This report investigates the digital transformation occurring within GVCs and describes the implications those changes carry for APEC cooperation. The COVID-19 pandemic is expected to accelerate the digital transformation and bolster the digital economy as work is underway to overcome this unprecedented crisis. Under these circumstances, understanding digital transformation within GVCs is critical to surmounting the COVID-19 crisis and preparing for a post-pandemic era.
This article is related to research conducted as part of the collaboration between KIET and GVCC. The article was published in the March/April 2019 KIET Industrial Economic Review, Volume 24, Issue Number 2, p. 14-27.
This joint report by the GVC Center and KIET builds on recommendations from the first project to explore opportunities in technology-related services. This report: describes and defines the digital economy, provides a case study that illustrates how Industry 4.0 impacts the capital equipment GVC and provides analysis of the activities taking place in different countries including the US, China, India, Singapore and Korea. To identify entry and upgrading opportunities in this field, 28 company case studies of global information technology (IT) lead firms were completed to identify common strategies of existing global leaders.
Duke GVCC presented The Digital Economy & Global Value Chains: Implications for Korea in Seoul, Korea on December 4, 2018 at the KIET-Duke GVCC seminar on Upgrading Globalization for Innovation Growth: Expansion of Digital Companies in GVCs and its Implications. The presentation provides an overview of the results of our recent project KIET on the digital economy and GVCs.
The Korea Institute for Industrial Economics & Trade (KIET) commissioned a global value chain study to Duke University Global Value Chains Center (Duke GVCC). The goal of this study is to analyze the country’s participation in specific global industries to identify broader lessons for Korea’s future ambitions for industrial transformation.
To do so, we examine Korea’s participation in two major industrial sectors: electronics and shipbuilding. Together, these two industries comprise 30% of exports, account for over half a million semi- and skilled jobs and a substantial share of the country’s R&D spending. They provide two distinct perspectives for Korea’s participation in GVCs. On one hand, electronics products are targeted to the consumer market, technologies are rapidly changing and profits are derived from bulk production for mass consumer markets, and control over marketing and branding. Shipbuilding, on the other hand, is very capital-intensive, ships have long life cycles, and production is highly concentrated in three countries. In both industries Korea has established a global leadership position in a select number of final product categories and key component products by continually investing in process and product upgrading coupled with strong R&D investments.
Having built its economy on a strong manufacturing base, Korea is now at a crossroads and must redefine its growth drivers for the future. Its strong commitment to process and product improvement have seen steady gains in productivity and output in the past. However, its manufacturing sector is coming under growing pressure on two fronts. In labor-intensive operations, Korea increasingly competes with lower cost countries which are building up their capabilities, particularly China and others from Asia, while, in capital- and knowledge-intensive stages of the chain, Korea is up against the world’s most advanced industrialized countries – the US, EU and Japan, which are all rapidly innovating, defining brand new industries, and ramping up new production technologies that will shape the future of manufacturing itself.
Traditional development paradigms would suggest that, to survive these challenges, Korea aim to move out of manufacturing and into services. With an underperforming services sector, this provides a somewhat pessimistic outlook for Korea’s future. It also presents policymakers with an overwhelming task as the “services” sector is broadly defined and covers a very wide range of activities, including everything from construction to finance and insurance and tourism, drawing on a wide range of skills and other capabilities and requiring a considerable transformation of the economy. The global value chain (GVC) paradigm, however, suggests that the country leverage its existing strengths in manufacturing to lead its upgrading into services, while at the same time, consolidating its leadership as a production technologies specialist. Korea has established a formidable leadership in its manufacturing chains to date based on strengths in science and technology, manufacturing and an emphasis on applied research and development (R&D). By identifying future sources of value in these manufacturing GVCs, Korea can pursue a much more targeted approach to drive the development of a stronger services sector while focusing on the highest value manufacturing segments.
This study analyzed Korea’s participation in two of its leading manufacturing sectors: electronics and shipbuilding.
Shipbuilding in Korea has been a lynchpin of industrial development, national security, and source of employment and foreign exchange for the country since the 1970s. From relatively humble beginnings in 1972, when Korean national economic development plans identified shipbuilding as a key industrial sector for development, the big three Korean shipbuilding firms, Hyundai Heavy Industries, Samsung, and Daewoo have become dominant firms in the global shipbuilding industry, producing sophisticated commercial vessels for customers around the world. Today, the shipbuilding industry contributes about 2% to Korea’s GDP (OECD 2015), directly employs approximately 200,000 workers, particularly in rural areas, and makes up between 7-8% of total exports (KOMEA 2016). Shipbuilding is routinely among the top three most valuable Korean export industries, competing with automobiles and electronics for the top spot (KOMEA 2016).
This chapter investigates the shipbuilding value chain and Korea’s position in the regional and global industry.
This report uses the Global Value Chains (GVC) framework to analyze Korea’s participation and leadership in the electronics global value chain. As one of the most highly traded industries, it provides significant insight into how countries engage in global chains. As Korea’s major export industry, the country’s performance in the electronics GVC can provide important lessons for how Korea may be able to leverage its leadership, using Industry 4.0 trends to drive industrial transformation of its economy.
This chapter reviews the policies that impact industrial development in Korea across all industries, and examines how the country’s approach to economic development has evolved over the past few decades. The review included identifying key stakeholders, trade, industrial and labor-related policies and programs.
The GVC framework has been developed over the past two decades by a global network of researchers from diverse disciplines in order to understand the phenomenon of globalization. This chapter outlines how this tool addresses economic development issues.
GVCC and the Korea Institute for Industrial Economics & Trade (KIET) investigated industrial upgrading opportunities for the Korean economy from a GVC perspective. The project team included Stacey Frederick, Penny Bamber, and Lukas Brun, and in Korea, Joonkoo Lee at Hanyang University, and Jaehan Cho at KIET. The research focused on the evolution and current status of the electronics and shipbuilding industries in Korea, and where Korea is positioned in these industries from a regional and global perspective. The research highlighted the importance of using a GVC framework when creating industrial policies in a developed country. This was followed by a second project on the Digital Economy and GVCs and in Asia.
Korea in Global Value Chains: Pathways for Industrial Transformation
The GVC framework is useful in helping developed countries understand how to remain competitive and continue to push innovation boundaries in an increasingly automated, connected and service-driven world. Korea provides an interesting case for understanding the implications of the rising phenomenon of servicification of GVCs for economic growth. This is essentially the presence of services to complement traditionally strong manufacturing sectors.
Korean economic policies of the past have transformed the country from a rural economy into an industrialized one. GDP has quadrupled since the late 1990s alone, to $1.4 trillion in 2016, making it the world’s 11th largest economy. Success to date has been based on well-known global giants, such as Samsung and Hyundai, with strong support by the national government.
However, the country has focused its innovative energies on a small set of traditional manufacturing industries and technical know-how. Korea must adapt in an increasingly service-driven landscape that will look quite different due to automation and other dynamics. Such services – sold independently of physical manufactured products – include collection and analysis software, logistics, research and supply chain management expertise. New pre- and post-production services such as after-sales data driven knowledge services are creating different business models such as clients paying a fixed subscription or per-use fee as opposed to purchasing equipment outright.
Servicification is not the only driver of the shifting landscape in manufacturing. The rise of automation and the incorporation of new disruptive technologies into supply chains are making production operations increasingly capital-intensive rather than labor-intensive, favoring more developed countries. Korea is well positioned to incorporate a growing share of automation technologies into its production operations because of its strong technological capabilities and its proximity to a growing Asian market.
Korea can reorient its strengths by prioritizing change in three key areas.
1. Industry Stakeholder Coordination and Collaboration. Participation in today’s complex GVCs demands industry stakeholder coordination and collaboration to ensure that interests are aligned, skills gaps are met, constraints are overcome and regulation is supportive for development. Organized action to assess, formulate and implement specific initiatives is essential for industry upgrading. The country’s previous hierarchical industrial policy approach allowed Korea to technologically “catch up” with other industrialized countries. Over the past decade, Korea has been transitioning from this bureaucratic approach to a new industrial policy model that is more inclusive of a broader range of actors, although these are mostly local. This new model has not always been successful and has encountered duplication of efforts. Future upgrading will require a suitable institutional development, which effectively includes all actors from small and large firms alike, and R&D centers to universities and labor organizations from across all major economic sectors. These need to include both local and foreign entities to help absorb and contribute to the latest global discoveries.
2. Entrepreneurship. The most innovative countries today recognize the value of small and innovative service firms to their economic development and put in place policies to create a conducive environment for their emergence and growth. Korea’s industrial policy environment has long emphasized manufacturing over services, and prioritized large firms over small. This compounds the challenges for creating the new knowledge-based services firms for the future. The local regulatory environment remains significantly more stringent for services than manufacturing. In 2013, there were four times as many regulations for services, according to the OECD. The Korean government needs to play a facilitating role in establishing creative hubs that can be hotbeds for the emergence of new ideas, while supported by policies that make core procedures for setting up and running a business easy.
3. Innovation Systems and Human Capital. Korea needs a well-structured innovation system with a focus on incentivizing cutting-edge research, developing the right types of human capital, and promoting mechanisms for the adoption and diffusion of new knowledge and technological capabilities to business. Service provision relies on an entirely different set of skills from those that make countries and firms great manufacturers. Thus education systems need to develop people with the skills to create software that enables increased automation and connectivity as well as people who know how to use technology to analyze and interpret data.
Currently, about three-quarters of business-sector R&D is carried out in high and medium-high technology manufacturing industries, primarily within electronics and automotive. Korean firms in these industries have well-established private R&D operations while universities contribute less than 1% of R&D funding. A challenge for the country will be to reorient its public R&D systems toward a more balanced approach with a stronger focus on universities and international collaborations.
View the article from Sept. 2017 by Frederick & Bamber on Medium.