The Secret of Korean Success: State Investment and Growth of Giant Conglomerates

The names of the large Korean conglomerates, such as Samsung, LG, Hyundai, SK and Kia Motors are recognized all over the western world. It sometimes seems as if Korea has always been a focus of economic and technological prosperity, but that is not so. During the first half of the twentieth century, Korea was subject to Japanese occupation that lasted for 35 years. This was the last occupation in a series of foreign conquests that began thousands of years ago. Upon conclusion of the Second World War, the world powers attempted to establish a united independent state in the Korean peninsula. The failure of these efforts led to the outbreak of the Korean War between the communists in the north and the anti-communist forces in the south. In 1953, following three years of fighting, a ceasefire was declared and the current division between the two halves of the peninsula became permanent. The Republic of Korea, an agrarian and completely devastated country in the wake of the war, began an accelerated process of rehabilitation. A momentum of construction and innovation were accompanied by a national sense of total commitment to the state and its success, and by an underlying understanding that growth was the only way forward after the low point at the conclusion of the war.

It was during these years that the infrastructures of the modern Korean economy were laid. The authoritarian regime that ruled during the post-war era established a quality education system the graduates of which comprised fertile ground for the absorption, assimilation and subsequent development of technology. The regime also established a technical university and many research institutions in a technological park that developed into a flourishing complex. This process, termed “The miracle on the Han River”, transformed Korea from a poor agricultural economy into one of the wealthiest and most developed in the world, the product per capita of which has grown from 605 dollars in 1970 to 35,920 dollars in 2016.^{1 2}

 
Over the years, the Korean government has acknowledged the significance of technological innovation for national development, and therefore invested, and is still investing, vast funds in research and development, especially in the fields of ICT³. The rate of R&D investment in Korea thus doubled between the years 2000-2015 and stands today at 4.23% (as of 2015).⁴ The level of state expenditure on research and development is particularly high when compared to other developed countries, and stands at approximately 1% of GDP.⁵
To illustrate, a national R&D program launched in 1982 encouraged investment in R&D in the corporate sector by means of funding R&D, providing tax benefits and other incentives, and emphasized the companies’ competitiveness in international markets. Between 1982-1993, this program resulted in 2412 projects at a total cost of approximately 2 billion dollars, of which the government financed approximately 58 percent. The program’s success was reflected in the creation of 1384 patents and the development of 675 commercial products.⁶
Today, the country is harvesting the fruits of its investment: Korea was ranked as the world’s most innovative economy according to the Bloomberg Index in 2016.⁷ Koreans themselves enjoy the fastest internet connection in the world, high availability of mobile telephones, and a well-deserved reputation as early adopters of technology.^{8 9}

A further aspect of the accelerated rehabilitation process included significant government support for several conglomerates under family control (known as “Chaebols”), considered central partners for implementation of the state program of growth and industrialization. The Korean business approach espouses ‘Scale Up’: gradual growth in a comprehensive, fundamental and continuous manner. Over the years, Koreans have specialized in the establishment of small and medium-sized companies and their scale-up into conglomerates, while relying on widespread recruitment of skilled personnel, generous government resources and large injections of funds at the beginning of each new project. Today, the conglomerates function as the country’s economic backbone, while the largest, – Samsung – constitutes approximately 17% of the entire Korean economy. The Samsung Group was founded in 1969 and is today comprised of nearly 80 subsidiary companies developing, producing and marketing in a wide range of fields such as electronics, engineering, shipbuilding, construction, retail & leisure, insurance, medical services and others, in which hundreds of thousands are employed.
 
The conglomerates are also a major focus of technological innovation and each of their business-technology divisions includes an in-house   R&D Institute. In this manner, while the private sector’s share of total R&D investment stands at 75%, the 20 largest corporations in Korea’s share of the total R&D investment is approximately 57%.¹⁰

The Secret of Israeli Success: A Culture of Entrepreneurship Unafraid of Failure

Israel, in contrast to Korea, is a small country with a culture of entrepreneurship that relies on audacity, improvisation and experimenting. While in Korea it is expected that an entrepreneur whose venture has failed will beat his breast and express deep sorrow, business culture in Israel encourages, even admires risk taking and development of pioneering technologies, and acknowledges the benefit of spillover knowledge acquisition even from projects that fail. The serial entrepreneur Dov Moran emphasized this approach in describing his company Modu which developed a modular cellular phone and then closed in 2010. Moran stressed that as far as he is concerned, Modu was not a failure because thanks to the knowledge generated during its operation, 30 other new start-up companies were created.¹¹

Accordingly, the Israeli high-tech industry is characterized by a large number of innovative start-up companies that are developing pioneering components or technologies. These developments are frequently acquired by a large corporation that will then integrate them into a broader-based system or final product. The central challenge for Israeli innovation today is therefore to grow complete companies and entire value chains- that type of Scale Up in which the Koreans excel.

The Israel-Korea R&D Fund

KORIL (KORIL-DF), the Israeli-Korean binational Research and Development Foundation, was established as the result of a Memorandum of Understanding signed by the two governments in 1998 with the specific objective of advancing industrial R&D via joint technology projects. KORIL operates in conjunction with the Israel Innovation Authority and the Korean Ministry of Trade, Industry and Energy (MOTIE). Representatives of the Israeli and Korean governments comprise the Foundation’s Board of Directors. The Foundation’s head office is located in Seoul while an official Israeli representative is situated in Israel. The Foundation’s budget was enlarged to total USD 4 million in 2013, USD 2 million from each country. Its main roles are to assist companies in locating partners for R&D initiatives from both countries; funding direct R&D expenses in collaborations between Israeli and Korean companies which develop unique commercial products based on technological innovation; and the facilitation between partners from Israeli and Korean companies, especially regarding challenges arising from differences in business culture.
Proposals for support for joint initiatives are submitted to the Foundation in three budget models: Feasibility Study, Mini Scale Project or a Full-Scale Project. The Foundation’s decision whether to authorize or reject the proposal is made following parallel due diligence in Korea and Israel. Foundation website: www.koril.org 
In Practice: Strategic Cooperation with BondIT
The Fintech company BondIT, founded in 2012, develops learning machine-based solutions for financial advisors, that build and optimize bond investment portfolios. In July 2016, the company signed a strategic cooperation agreement with KIS Pricing, a Korean subsidiary company of the global finance corporation Moody’s. Within the framework of the cooperation, the two companies are jointly developing software for managing bond investment portfolios, with the financial support of the Israel-Korea R&D Fund (KORIL).

• The characterization and comparison of cultures in different countries may be inclined towards generalization. Any error on our part regarding cultural nuances in Israel and Korea is unintentional.

1. [1] Yim, D. S. (2004). Korea’s National Innovation System and the Science and Technology Policy. Seoul: STEPI; ↩︎
2. [2] OECD figures – GDP in current prices. See:https://data.oecd.org/gdp/gross-domestic-product-gdp.htm ↩︎
3. [3] Campbell, J. (2012). Building an IT Economy: South Korean Science and Technology Policy. Issues in Technology Innovation, vol. 19, 2012. ↩︎
4. [4] Van Noorden, R. (2017, February 7). Israel edges out South Korea for top spot in research investment. Nature. http://www.nature.com/news/israel-edges-out-south-korea-for-top-spot-in… ↩︎
5. [5] OECD figures for 2014 ↩︎
6. [6] Lall, S. (1999). Promoting Industrial Competitiveness in Developing Countries: Lessons from Asia. London: Commonwealth Secretariat. Pp. 51-52. ↩︎
7. [7] Lu, W. and Jamrisko, M. (2017, January 7). These Are the World’s Most Innovative Economies. Bloomberg. https://www.bloomberg.com/news/articles/2017-01-17/sweden-gains-south-k…. ↩︎
8. [8] Son, J. (2017, March 4). South Korea has World’s Fastest Internet. http://technology.inquirer.net/59866/south-korea-worlds-fastest-internet; The ICT Development Index of the ITU can be seen at: http://www.itu.int/net4/ITU-D/idi/2016/. ↩︎
9. [9] The 2016 ICT Development Index of the United Nations ITU (International Telecommunication Union). See the ITU website: http://www.itu.int/net4/ITU-D/idi/2016/ ↩︎
10. [10] Chung, S. (2007). Excelsior: The Korean Innovation Story. Issues ןn Science and Technology, Volume XXIV Issue 1. http://issues.org/24-1/chung/ ↩︎
11. [11] Based on a number of lectures of Dov Moran in Korea, the latest at the Hello Tomorrow Korea Conference within the framework of the Asian Leadership Conference in Seoul, July 2017. ↩︎

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