The transformation of the South Korean economy and international economic development in East and Southeast Asia

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1 International Planning Studies ISSN: (Print) (Online) Journal homepage: The transformation of the South Korean economy and international economic development in East and Southeast Asia Sang Chul Park To cite this article: Sang Chul Park (1997) The transformation of the South Korean economy and international economic development in East and Southeast Asia, International Planning Studies, 2:2, , DOI: / To link to this article: Published online: 18 Apr Submit your article to this journal Article views: 222 Citing articles: 2 View citing articles Full Terms & Conditions of access and use can be found at

2 International Planning Studies, Vol. 2, No. 2, The Transformation of the South Korean Economy and International Economic Development in East and Southeast Asia SANG-CHUL PARK Centre for East and Southeast Asian Studies, School of Economics and Commercial Law, Göteborg University, Sweden. ABSTRACT The Asia-Pacific region has been the most dynamic part of the world economy throughout the postwar period. Rapid economic development in the Asian countries has resulted in a transformation of economic structure as well. However, regional cooperation in Asia is still weak compared with the European Union. Its multilateral economic cooperation is mainly based on the governmental level instead of private sector initiatives. The South Korean economy can be explained by three facets of growth, namely diversification, stabilization and growth momentum. In order to reach these goals, the government has played the role of entrepreneur who planned what, when and how much to produce. Introduction The Asia-Pacific region has been the most dynamic part of the world economy throughout the postwar period. The wave of industrialization spread out from Japan to South Korea, Taiwan, Hong Kong and Singapore in the 1960s and 70s. It has continued to the ASEAN-4 (Indonesia, Malaysia, Philippines, Thailand) and mainland China since the 1980s. Even in the first half of the 1990s the Asian countries (excluding Japan) have achieved steady economic growth, while the advanced industrialized countries have been facing a prolonged recession. Through continuous economic development the Asian countries have created a greater degree of self-sustained growth in the 1990s. In addition, they are expanding to a new economic frontier, to the socialist countries, e.g. China and Vietnam, and deepening economic interdependence that is emerging within Asia as a result of intra-regional trade and investment flows. (Chi, 1993). Rapid economic development in the Asian countries has resulted in a transformation of economic structures as well. The share of exports in manufactured goods accounts for more than 90% in the NIEs and that in ASEAN-4 and China is also increasing rapidly. Additionally, the traditional pattern of intra-regional trade in Asia that was mainly the exchange of manufactured goods and primary commodities between Japan and the rest of the Asian countries, is now changing to a pattern of two-way trades in manufactured goods among Asian countries at different levels of economic development. A theory of economic development by Kaname Akamatsu known as the /97/ Carfax Publishing Ltd

3 242 S.-C. Park 'flying-geese' paradigm explains the development of an industry from the introduction of its products to an economy through imports and through the establishment of local production facilities to the emergence and growth of exports. Akamatsu's model is a catching-up cycle model based on a latecomer's point of view. It presupposes dynamic changes in economic relations among advanced and developing countries. The 'lead goose' (advanced nation) eventually tires out and falls back. Its position is taken over by a more vigorous one (developing nation). His analysis focuses on the structural catching-up mechanism of latecomer countries rather than the decline of a lead country. His basic idea is that a developing country industrializes and goes through industrial upgrading by capitalizing on the learning opportunities made available through its external relations with more advanced countries. (Akamatsu, 1961) In this case, the role of government as a major planner of strategic industrial policy is very important (Korhonen, 1994). This paper focuses on the transformation of the South Korean economy, the role of government as planner, the emerging high technology, foreign direct investment (FDI) and intra-regional economic development. Context: Emerging Intra-regional Division of Labour There are three main factors for the deepening intra-regional interdependence of the Asia-Pacific region: first, the relative weakness of US economic power and rising trade friction based on regional trade blocs, e.g. the European Union (EU) and the North American Free Trade Agreement (NAFTA), has stimulated Asian countries to diversify their export markets and trade more among themselves. Second, the flow of foreign direct investments in the Asian countries has contributed to the economic development and deepening regional interdependence as well. Japan became the largest source of foreign direct investment in Asia during , while the other Triad members, particularly the EU, paid less attention. The share of the region in FDI and exports from EU firms remained largely stagnant. 1 The Asian NIEs have also become major investors in the region since the early 1990s. Finally, a removal of political barriers and global detente enable the Asian countries to cooperate with one another across national borders. Following China, Vietnam also adopted its Doi Moi policy (opening door policy) in order to take advantage of the economic dynamism in the region (Tonnesson, 1994). However, regional cooperation in Asia is still weak compared with the European Union. Its multilateral economic cooperation is mainly based on the governmental level instead of private sector initiatives. In Northeast Asia, a major development project under the auspices of the United Nations Development Program has been discussed. This project is planned to develop the Tuman Delta Area bordering North Korea, China and Russia. South Korea and Japan are also interested in participating in the project (Cho & Valencia, 1991; Miller et ah, 1991). Northeast Asia, comprising the Korean peninsula, Japan, Northern China, Mongolia and Eastern Russia, is pursuing regional cooperation at embryonic stages whereas Hong Kong and Southern China have experienced booming economies. Even ASEAN, a symbol of regional economic cooperation, has not yet achieved significant results in the region. Thus, in order to cope with the rising trade of regionalism, strong regional cooperation is necessary at the governmental level as well as at the private sector level. The relative lack of

4 Transformation of the South Korean Economy 243 complementarity in the economic structures of the ASEAN countries has been regarded as the major barrier to economic cooperation within the ASEAN. This fundamental and structural problem can be overcome by extending its membership to other countries at different stages of economic development. As a concept proposed by Malaysia's Prime Minister Dr Mahathir, an East Asia Economic Caucus (EAEC) is being considered. The purpose of the EAEC struggles for the economic complementarity by coupling countries at low stages of development, such as China and the three Indochinese states, Vietnam, Laos and Cambodia, with more economically advanced countries such as Japan and the NIEs. The EAEC, however, would not include the USA, Canada, Mexico and Chile, which belong to the wider economic cooperation zone, Asian and Pacific Economic Cooperation (APEC). Thus, it is still in doubt that Japan would take a leadership role to carry out the EAEC concept in the absence of US support. In 1992, the ASEAN countries established an ASEAN Free Trade Area (AFTA) to be more attractive to foreign investors. It will cover manufactured goods and processed agricultural products and set up a common effective tariff scheme to the 0-5% level by the year AFTA aims at a greater horizontal division of labour in industrial goods on the one hand, and is expected to enable foreign capital flow into the ASEAN countries on the other. Additionally, the Growth Triangle programme being pursued to develop regional manufacturing bases in Malaysia's Johor district and Indonesia's Riau Province, including Batam Island, and Singapore is another concept to strengthen economic cooperation among the ASEAN countries. 2 The agreement to complete the achievement of the goal of free and open trade and investment in the Asia Pacific region no later than the year 2020 reached by the Asia-Pacific Economic Cooperation forum's Ministerial Meeting in November 1994 is another step towards improving the investment climate in the region. 3 These developing economic zones from north to south along the Western Pacific Rim, which form an interlocking corridor, are creating the fast growing economies of Asia and at the same time intra-regional division of labour. Transformation of the South Korean Economy and Role of Government Late industrialization is characterized by three facets of growth, namely diversification, stabilization and growth momentum. The transformation of the South Korean economy can be explained by these characteristics. In order to reach these goals, the government has played the role of entrepreneur who planned what, when and how much to produce. The initiative to enter new industrial sectors has come primarily from the public sphere. In the 1950s, the economic policy was under public control due to heavy US foreign aid for Korean War reconstruction. In comparison, every major shift in industrial diversification in the 1960s and the 1970s was planned by the South Korean government. (Amsden, 1989). The state masterminded the early import-substitution projects in cement, fertilizers, oil refining and synthetic fibres. In particular, the last improved the profitability of the textiles industry. The transformation from light to heavy industry was also initiated by the state. It was fully responsible for the push into heavy machinery and chemicals in the 1970s. Hence, it is safe to say that major milestones in South Korea's industrialization have been decided by the state.

5 244 S.-C. Park In South Korea, as in Japan, a tradition of considering bureaucratic careers is vital in providing both legitimacy for state initiatives and non-material incentives. The bureaucracy has managed to retain itself as one of the power elite groups along with the military. The most privileged bureaucratic organ was the Economic Planning Board (EPB) headed by a deputy prime minister and chosen by former president Park Chung Hee to be a superagency in the economic area (Kim, 1987). It coordinated economic policy through control of the budgetary process and the Economic Ministers Consultation Committee. Additionally, the managers of EPB were often promoted into leadership positions in other ministries (Choi, 1987). The government-led economic transformation resulted in strong ties between the regime and the largest conglomerate business (Chaebol). The Park regime was dependent on Chaebol to implement industrial transformation, which guaranteed the basis for its legitimacy (Evans, 1995). These strong ties were enhanced through the governments of the Chun regime and the Roh regime. Economic Development and Government Strategies A major change in direction of the South Korean economic development began with the military government that took power in Its economic policy aimed at rapid industrial development based on an export-oriented industrialization strategy, active inducement of foreign capital and various institutional reforms (Sakong, 1993; K.-S. Kim, 1994). To carry out the outward-looking development strategy, the government devalued its currency in May 1964 by almost 50% from 130 to 214 Won per US dollar and large-scale foreign borrowing to finance investment in export industries flowed into South Korea. Furthermore, substantial imports of raw materials, components and machinery were also necessary to promote the export drive policy. It provided the most successful exporters with a range of benefits including preferential access to loans at subsidized interest rates, tax incentives, discounts on power and freight costs and access to important licences for their machinery and components 4 (Bloom, 1993). These measures enabled a few major exporters to expand their exports and led Table 1. Average annual growth rate of Chaebols, (%) Level Top 5 Top 10 Top 20 Top 46 1 to 5 6 to to to 46 1 to 46 GDP Total value added Value added in manufacturing Source: Sakong (1993), Korea in the World Economy, p. 62.

6 Transformation of the South Korean Economy 245 to a concentration of economic power in Chaebols, which accumulated profits and branched into new lines of business across industries to form groups. They became further diversified and grew faster than the rest of the economy. The 46 largest Chaebols grew at an average annual rate of 22.8% between 1973 and 1978 while the nation's GDP grew at an average annual rate of 9.9% in the same period (see Table 1). Their share in GDP also increased from 9.8% to 17.1% during the same period (Sakong, 1993). A major factor in the fast growth of the conglomerates in the 1970s was the government's new industrial policy based on the heavy and chemical industries (HCI). The government supported them further in order to reach its target of economic growth. HCIs' preferential access to bank credit enabled big conglomerates participating in the government's HCIs promotion policies to receive nearly 60% of the total bank loans from 1975 to 1977 and almost 95% of policy loans in It resulted in the neglect of the light manufacturing industries that were significant exporters as well as producers of daily necessities. At the same time, over-investment in targeted industries occurred, based on supply-side considerations rather than realistic demand-side forecasts at the firm level. Consequently, the government announced a set of comprehensive stabilization measures including restrictive aggregate demand management through a tighter monetary and fiscal stance in It meant that the growth-first strategy in the 1960s and 1970s turned to stabilization policy in the 1980s although the latter was based on a short-term strategy. The policy shift caused severe problems in the non-targeted, labour-intensive sectors of the economy and the balance of payments crisis created by the second oil shock. However, it was well timed and South Korea took advantage of the boom in manufactured exports in the mid-1980s. Moreover, selective industrial promotion laws oriented to sunrise industries such as electronics and petrochemicals were replaced by the Industrial Development Law in 1986 that mainly focused on rationalization of declining industries such as the textile industry, ferro-alloys and fertilizers. The new law also supported technological upgrading instead of providing only credits. It enabled the government to establish a basic principle. The government was ready to be involved in industries only in cases of obvious market failure. After the second half of the 1980s trade liberalization became essential for maintaining a cooperative relationship with the United States in particular and a liberalization in the financial sector began in a limited form. 5 The close association of government and business in South Korea's economic development has been regarded as Korea Inc. (Cumings, 1987; Wade, 1990). However, although this government-business relationship contributed to the rapid industrialization, the national economy suffered from a fundamental distortion of the competitive market structure, misallocation of resources, and severe inflationary pressure and unbalanced development of the industrial structure created by excessive government intervention until the first half of the 1980s. 6 Furthermore, the domestic environment has changed rapidly since the end of the 1980s. The technology-intensive sector has continuously expanded and at the same time the manufacturing sector is becoming more sophisticated and diversified. Big conglomerates such as Hyundai, Samsung, Lucky Goldstar, Daewoo etc. are becoming more integrated into the world economy through corporate alliances and foreign direct investment that enables them to evade

7 246 S.-C.Park government directives. Thus, the new directions of the economy ought to be concerned about technology-related market failures based on the lack of human and relatively underdeveloped subcontractors. In the beginning of the 1990s the external environment has also been changing rapidly through new regional alignments and a new order of world trade based on the World Trade Organization (WTO). In order to overcome trade barriers, the government and businesses promote overseas direct investments on the one hand and are keen to increase their competitiveness against foreign firms on the domestic and international market on the other hand. Hence, the role of the government is focusing on support for research and development (R&D) activity to upgrade technological standards. The government is also keen to upgrade the industrial structure oriented from industrial widening toward industrial deepening, and to improve the industrial competitive environment created by well-developed infrastructure, stable labour and land supply etc. 7 The Emerging South Korean High Technology In the mid-1960s, some American electronics companies established mostly wholly owned operations in Korea. They were mainly assembling components for export using imported parts. Under these circumstances South Korean companies could not take any advantage from the American companies. A real development in the South Korean electronics industry stems from the Japanese investment that began in 1969 and grew rapidly in the early 1970s. At that time the Japanese production moving overseas was based on a strategy for globalization and provided embryonic Korean electronics producers with an opportunity to establish joint ventures with Japanese counterparts. In short, the Japanese strategy for globalization and the South Korean government strategy for economic development were related to each other for their own interests. Thus, Samsung and Lucky Goldstar achieved most benefits from Japanese investments in the South Korean electronics industry. Samsung established joint ventures with NEC and Sanyo Electric and the Lucky Goldstar Group with NEC and with Alps Electric (Bloom, 1993). Needless to say, there was little technology available to South Korean companies in the 1960s because of inadequate research infrastructure and lack of skilled manpower. Besides, there was no technology transfer from the wholly owned subsidiaries of the American companies. This resulted in a restricted development strategy to obtain foreign production technology in the form of machinery and equipment for electronics assembly. In order to operate this equipment, the South Korean electronics companies developed the required managerial skills and hired low-cost female labour to assemble the basic components. 8 Furthermore, the finished products were mainly exported usually on an original equipment manufacture (OEM) basis and own-brand sales were restricted to the domestic market. These were the main strategies for the embryonic South Korean electronics industry. As a next step, in the early 1970s the South Korean companies received foreign technology from the Japanese companies established as joint ventures with South Korean companies, particularly in the consumer electronics sector. Later, with the growing R&D activities of the South Korean companies, licensing and OEM agreement became more significant. The Japanese companies began to withdraw from the joint ventures in the late 1970s and early 1980s. In order to

8 Transformation of the South Korean Economy 247 Table 2. Export of semiconductor products Growth (%) Growth (%) Manufacturing Memory DRAM 1M 4M 16M Non-memory Assembly Note: Unit = US$millions. Source: MOTIE (1994). conduct R&D activities in high-technology fields, the government established materials research institutes in the 1970s, which had a considerable impact in increasing the R&D efforts of private companies. Finally, in the 1980s electronics companies, mainly Samsung and Goldstar, and later Hyundai, began to grow rapidly in the world market for consumer electronics. This resulted from the government's technology policy encouraging a concerted effort in the electronics industry as part of its export promotion policy. It was also the result of the recruitment of production management from the foreign ventures established in South Korea and of South Korean engineers educated and working in the electronics industry in the USA. 9 In the semiconductor industry, Samsung Electronics produced 8.0 million 4M-DRAM (dynamic random access memory) chips per month in Hyundai Electronics and Goldstar Electron were producing 4.5 million 4M-DRAM and 3.5 million 4M-DRAM per month respectively in the same year. 10 The export of semiconductor products has been growing rapidly as well. As Table 2 shows, the export of semiconductor products increased by 73.1% in In particular, the export of 4M-DRAM expanded to 85.8%. Thus South Korean semiconductor products accounted for 10.3% of world market share in the same year (see Table 3). Although the South Korean semiconductor industry has expanded as the Table 3. Current situation of semiconductor industry World market (A) Domestic production (B) Market share (B/A) Export (C) Import (D) Trade balance (C-D) Note: Unit = US$ millions. Source: Dataquest and MOTIE (1994).

9 248 S.-C. Park Advanced memory chips Manufacturing equipment, materials etc. Basic technology Korea Japan Taiwan Figure 1. Technology structure of South Korean semiconductor companies. Source: Nomura Research Institute (1993). second largest producer in the world, it still has weaknesses in non-memory production incorporating basic technology and design technology. 11 A demand for non-memory chips, application specific integrated circuits (ASICs), is increasing rapidly since electronics products have become more complex and the life-cycle of products has decreased. Michael Hobday, semiconductor specialist, pointed out that ASICs will be applied to all industries and defined as the rules of the game in the future. 12 At the same time, the South Korean semiconductor industry is heavily dependent on foreign suppliers, mainly in the USA and Japan, for more than 80% of domestic non-memory consumption as well as semiconductor making equipment. 13 Moreover, the South Korean semiconductor industry has a wide technological gap even with Taiwanese competitors especially in basic technologies, materials and manufacturing equipment. Japanese and Taiwanese producers have broad basic technologies whereas South Korean producers exhibit an unbalanced technology structure (see Figure 1). In addition, Chaebol dominance in the South Korean semiconductor industry implies a lack of innovative activity despite rapid production growth of DRAM chips, while small and medium sized Taiwanese competitors have succeeded in developing superior technology and negotiating with foreign companies. The Table 4. R&D expenditures ( ), selected countries Country R&D expenditure (US$ millions) Financed by, government funds (%) R&D expenditures to GNP (%) No. of researchers Japan Taiwan Korea Source: Korea Ministry of Science and Technology, ROC Taiwan Statistical Data Book.

10 Transformation of the South Korean Economy 249 Chaebol-led economic system also lacks the capacity and willingness to cooperate with foreign firms. As a new trend, however, the multi-layered structure of the new computer industry needs to work closely with many others in order to obtain access to technology or manufacturing expertise. Therefore, any single firm, even a big conglomerate that is left out of alliances and linkages, will face difficulties in maintaining its viability in the future (Simon & Soh, 1994). Taiwan has been always one of the hardest competitors for South Korean high-technology industry on the world market. As Table 4 shows, both countries compete with each other in high-technology industry and R&D activities. Taiwan was the seventh biggest export market for South Korea and 12th most important import country at US$2296 million and US$1407 million respectively in 1993 although diplomatic relations between the two countries were broken because of South Korean diplomatic ties to mainland China in Bilateral trade volume in the microelectronics, computer and semiconductor sectors amounted to US$ in 1992 (exports: US$ , imports: US$ ). South Korean exports to Taiwan and imports from Taiwan in these sectors accounted for 23% of the total exports to Taiwan and of the imports from Taiwan respectively, while their shares in the whole trade volume reached 5.5% and 9.2% in these sectors. 14 With the advent of the South Korean market-opening policy, world personal computer (PC) giants landed recently in South Korea. Among them a Taiwanese PC maker, Acer, launched an independent marketing association in March 1995 and plans to establish a production line in June in order to supply Pentium-level PCs for corporate users. 15 Its PC world market share in 1994 accounted for 2.6% the 6th largest share on the world market. The Federation of Korean Information Industries (FKII) estimated that the domestic market share of foreign-brand PCs reached 15% in 1994, up from 8% in 1993 and was expected to be higher than 20% in South Korea's Industrial Challenge and Technological Strategies South Korea's key industrial challenge is to keep ahead of the ASEAN-4 and mainland China by maintaining and expanding the existing technological gap and at the same time achieving higher levels of product sophistication, in order to compete with other NICs as well as with Japan, the USA and Europe. With a new global economic order, involving triple blocs, South Korean industry faces severe trade barriers in other blocs on the one hand and new intra-regional competition based on a rapid increase of intra-regional trade connections in high-technology and knowledge-intensive goods and services in its own bloc on the other. Thus, South Korea needs to develop technology-intensive industries in order to survive in a dynamic international and regional environment. Historically, the Chaebol dominant industrial structure has restricted the entry of small and medium sized firms, which has resulted in serious technological dependence. Activities of small and medium sized firms based on their flexibility play an important role in innovation. In order to slow down Chaebol dominance and to encourage small and medium sized firms, the government launched two strategies aiming at rapid and sustained technological development. First, South Korea is struggling to upgrade its technological capacity through using imported technologies; this is part of the strategy to build up the country's physical and manpower infrastructure. The main goal of this strategy

11 250 S.-C. Park Table 5. R&D expenditures by sector of performance (%) Year Research institutes National & non-profit Public Universities Private companies Source: Ministry of Science and Technology ROK (1994) Report on the Survey of Research and Development in Science and Technology is to form the nation's linkages with key multinational companies in various industrial areas. Secondly, South Korea is keen to strengthen the country's technological self-sufficiency by deepening its existing industrial and technological capabilities. In order to carry out this strategy successfully, an increase of R&D activities is necessary. The government promotes participation of local industries in R&D activities through offering a large number of incentives such as depreciation allowances, investment tax credits, deferral of income tax payments, and duty-free import of selected capital goods (Simon & Soh, 1994). The share of R&D between government, universities and private companies has rarely changed from 1989 to 1993 except that the share of R&D by private companies increased from 73.9% in 1989 to 80% in 1990 (see Table 5). The government expects that the private sector share of R&D will increase in the mid-1990s. South Korea's Foreign Direct Investment (FDI) South Korea's overseas direct investment began with a forestry development project in Indonesia in Since then, it has grown at a modest rate until the middle of the 1980s. As an exception, however, construction project investment in Middle Eastern countries increased substantially in Following 1986, as Table 6 shows, outgoing FDI has been growing rapidly. In particular, its ratio of increase indicates a remarkable result and finally outgoing FDI surpassed investments from abroad in The rapid increase in South Korea's outgoing FDI in recent years results from two factors. First, South Korean businesses aim to take part in the current international trends toward globalization of business operations in order to take advantage of different factor endowments and to acquire the necessary skills and technologies via FDI as well as to avoid trade barriers based on regional protectionism. Second, the experience of a South Korean balance of payments surplus in 1986 enabled the liberalization of regulations on outgoing FDI that was effective in increasing FDI outflow and contributed to participation of South Korean firms in global business activities. 17 The FDI contributed to technology import as well as upgrading impressive technological capabilities. South Korea achieved much more in developing advanced innovative capabilities than other NIEs in the region. The share of FDI in gross domestic investment (GDI) in South Korea during was lowest

12 Table 6. South Korean Foreign direct investments Year Total investment Withdrawal Actual investment Southeast Asia North America Central America Europe Other i 3 3 t 3a *-t- S" 3 Note: Unit = US$ millions. Source: The Bank of Korea (1993). CD O K 3^ i 3 m 3 O I i '

13 252 S.-C. Park Table 7. FDI as share of GDI and R&D as share of GDP in NIEs ( ) (%) Nation FDI/GDI FDI/GDI R&D by productive enterprises as a share of GDP Hong Kong Singapore South Korea Taiwan Source: United Nations (1994), p. 73. Table 8. Foreign direct investment in different regions Regions Case 1992 Amount Case 1993 Amount Asia China Indonesia Vietnam North America Europe Others Total Note: Unit = US$ millions Source: MOTIE (1994). among NIEs whereas research and development as a share of GDP reached the highest rate among these nations during the same period (see Table 7). This indicates that a connection between industrial policy, selective restrictions on FDI and pursuit of technological deepening enabled the achievement of high economic growth. Additionally, it shows that FDI was one of the important policy tools in the development of indigenous capabilities in South Korean industry. 18 The geographical pattern of South Korea's outgoing FDI has been concentrated mainly on North America and Southeast Asia. As a new trend, Southeast Asia became the largest South Korean FDI region at US$ in After 1992, South Korea's outgoing FDI implies a new geographical pattern through the opening diplomatic relationship with mainland China. South Korea's FDI to China has been increasing dramatically. In 1994, China was South Korea's largest FDI country with accumulated total net foreign investment of US$1113 million. At the same time, Vietnam attracted South Korean FDI, while the total investment to Indonesia has decreased recently (see Table 8). South Korean firms had invested 11% of total outward FDI in East and Southeast Asia in This share had increased to 48% in Although Asia remains the most favoured destination for South Korean investment, the EU, particularly the United Kingdom, has emerged recently as a new magnet for South Korean factories. In July 1996, Lucky Goldstar, the third

14 Transformation of the South Korean Economy 253 largest Korean conglomerate, announced plans to build a US$2.6 billion electronics complex in Newport, South Wales. Additionally, Samsung, the second largest conglomerate, opened a US$675 million consumer electronics complex at Wynyard Park in north-east England in Their strategies to invest in the UK are mainly to overcome a stagnant home market, rising domestic wage costs and the threat of trade protectionism. 20 Conclusion The post-second World War long economic boom resulted in a massive increase in world trade and domestic investment. Since the early 1980s, however, a new trend has emerged in the form of a sudden increase of FDI. With regard to FDI activity it is important to note that a distinct regional pattern of distribution has emerged that has formed trade blocs such as the EU and NAFTA. In East Asia, Japan has been a core of FDI and NIEs have become a new source of FDI in the ASEAN-4 and mainland China that is fostering regional economic integration and interdependence. South Korea has been playing a major role to construct a framework of intra-regional division of labour along with Japan and other NIEs in the region. Following late industrialization based on state intervention, foreign loans, borrowed technologies etc., South Korea has become one of the major economic powers in the region. Its economic development is regarded as a miracle of East Asia and a model for other developing nations. In the rapid economic growth period, the government chose strategic industrial sectors, which contributed to improving national competitivenesses in the world market. This government-led economic development strategy resulted in strong ties between the government and industry, which enabled the formation of Chaebols. A Chaebol-oriented economic structure contributed to rapid national economic growth and, at the same time, faced severe trade barriers from the EU and NAFTA due to its mass production system. Furthermore, domestic production costs have increased continuously because of well-organized labour unions and rocketing land prices. These negative factors pushed the industries to reorganize their structures. South Korea struggles to achieve technological upgrading of industry and foreign direct investment in the region as well as in the advanced industrialized countries. The technological upgrading of industry will make the South Korean economy grow further. The strategic patterns of foreign direct investment can be explained as follows: FDI in the Southeast Asian countries and mainland China is mainly to transfer the light industries such as shoes and textiles, which are no longer profitable, to production at home because of high labour costs. By contrast, FDI in the advanced industrialized countries is focused on high-technology industries, such as microelectronics and semiconductors, in order to upgrade technological capacities and to increase market shares. South Korea faces a new industrial challenge through changed regional and global environments and is committed to strengthening its competitiveness in technology and industry. In order to overcome trade barriers and at the same time to take advantage of increasing challenges of intra-regional competition, it is clearly significant that its technological capacity must be highly developed. In reality, however, it is seriously dependent on advanced industrialized countries.

15 254 S.-C. Park Thus, South Korea needs technological linkages with key multinational companies in the form of network-oriented cooperation associated with strategic alliances to strengthen its technological self-sufficiency. After fulfilling this aim, South Korea can increase its importance in global competition in the years ahead. Notes 1. United Nations (1995), pp See Far Eastern Economic Review, 7 January 1993, p United Nations (1995), p Cf. Kwang-Suk Kim, Industrial policy and trade regimes, in: L.J. Cho & Y.H. Kim. (1994) Korea's Political Economy, (Boulder/San Francisco/Oxford), p Sakong (1993), p. 75. See also Leipziger & Petri (1994), p Y.H. Kim (1994), p See Ministry of Trade, Industry and Energy (1994), pp Female workers in the electronics industry sector have been always a majority because of its low-labour cost. At present they remain the majority in this sector. 9. See H. Wakabayashi & M. Sumita (1993) South Korea's semiconductor industry, Nomura Research Institute (Ed.) MRI Quarterly, 2 (Summer), p See the Korea Economic Weekly, May According to the latest statistics (April 95), Samsung Electronics, LG Semicon and Hyundai Electronics produced 12 Million, 8 million, and 7 million respectively per month. 11. According to government statistics, the capacity of Korean basic and design technology in the semiconductor industry sector accounts for 20% of its Japanese and US counterparts. See Maekyung Business Week, 19 February 1994, pp Hobday, (1991), pp MOTIE (1994), p. 174; cf. Wakabayashi & Sumita, op.cit., pp For the statistics, 236 export items and 270 import items in microelectronics, computer and semiconductor sectors are chosen. They are based on the government statistics on foreign trade. See Korean Customs Administration/Korea Customs Research Institute (1992). 15. See Korea Economic Weekly, 1 May 1995, p Korea Economic Weekly, ibid. 17. See Sakong (1993), pp United Nations (1994), pp United Nations (1995), p See Financial Times (1996). References Akamatsu, K. (1961) A theory of unbalanced growth in the world economy, Weltwirtschaftliches Archiv, 86(2), pp Amsden, H. (1989) Asia's Next Giant, South Korea and Late Industrialization (New York: Oxford University Press). Bloom, M.D.H. (1993) Globalization and the Korean electronics industry, Pacific Review, 6(2), pp Chi, H.K. (1993) Asia's economies: outlook to the year 2000, Nomura Research Institute (Ed.) NRI Quarterly, 2(3), pp Cho, L.J. & Valencia, J. (1991) Summary, in: International Conference on Cooperation in the Economic Development of the Coastal Zone of Northeast Asia, pp Choi, B.S. (1987) Institutionalizing a liberal economic order in Korea: the strategic management of economic change, PhD dissertation, Kennedy School, Harvard University. Cumings, B. (1987) The origins and development of the Northeast Asian political economy: industrial sectors, product cycles, and political consequences, in: F. Deyo (Ed.), The Political Economy of the New Asian Industrialism (Ithaca, NY: Cornell University Press). Evans, P. (1995) Embedded Autonomy, State and Industrial Transformation (Princeton: Princeton University Press). Far Eastern Economic Review (1993) 7 January.

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