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Keun Lee

Chapter 3 proposes a “capability-based view” on the Korean experience in catching-up development. This approach may be considered as an extension of the technology-based view but wants to keep a distance from the government–market dichotomy as it has a more sound microeconomic foundation. The reason we are taking this view is that the real lesson from the Korean achievement is not from the role of government in economic development but from the fact that it was able to build firms’ capability and thereby sustained growth for several decades. Sustained growth for several decades is not easy, and there are numerous cases where macro-based reform brought in immediate recovery but was not sustained, and eventually the economy fell into another round of crisis. The most fundamental factors for sustained development is whether to build local capabilities or not. We contend that without some critical degree of capabilities, growth which is based on lower wage rates or simple price competitiveness tends to be short-lived or not sustained. The discussion in this chapter suggests that the Korean economy had laid the basis for a transition from a middle- to high-income country by building up technological capabilities around the early to mid-1980s. The early to mid-1980s is when the R & D/GDP ratio surpassed 1%, the share of private R & D exceeded half to reach around 70%, and the share of corporate patents became larger than that by individual inventors. Based on these capabilities, Korea was able to make the transition from an upper-middle income to a high-income country. We argue that it is not more openings but capability building associated with tertiary education and private R & D that has made the transition possible. The final section of the chapter discusses the issue of the transferability of the Korean model, focusing on the role of the government, the possibility of state activism in the World Trade Organization environment, and the role of locally owned firms.
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Keun Lee

In Chapter 6 a structuralist macroeconomics perspective is taken to interpret the two recent financial crises in Korea, and a new policy framework and reform measures are suggested to build a crisis-resilient macro-financial system in Korea. The chapter focuses on the so-called “Frenkel-Neftci” cycle and the two kinds of expected spreads, namely, interest spread and capital gain spreads, which initially motivate foreign investment in emerging economies. To establish a crisis-resilient macro-financial system, a new macro policy framework that can be described as “an intermediate system” is proposed, with full capital mobility but with an explicit option of Tobin taxes, a flexible basket, band, and crawl exchange rate system, and relative independence in monetary policy making with a new balance between interest rates and exchange rate targeting. A justification for the intermediate system proposed in this chapter is made because it is not easy to prevent the “two kinds of spreads” from happening simultaneously in a standard (orthodox) open macroeconomic policy setting.
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Keun Lee

Chapter 12 examines the effects of establishing factories abroad on domestic jobs and the issue of technological hollowing out, using the case of Samsung Electronics’ mobile phone business. It finds that the offshoring of mobile phone assembly to China, India, Brazil, and Vietnam did not result in a reduction of domestic jobs. On the contrary, Samsung’s domestic employment increased from 5,960 persons in 2002 to 20,500 in 2012. This increase mainly reflects a net increase in high-paying jobs (R & D, engineering, design, marketing) while the number of low-paying jobs (assembly) remained stagnant. To cope with possible technological hollowing out, Samsung kept its core engineers/technicians in a special unit, instead of firing them, whenever domestic assembly lines were reduced or foreign lines were established. They were kept inside the so-called “global manufacturing technology center,” with the number of its employees increasing from 80 in 2006 to more than 1,103 in 2011. These employees visit overseas factories to conduct activities such as maintenance, monitoring, re-modeling of assembly lines, and automation. In terms of strategy, Samsung engages in offshoring, but not outsourcing. This is in contrast to Apple which does both offshoring and outsourcing by contracting with Foxconn.
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Keun Lee

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Keun Lee

Chapter 11 explains the success by Korean business groups in the Chinese market, despite their late entry. It uses the concept called “project execution capability” of diversified business groups, which has led to another strategic capability of “vertical integration” (VI) among affiliates. It examines Samsung’s electronics businesses in China as an excellent case of resource sharing and coordination among affiliates in the execution of a project despite late entry into a new market. The chapter finds that the VI network was first created in the early 1970s in Korea and has since been replicated in many parts of the world such as Mexico, Malaysia, and, most recently, China. The VI network has three tiers consisting of Samsung Electronics at the top as the final assembler, Samsung Electro-Mechanics and Samsung SDI in the middle, and finally, Samsung Corning at the bottom. In the rapidly changing display market, Samsung’s stable component sourcing among affiliates has played a critical role in developing new products at lower costs to meet changing market needs. This case shows that business groups can upgrade their capabilities rather than simply lose their advantages with the maturing of market mechanisms.
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Keun Lee

Chapter 14 develops a new sequential internationalization theoretical framework to explain the processes of internationalization by SMEs from a dynamic emerging economy. It is applied to 18 FDI cases of Korean SMEs in China to analyze the changing map of the division of labor between parent firms in Korea and subsidiaries in China. We have found that the internationalization process has been sequential, reflecting the cautious behavior of SMEs with more resource constraints compared to the case of large firms. They proceeded from a product-based division of labor to a value-chain-based one, and finally to a market-based division of labor between the parent firm and its local subsidiaries. In the first stage, Korean SMEs establish production subsidiaries in China to manufacture low-end goods for re-exportation. In the second stage, the subsidiaries expand production scope to high-end goods, while the parent firm administers R & D, marketing, and production of some high-end goods. In the third stage, as the Chinese market grows in importance with local consumers’ increasing purchasing power, the subsidiaries integrate marketing and local-market-specific R & D with the existing value chains.
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Keun Lee

Chapter 10 deals with the question of why making a catch-up is even more difficult in capital goods industries that are usually led by small or middle-sized companies. It relies upon the sectoral systems of innovation as a theoretical framework for analysis. From the findings, the chapter has identified three sources of difficulties in the catch-up of the capital goods industry, particularly in machine tools. First, while small firms in the capital goods industry are usually specialized suppliers to big final goods assembly firms in the consumer goods industry or other industries, and thus the tacit knowledge accumulated from the interface between the producer and the customer firms is very important, a serious difficulty lies in the fact that local client firms are reluctant to use locally made capital goods due to their poor quality and low precision level. Second, while a successful catch-up first requires the ability to produce goods of better quality and lower prices than those produced by incumbent firms from advanced countries, a typical difficulty arises because incumbent foreign firms often react by charging predatory prices upon news of the local development of capital goods by latecomers . Third, if the catch-up firms overcome this barrier, then the next strategy used by incumbent firms is to charge latecomers with legal actions for patent violations. Despite these intrinsic difficulties, the Korean economy has achieved a very slow but gradual catch-up in the capital goods industry. The chapter attributes such achievement to several factors, including the strenuous efforts of the government, niche markets in general-purpose machine tools and emerging economies, and finally, the increasing introduction and adoption of IT or digital technologies in machine tools.
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Edited by Eduardo Albuquerque, Wilson Suzigan, Glenda Kruss and Keun Lee

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Daniel Schiller and Keun Lee

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Glenda Kruss, John O. Adeoti and Dani Nabudere