in 1988, when it organized an LCD

business unit. Lacking capability in the more advanced display technologies, it imported the stick

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form of twisted nematic (TN) LCD from a Japanese firms, Oprex, in 1990, sending its engineers

to Oprex for training in production and LCD design and importing a complete production display

from Japan. Training, in-house R&D, and collaborative efforts in a government-sponsored

research cooperative, the Display Research Cooperative, led to the development of Hyundai’s

own TN LCD within months, and a super TN LCD by 1993. In three years, Hyundai increased

its output more than a hundredfold: from 116 thousand units in 1990 to 15.22 million units in

1993.

Based on this experience and its growing capabilities in semiconductors, Hyundai

organized a task force team to develop the more advanced TFT-LCD. It also approached

Japanese and American LCD firms, including Oprex, for technical assistance, but none were

willing to share the emerging technology. As an alternative, Hyundai in 1992 set up a joint

venture in San Jose, Image Quest Technology, with a group of leading American LCD engineers,

who spun out of Colory, Inc. Hyundai invested over $16 million in developing a 10.4-inch VGA

TFT module prototype and in setting up a pilot plant at Image Quest. Participation in the joint

research brought Hyundai engineers to a par with their Japanese counterparts.

Two other semiconductor firms -- Samsung and LG -- were as advanced as Hyundai in

TFT-LCD technology, if not more so. In 1994, Samsung developed a 14.2-inch TFT-LCD with a

thickness of less than 3 centimeters. In 1995, it developed a 3.1 inch polysilicon TFT-LCD,

which embeds drive ICs on panels to increase the light transmissive efficiency up to 80%,

enabling the producers to extend the display size to 100 inches and to diminish defect rates. In

1995, Samsung also developed a 22-inch TFT-LCD screen, one inch larger than the world’s

previous biggest LCD (produced by Sharp). This signaled that Korean companies had become

innovators in TFT-LCD technology. As a result, Korean firms are now attractive candidates for

strategic alliances with Japanese firms. LG Electronics, for instance, established a 50:50 joint

venture R&D firm with Alps Electric (Japan) to expedite the development of the next generation

29

TFT-LCD, such as plasma processing and LCD panel processing.

In 1999, Korea is the second largest TFT-LCD producer after Japan, accounting for about

30 percent of the global market. According to International Data Corp, Korea is expected to

expand its market share to 40 percent by the end of the year.

Medison Company: A small high-technology firm

In the early years of Korea’s industrialization drive most small and medium-sized

enterprises (SMEs) were barely surviving as traditional enterprises, largely neglected by

government policies. Especially in the 1960s and 1970s, SMEs suffered from a disproportionate

allocation of financial, technical, and human resources to the chaebols. As a result, SMEs in

Korea accounted for less than half the shares of manufacturing employment and value added of

SMEs in Japan and Taiwan. It was only in the early 1980s that the government belatedly

recognized the importance of SMEs and began to support their growth. Consequently, the share

of SMEs in manufacturing employment rose from 37.6% in 1976 to 51.2% in 1988, and their

share of manufacturing value added from 23.7% to 34.9%. The case of one technology-based

small firm, Medison, illustrates the increasing potential for innovative growth for Korean SMEs.

Medison is one of many technology-based small firms spun off from KAIST, the

research-oriented graduate school of applied science, and one of the most successful new venture

companies in Korea. The founder, Min-Hwa Lee, with a Ph.D. in electronics engineering, and his

four co-founders were all graduate students under Professor Song-Bae Park. Professor Park

directed a research project for two years (1984-85) on ultrasonic scanner technology, funded

jointly by the government and a local medical equipment manufacturer. When the company

decided to pull out of the project, the laboratory research team searched for an alternative

industry sponsor (national R&D projects required an industry partner who would be willing to

commercialize research outcomes). Failing to find another supporter, the research team, led by

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Dr. Lee, decided to spin off from KAIST to form a new venture in July 1985, becoming the

industrial sponsor of the project. A person experienced in medical equipment marketing joined

the five researchers from KAIST. The research team had already published eight research articles

at the time of founding and obtained four patents.

The government played three important roles in Medison’s success: R&D supporter,

venture business financier, and market creator. First, the government funded the initial R&D

project for more than four years before and after the establishment of Medison, leading to

substantial progress in mission-oriented research on ultrasonic technology at a KAIST

laboratory. Second, the government assisted Medison indirectly through venture capital

financing: during its first year, Medison received crucial venture capital investment and a loan

from the Korea Technology Development Corporation, a venture capital company established by

the government in 1981 to promote the emergence of new ventures (Kim, 1997). Third, the

government created a market for Medison by restricting imports of foreign ultrasonic scanners,

gradually liberalizing the market as Medison established its position.

The company’s first product was a technical and a commercial failure. The team

established a very ambitious goal: to complete the development of a prototype within two

months so as to exhibit it at the Korea International Medical Equipment Show in September

1985. The research team rented a small room in an inn near the KAIST campus, virtually living

in the room and working around the clock for two months to translate their highly innovative

patent (eight point continuous dynamic focusing technology) into a working model. They met the

deadline, and the government bestowed on the founder an Industrial Achievement Award for one

of the most innovative products introduced that year. However, although they placed and

improved working models in two university teaching hospitals before they began marketing the

product in February 1986, the 30 or so rural hospitals that purchased the product found that its

image was blurry and often faded away. The scanners also broke down completely two or three

31

times a month, forcing the team members to travel constantly to service their products.

Facing problems in commercializing their innovative technology, the team adopted a

simpler proven technology to produce more reliable scanners. Once again, driven this time in

part by financial desperation, they worked around the clock for another four months. This time,

their experience provided enough capability to develop a second and more reliable model, which

incorporated a unique SCD design developed by the team. This model was commercially

successful, and over 100 units were sold in the first year, including exports to Turkey, Pakistan,

Italy, Hong Kong, India, and Mexico.

Sensing a potentially large market not only in Korea but also abroad, Medison attempted

to develop an inexpensive portable model. Again, their first effort at a product was a disaster, but

provided the platform for a more successful model in 1988, which found an export market in

developing countries. By 1990 it received U.S. FDA approval and became the best selling

portable model in many developing countries.

Not content with these markets, however, Medison continued to push its technological

capabilities, through its own R&D and through joint projects with KAIST. In 1988 it developed a

model that incorporated patented uniform ladder algorithm (ULA) into sector display

technology, but its quality was noticeably inferior to comparable foreign models. Again,

however, it proved the platform for an improved product in 1989, a model that came to dominate

the domestic market even in the face of increased foreign competition in the liberalizing Korean

market. Its next generation product, incorporating doppler technology, became a hot selling

model abroad, and Medison doubled its sales almost every year.

Medison has been aggressive at diversifying into related businesses. It established

Meridian, a subsidiary to launch its bio-energy medical equipment business, integrating oriental

medicine with modern bio-energy technology developed in Russia. A research team from

Medison spun off to form Meridian. Medison also established Medidas to develop medical

32

information systems such as its medical image display archiving system, tele-radiology, and a

picture archiving communication system (PACS). Medison also invested in Korea Multimedia

Communication, Byte Computer, and Taeha Mechatronics for research in medical information

systems and medical automation.

It has reached beyond Korea to establish overseas marketing subsidiaries in the US,

Europe, Russia, China, Japan, and Singapore. In production, it has entered a licensing agreement

with an Indian firm to assemble Medison’s scanners on a CKD (Complete Knock-Down -- that

is, assembly of pre-packaged components) basis. Shanghai Medison has also begun assembling

Medison models for the Chinese market. And in R&D, Medison acquired Kretztechnik of

Austria, a leading ultrasonic equipment developer, in 1996 and Acoma X-ray of Japan in 1997.

Medison also entered strategic alliances with Advanced Technology Laboratory (ATL) of U.S.

and NEU-Alpine of China. It has 15 domestic subsidiaries. In 1998, Medison developed the

world’s first and only 4D (real-time digital 3D) color ultrasound device, making a major

milestone in ultrasound technology.

Medison is a rapidly growing company of a new generation (about 300 workers at the

headquarters and over 1,000 around the globe), moving rapidly along changes in frontier

technology and aggressively seeking out opportunities on a global basis. It became a leading

force in 13 medical equipment sectors. It has a vision to become the third largest medical

equipment producer in the world by 2005.

4. THE ASIAN CRISIS AND KOREA’S BUSINESS SYSTEM IN TRANSITION

After three decades of phenomenal growth, Korea has recently plunged into a major

economic crisis in the late 1997. Unlike past crises, which were evoked largely by external

shocks, the current crisis stems largely from its structural weaknesses in technology and business

systems. On one hand, the economic crisis has resulted in a major blow to the Korean economy,

33

but on the other hand it can be a blessing in disguise, providing a rare opportunity for Korea to

fix the structural weaknesses. This section discusses the impact of the crisis on Korea’s business

systems and its transition into the 21st century.

The Role of the Government

Through the early 1970s, the government had been an effective force in the expansion of

the technology system. The effectiveness of the government’s developmental role has, however,

waned significantly in the rapidly changing market and technology environments of the 1980s

and 1990s. Yet the government has been reluctant to surrender its role in the driver’s seat.

Despite various measures to loosen their formal hold on the economy, technocratic self-interest

in maintaining bureaucratic power and inertia in existing practices have inhibited the dynamic

growth of private initiatives. In addition, two factors have made it difficult for the government to

play an effective developmental role in the past decade and a half. One factor has been

corruption, resulting in political collusion between the government and the chaebols, leading to

irrational allocation of resources and to an excessive focus of managerial energy on maintaining

close and collusive relationships with the government. Second, the economic power of the

chaebols has grown so strong that the government has increasingly found itself rescuing poorly

managed chaebols from financial troubles to protect other firms upstream and downstream (Kim,

2000).

In the wake of the economic crisis, the government has, however, taken initial steps to

introduce major reforms in the public sector, the financial sector, and the private sector. The

government is in the process of reforming central and local government agencies and privatizing

state-owned enterprises. Although slow in progress due to strong resistance from bureaucrats

and politicians, the President of the nation is determined to reform government agencies small,

efficient, and transparent. Many of the major structural reform measures have been thwarted in

the political process but the government is still in the process of introducing corporate

34

management principles into government organizations. The role of the government in reforming

the financial and the private sectors will be discussed more in detail below.

The restructuring of the financial sector

The financial sector has long been a tool of collusion between the government and

chaebols, resulting in a major resource misallocation and huge non-performing loans. This had

long been recognized as one of the most serious problems in the Korean economy. But moral

hazards on the part of technocrats and politicians have kept the sector from correcting the

problems. The economic crisis has, however, enabled the new government to take bold steps to

introduce a major reform in the financial sector, forcing many poorly managed financial

institutions to go down the drain. Sixteen merchant banks, five commercial banks, and twenty

other financial institutions have so far been closed, giving a shocking signal that even banking

institutions can fail. Several large commercial banks have merged into three giant banks. Two of

the largest commercial banks are under negotiations for sale to foreign capitalists.

Then, the government rescued better managed banks by turning non-performing loans

into equity, resulting in drastic increase in the government ownership of the commercials banks

and consequently giving the government more power in the financial sector. Once banking

institutions stand on their own feet, it is the government’s plan to privatize its ownership, so that

commercial banks can operate on the basis of market principles in allocating financial resources.

The anticipated purchase of the two large commercial banks by foreigners and increasing

foreign equity participation in other commercial banks are expected to introduce more modern

market-oriented banking techniques and transparency in operations, resulting in rational

allocation of financial resources.

The restructuring of chaebols

Multi-sector, family-controlled business groups are in most Asian business systems, and

were dominant in pre-war Japan. But nowhere else have they been so consistently aggressive in

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diversifying businesses and developing technological capabilities than in Korea. Not even the

Japanese zaibatsu and their postwar heirs, the horizontal keiretsu, were so active in seeking out

new business opportunities and developing and sourcing technologies for them. This has been a

key factor in Korea’s economic growth and the rise of leading chaebols to global prominence.

These chaebol firms are now facing two challenges: (1) The government’s mandate

requirements to reduce debt/equity ratio below 200 percent and to focus on a few core businesses

and (2) a major reform in organization and management in response to changing market and

technology environment. First, in the wake of the economic crisis, the government set clear goals

and forced chaebols to down-scope businesses so as for them to be able to strengthen their

competitiveness in a few core businesses. The government, as a major shareholder of banking

institutions, disciplines these chaebols by withdrawing or renewing credits to these debt-ridden

firms. To meet the mandate requirement to reduce the debt-equity ratio for core businesses,

chaebol firms had nothing but sell off many of their unprofitable businesses to foreign firms.

Hyundai, for instance, announced to focus on five core businesses -- automobiles, electronics,

construction, heavy industry, and financial services – reducing its number of subsidiaries from

present 62 to 26 by the end of 1999. Samsung decided to concentrate on four core businesses –

electronics, finance, trade, and services and to reduce its number of affiliated companies from 64

to 40 by the end of 1999. LG’s main business segments will be chemicals/energy,

electronics/telecommunications, services, and finances. Through the sale and disposition of

unprofitable businesses, the number of affiliates will be reduced to 32 by 2000. Daewoo might

have to give up most of its businesses just to concentrate on automobiles. Other smaller chaebols

are also in the process of a major restructuring of their businesses, signaling a major structural

change in Korea’s business system.

Second, while the chaebols have been crucially important in Korea’s development, they

face some serious problems in their organizational and managerial style in further raising their

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innovation capabilities. The top-down management style was fostered by the need for top-level

relationships with key government leaders. The three decades of military government fostered a

management style that closely resembled the military bureaucracy, in which virtually all Korean

males served. Unlike highly formalized civilian bureaucracies, Korean firms were adaptable to

changes once a decision was made at the top by the “commanding general.” This style was quite

compatible with the imitative “learning by doing” of the early years of industrialization, when

targets were clear and the expenditure of effort and other resources was the key to success. But

these dynamics can be a major hindrance to raising the innovative capabilities of Korean firms

through R&D.

Many chaebols recognized the imperative of major changes to transform themselves into

innovation-oriented organizations. This requires more decentralized, self-contained, strategic

business units that can respond quickly to changing markets and technologies; an organizational

climate that nurtures creative individuals and effective teamwork; effective lateral

communication and coordination across functions; and bottom-up communications to identify

and respond quickly to market opportunities and threats. There have been a lot of rhetoric but

little action.

The recent economic crisis has, however, forced chaebols to reform their organizations

and management to be compatible with new needs. It will, however, take some time before some

results can be seen. The chaebols find that while the formal organizational structure and

management system can be changed overnight, but changing the behavior of managers and

employees to be compatible with the new system is more difficult and time consuming.

Despite many problems, the chaebols will remain assets rather than liabilities for Korea

even today, and will do so for the foreseeable future. As possessors of the needed technical and

financial resources, they will continue to play the major role in strengthening Korea’s

technological capability and spearheading the globalization of Korean business. As they evolve

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towards more focused, decentralized, flexible, and agile and as their links with SMEs develop

and are strengthened, their changing strategies and growing capabilities will significantly change

Korea’s business system.

The Reorientation and Restructuring of Technology Infrastructure

An important arena where government has made a major mistake in its development

program is in education. In the 1950s and 1960s, Korea over-invested in education relative to

national needs. As a comparative study by Harbison and Myers (1964) found in the late 1950s,

Korea’s educational achievement (in terms of school enrolment at all levels) stood close to the

level expected of a country with three times its per capita GNP. This built a strong skill base for

Korea’s imitation drive in the 1960s and 1970s. But in the last two decades the government has

under-invested in the quality of education, particularly at the university level, resulting in a short

supply of highly trained human resources in Korea’s innovation drive from the mid-1980s. The

scarcity of research-intensive universities also constrained the emergence of technology-based

small firms.

The importance of reorienting a dozen of leading universities from teaching- to research-

oriented institutions have long been recognized, but the government has not been effective in

mobilizing resources for major investment in education. The recent economic crisis, however,

prompted the government to formulate a major reform program and earmarked W. 1.6 trillion

(about $1.4 billion) to invest over seven years in order to transform some of leading universities

into excellent research centers. It is yet premature to estimate the outcome of the program, but

once implemented properly, the program is expected to significantly upgrade the quality of

scientists and engineers Korean institutions will produce in the future.

Another arena where technology infrastructure faces a major challenge is government

research institutes (GRIs). KIST and its spin-off GRIs spent a large proportion of the public

R&D expenditures throughout the decades. GRIs played a significant role in helping firms

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acquire foreign technology in the early years of industrialization, and in informally transferring

and diffusing technology throughout the economy through reverse-engineering of foreign

technologies. But the role of GRIs has been weakened vis-a-vis the chaebols’ corporate R&D

centers for two reasons. First, the government’s direct control of GRIs has resulted in rigid

bureaucracy in these institutions, stifling initiatives and creativity of research managers and

researchers. Second, GRIs have had difficulties in retaining competent researchers, who either

hop to academic institutions for prestige or to corporate R&D laboratories for better economic

incentives.

The government has formulated plans to introduce a major restructuring of GRIs several

times in the past, but has never implemented its plans due to strong resistance of the

stakeholders. The recent economic crisis enabled the government to introduce a major

restructuring of GRIs. As part of public sector reform, the government introduced three research

councils, a pattern after German and British systems, and reorganized GRIs under the

jurisdiction of these councils by eliminating the direct control of GRIs by government ministries.

It might take sometime before the new structure would function properly, but the restructuring is

expected to result in increased administrative freedom and major reorientation of GRIs to meet

new missions.

SMEs in Transition

Despite the government’s focused promotion of SMEs in the past two decades, they have

faced many problems. Promotional policies have not been effective due partly to the increasing

dominance of chaebols in the financial and product markets and partly to flooding inflow of

competitive products from China. In addition, linkages between SMEs and large firms have had

enormous transaction costs: exploitation of small by large firms has taken the form of deferred

payments and widespread financial kickbacks. As a result, the weakness of “related and

supporting industries,” in Porter’s (1990) phrase, has become a serious problem, intensifying the

39

large firms’ dependence on Japan for technology-intensive parts and components and slowing

the pace of product and process innovation.

Arguably, although SMEs face real problems in the Korean business system, Korea faces

fewer barriers to the growth of entrepreneurial, technology-based SMEs than does Japan,

especially in terms of labor markets. The lifetime employment patterns of Japan have no

analogue in Korea, especially for technical talent. And as the case of Medison illustrates, it is

possible for technology-based SMEs in Korea to achieve not only a strong domestic market but

to become global companies.

The role of such firms in the Korean business system is bound to grow in the future. This

is particularly true after the Asian crisis. Large chaebols have reduced their R&D activities by

about 13 percent after the crisis in order to improve short-term liquidity. This resulted in a major

surge of technology-based small firms in Korea. Well-trained scientists and engineers, who had

been laid off by chaebols, formed a large number of technology-based small firms. The recent

promotion of venture businesses by the government also played a role in fostering the surge of

venture firms. On the contrary to general expectations, the number of corporate R&D

laboratories increased from 3,060 at the time of the crisis in Korea to 4.232 a year and half later.

95 percent of the increase is accounted for by SMEs, signaling that on-going restructuring of

chaebols have forced many of high-caliber scientists and engineers to spin-off to form

technology-based small firms and that such moves would make a significant dent in skewed

industrial structure in Korea.

Koreans are very entrepreneurial, if the activities of emigre Koreans are any guide. In the

United States, Koreans have been among the most entrepreneurial of immigrant groups,

engaging in small-scale family business in trade and commerce, much like the Chinese, although

with even greater intensity. And yet entrepreneurship is clearly a key factor in the development

of the Korean business system and its technological capabilities. Peter Evans (1995), for

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example, identifies the “state-fostered entrepreneurship” of the 1970s as a key factor in Korea’s

success in the information industries, compared to Brazil and India.

That entrepreneurship was initially channeled by government policy into certain sectors

and certain forms (the large-scale, diversified industrial enterprise) is undeniable. But the recent

promotion of venture businesses by both the central and local governments fosters a new type of

entrepreneurship in technology-intensive areas.

Foreign Alliances on Rise

Korean firms have developed extensive global networks with firms that have provided

capital goods, technology licensing, and OEM orders. These networks have been a major source

of technological learning for Korean firms. But Korea has relied least on foreign direct

investment (FDI) for technological learning. For example, The proportion of FDI to total

external borrowing was only 6.1 percent in Korea compared with 91.9 percent in Singapore, 45

percent in Taiwan, and 21 percent in Brazil (KEB, 1987). As a result, unlike other developing

countries, FDI’s contribution to the growth of Korean GNP in 1972-1980 amounted only 1.3

percent, while its contribution to total and manufacturing value-added was only 1.1 percent and

4.8 percent respectively in 1971 and 4.5 percent and 14.2 percent, respectively, in 1980 (Cha,

1983).

The Asian crisis has, however, forced Korean firms to actively invite FDI in order to

mitigate pressing short-term cash flow problems. Not only peripheral businesses but also core

businesses are on sale. Consequently, unlike China and Southeast Asian countries, which have

witnessed a sharp plunge in FDI after the Asian crisis (e.g., Singapore 24.8 percent and Taiwan

and Malaysia 19 percent down), Korea saw a drastic increase in FDI. For example, FDI in

manufacturing increased from $2.3 billion in 1997 to $5.7 billion in 1998. A lion’s share of the

new FDI is associated with merger and acquisition of Korean firms by foreigners. Hewlett-

Packard purchased a 45 percent stake in its Korean subsidiary from its joint venture partner,

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Samsung Electronics for $36 million. Dow Chemical took over Ulsan Pacific Chemical by

purchasing a 20 percent stake. Phillips purchased a 50 percent stake in LG’s highly profitable flat

panel display business for $1.4 billion. Volve purchased Samsung’s construction machinery

division for $730 million. If assets sales are included, Korea’s top five chaebols raised over $7.4

billion in one year after the crisis. In short, Korea’s business system will be far more linked with

foreign multinationals than ever before.

In conclusion, Korea has been transformed from a subsistent agricultural economy into a

newly industrialized one within a single generation. In this transformation process, technology

development has been a driving force in the evolution of Korea’s business system. In the mature

technology stage, Korea’s business system had a strong developmental state and a limited

number of large chaebols have dominated production and market. Although this business system

had been relatively effective in the 1960s and 1970s, it has become a major rigidity for Korea to

adapt itself to the changing market and technology environment in the 1980s and 1990s, leading

to a major economic crisis in November 1997. The serious problems of the rigidity and the

necessity of radical changes had widely been recognized for many years, but Korea, like many

other countries such as the United Kingdom, began to take actions only after painful experience

of a major economic crisis.

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EXHIBIT 1: Korea 43 s Industrial and Science and Technology Policies 1

POLICIES 1960 to Mid-1980S Mid-1980s-1990sINDUSTRIAL POLICIES

Deliberate promotion of big business

Promotion of SMEs

Export orientation Export orientation

1 This table is taken from Kim (1997: 48).

References:

Abernathy, William J. and James M. Utterback (1978), “Patterns of Industrial Innovation” Technology Review, (June/July), 41-48.

Baba, Yosunori, (1985), “Japanese Color TV Firms: Decision-making from the 1950s to 1980s: oligopolistic Corporate Strategy in the Age of Micro-electronics,” D. Phil dissertation at University of Sussex.

Cha, Dong-Sae (1983), Weja Doipeo Hyogwa Boonsuk (The Effect of Foreign Direct Investment), Seoul: Korea Institute of Economics and Trade Press.

Cole, (1976)

Dore, (1973)

Evans, Peter (1995), Embedded Autonomy: States and Industrial Transformation, Princeton: Princeton University Press.

43

Promotion of heavy and chemical industries

Trade liberalizationFinancial liberalization

Repression of labour to maintain industrial peace

Intellectual property rights protectionShifting emphasis on R&D, manpower development

SCIENCE & TECHNOLOGY POLICIES

Restriction on FDI and FLs Promotion of FDI and FLs

Fortune (1999), “The Fortune Global 500: Ranked within Countries,” August 2, 1999, F37-42..

Goldstar Company (1993), Gumsungsa 35 Neon Sa (Thirty-five Year History of Goldstar Company), Seoul: Goldstar Company.

Harbison, Frederick and Charles A. Myers (1964), Education, Manpower, and Economic Development, New York: McGraw Hill.

Kim, Linsu (1980), “Stages of Development of Industrial Technology in a Developing Country: A Model,” Research Policy, 9, 3, 254-277.

Kim, Linsu (1997), Imitation to Innovation: The Dynamics of Korea’s Technological Learning, Boston: Harvard Business School Press.

Kim, Linsu (2000), “Korea’s National Innovation in Transition,” in Linsu Kim and Richard Nelson (eds), Technology, Learning and Innovation: Experiences of Newly Industrializing Economies, New York: Cambridge University Press. (forthcoming)

Kim, Linsu and Jeffrey Nugent (1999), “Korean SMEs and Their Support Mechanisms,” in Brian Levy, Albert Berry, and Jeffrey B. Nugent (eds.), Fulfilling the Export Potential of Small and Medium Firms, Boston: Kluwer Academic Publishers, 115-168.

KEB (Korea Exchange Bank), “Direct Foreign Investment in Korea,” Monthly Review, October, 84-87.

Lee, Jinjoo, Dong-Kyu Choi, and Zong-Tae Bae (1988), “Technology Development Processes: A Model for A Developing Country With a Global Perspective,” R&D Management, 18, 3, 235-250.

Magaziner, Ira C. and Mark Patinkin (1989), “Fast Heat: How Korea Won the Microwave War,” Harvard Business Review, (January-February), 83-93.

Nelson, Richard R. (1993), National Innovation Systems: A Comparative Analysis, New York: Oxford University Press.

44

Promotion of capital-goods imports

Extensive diffusion networks

Promotion of GRIs in lieu of university research

Promotion of corporate R&D activitiesPromotion of national R&D projects

Porter, Michael (1990), The Competitive Advantage of Nations, New York: The Free Press.

Stern, Joseph J., Ji-hong Kim, Dwight H. Perkins, and Jung-Ho Yoo (1995), Industrialization and the State: The Korean Heavy and Chemical Industry Drive, Boston: Harvard Institute of Industrial Development.

Utterback, James M. (1994), Mastering the Dynamics of Innovation: How Companies Can Seize Opportunities in the Face of Technological Change, Boston: Harvard Business School Press.

Utterback, James M. and Linsu Kim (1985), “Invasion of Stable Business by Radical Innovations,” in Paul R. Klendorfer (ed), Management of Productivity and Technology in Manufacturing, New York: Plenum Press, 113-152.

Vernon, Raymond (1966), “International Investment and International Trade in the Product Cycle,” Journal of Economics, 80, 190-207.

Vogel, Ezra F. (1991), The Four Little Dragons: The Spread of Industrialization in East Asia, Cambridge, MA: Harvard University Press.

45