Imitation to Innovation (Linsu Kim, 1997)

of 10

IMITATION TO INNOVATION: THE

DYNAMICS OF KOREA’S

TECHNOLOGICAL LEARNING

LINSU KIM (1997)

TABLE OF CONTENTS

1. INTRODUCTION

2. GOVERNMENT AS A LEARNING FACILITATOR

3. HARDWORKING KOREANS: EDUCATION AND SOCIOCULTURAL FACTORS

4. ANALYTICAL FRAMEWORK

5. THE AUTOMOBILE INDUSTRY: CRISIS CONSTRUCTION AND TECHNOLOGICAL LEARNING

6. THE ELECTRONICS INDUSTRY: FROM REVERSE ENGINEERING TO STRATEGIC ALLIANCES

7. THE SEMICONDUCTOR INDUSTRY: LEAPFROGGING INTO THE WORLD FRONTIER

8. IMITATION AND INNOVATION IN SMALL FIRMS: TWO CONTRASTING PATTERNS

9. KOREA’S TECHNOLOGICAL LEARNING: CONCLUSION

10. KOREA’S TECHNOLOGICAL LEARNING: IMPLICATIONS

INTRODUCTION

Korea’s rapid industrialization could be attributed to accumulation of technological capability over time.

Technological capability refer to ‘the ability to make effective use of technological knowledge in efforts to

assimilate, use, adapt, and change existing technologies’ (p.4). It comprises of production capability,

investment capability, and innovation capability, with details shared in Table 1.

Korea has growth mostly through imitation, not necessarily of illegal kind. Duplicative imitation, such as

counterfeits and knockoffs, is often the astute strategy adopted by low-wage, catch-up countries for

matured technologies. On the other hand, creative imitation, such as design copies, creative adaptation,

technological leapfrogging, and adaptation to another industry, involve learning and capability building.

Korea moved from duplicative imitation in decades of 1960s and 70s to creative imitation in 80s and 90s.

Some of the drivers of this transformation are: 1) the Korean War (transforming a rigid society into a

flexible, classless one); 2) strong government (directing industrial development); 3) Cheabols (growth

engines); 4) hardworking Koreans (coupled with commitment to education); 5) export-oriented strategy

(make it a life-or-death struggle); and 6) crisis as a major means of transformation.

The book looks at dynamic processes of technology learning taking firm as a unit of analysis.

of 10

GOVERNMENT AS A LEARNING FACILITATOR

Government interventions could be broadly divided into market mechanisms, technology flow, and time.

Market mechanisms include demand side (industrial policy), supply side (science and technology policy),

and linkage mechanisms (linking demand to supply). There are three dominant sequences of flow of

technology from abroad to catch-up countries: transfer of foreign technology; diffusion of imported

technology; and indigenous R&D to assimilate and improve imported technology and to generate its own

technology. Timing could be thought of as a dimension where policies could be fluid, transitory or even

specific to the stage of development.

Some specific features of Korean government acting as a orchestrator of economic growth are: 1) single

minded drive towards industrialization (under the regime of Park Chung Hee, starting 1961, through

heavy foreign borrowing, taking actions against illicit wealth accumulation); 2) making competent

technocrats responsible for government functions (creating meritocratic elites); 3) drawing lessons from

Japanese practices (during 1910-1945 Japanese occupation, and later by studying Japanese language).

Other mechanisms include promoting big businesses to meet scale economies by penalizing poor

performers and rewarding good ones with further licenses; adopting export-oriented industrialization

using an export-targeting system; promoting technologically advanced heavy and chemical industries

resulting in rapid capability assimilation, and repression of labor to maintain industrial pace.

Subsequently, in 1980s, the Korean government went about trade liberalization by lowering tariffs,

financial liberalization by nationalization of banks and establishment of venture capital industry, tighten

intellectual property rights regime, promoted SMEs, and shifted emphasis from heavy-industries to

knowledge-intensive industries, such as information technology and aircrafts.

In terms of the technology policy, technology transfer mainly happened through procurement of turnkey

plants and capital goods, as compared to foreign direct investment and foreign licensing. Purchase was

mostly funded by raising capital loans, in order to keep Korean management independent from influence

of foreign MNCs. Technology diffusion took place through public research institutions established in

1950s and 1960s, such as Industrial Advancement Administration, and KIST (estd. 1966). Indigenous

R&D happened through the routes of direct R&D investment (setting up Science Parks, government

research institutes (GRIs) as spin-offs from KIST, military R&D, but limited university R&D) and

indirect incentive packages (tax incentives, preferential loans for R&D, through initiatives such as World

Class Korean Products program of 1986, New Technology Commercialization program in 1993, Spin-off

Support program in 1992, etc). This resulted in private sector accounting for over 80 percent of all R&D

in Korea in 1990s. Also during early 90s, Korea launched segyehwa ‘total globalization policy’ to make

its industries world beating.

The major policy changes are summarized in Table 2.

HARDWORKING KOREANS: EDUCATION AND SOCIOCULTURAL FACTORS

Technology capability has two important elements: existing knowledge base, and intensity of efforts or

commitment. Koreans worked hard towards their way of building technological capability. Lack of

natural resources forced Korea to build its human resources, well balanced across all levels of education.

Apart from school education, there was also a focus on vocational training, junior college programs, with

a focus on science and engineering education. However, quality has suffered at the cost of quantity,

of 10

reflected by underinvestment at all levels since 1970s, especially underinvestment in university education.

Overseas training and observation is another important feature of Korean education system, including

compulsory military training of young men and women supported by US during 50s, people getting

educated under economic assistance program by USA, students studying in US universities, setting up of

KIST in 1966, and programs like Brain Pool to recruit engineers from Korea and outside.

On the sociocultural dimension, Confucian tradition has played an important role in development of

Korea. Five cardinal rules: filial piety and respect, the submission of wife to husband, strict seniority in

social order, mutual trust in human relations, and absolute loyalty to ruler – still permeate Korean

society. These traditional rules were combined with Protestant ethics to form the neo-Confucian

ideologies, emphasizing on education, discipline, role of clans, pursuit of global good, and harmonious

interpersonal relationships. The hard-working nature of Koreans can be attributed to the national trait of

tenacity, han psyche (resentment or grudges), conditioning during school days, physical environments,

‘beat Japan’ spirit, and experience of deprivation (p.70). Also the people are highly entrepreneurial, as

shown by ability to get into risky ventures. This is contrasted with discipline at the organizational level,

partly a result of military training received from first Japan and then US. The Korean War (1951-53)

transformed a hierarchical society to a mobile and flexible one, with compulsory military training

bringing men together, job-related movements, and network role played by clans. However, the young

generation is less willing to work hard.

ANALYTICAL FRAMEWORK

The dynamic process of technological learning at firm is influenced by global technological environment,

institutional environment, and technology transfer.

The global technological environment comprises of technology trajectory of advanced countries, and

catch-up countries. Technology trajectory in advanced countries follows the stages of fluid, transition,

and specific. Any new technology starts at a fluid stage characterized by heightened ambiguity; then as

the dominant design sets in, it moves to a stage of transition where production process gets setup; and

finally radical innovation gets replaced by incremental innovation in the specific stage. On the other hand,

the technology trajectory of catch-up countries follows the phases of acquisition, assimilation, and

improvement. Lacking local capabilities, firstly catch-up economies acquire packaged foreign

technologies mostly doing assembly operations on those technologies requiring engineering skills; next

comes the diffusion and assimilation of imported technologies by local firms, requiring engineering and

limited development skills; and finally applying this borrowed and assimilated technology and capability

to different product lines and applications result into improvement. As the firms in catch-up countries

move from acquisition to improvements and eventually to generation; their capabilities graduate from

duplicate imitation to creative imitation, and finally to innovation. Because the low-cost based

competitive advantage of catch-up economies erodes over time, they have to invest technological efforts

to get into greater value add. Figure 1 depicts the integration of the two technology trajectories and

corresponding movement from duplicative imitation to innovation.

In terms of institutional environment, sources of technological learning comprises of interaction with

international community, interaction with domestic community, and in-house efforts at the firm level.

International sourcing of technology could happen in the form of foreign direct investment, foreign

licensing, turnkey plant transfer, purchase of capital goods, and migration of technical personnel.

of 10

Domestic sources include universities, research institutes, other firms, and other support systems. Finally,

in-house efforts could be in the form of learning-by-doing, own R&D efforts, and production experience.

The learning from these sources is mediated by five important factors: market/ technology environment,

formal education, socioculture, organizational structure, and public policy. Figure 2 shows the interplay

between the various elements of technology learning at the firm level.

Development of technological capability not only requires assimilating existing knowledge, but also

creation of new knowledge through the process of learning. Knowledge is of the tacit and explicit type,

where the tacit knowledge is most important form of organizational learning. Further, learning depends

upon existing base of (tacit) knowledge, and intensity of efforts or commitment. However, the intensity of

effort is more crucial a determinant of long-term learning than the stock of knowledge. Cumulative

learning takes place through learning by going, but discontinuous learning requires crisis (p.103).

In Koran case, the intensity of effort is encouraged by ‘crisis’, which converts a threat into an opportunity.

This crisis could be natural or generated intentionally by a dominant coalition outside or within the firm.

Discontinuous learning can be achieved by crisis construction by entrepreneurial-minded top

management. This model of learning places a lot of importance on middle management.

Technology transfer from an advanced country to a catch-up country could be mediated by market or

based upon the active role of the foreign supplier. Figure 3 presents the various market and non-market

mechanisms, contingent on the role of foreign suppliers. The mode of transfer is determined by buyer’s

absorptive capacity.

THE AUTOMOBILE INDUSTRY

The Korean automobile industry grew steadily through 1960s to 1990s, reaching total production of 2.3

million and exports of 738,000 units by 1994. The imitation started in 1950s in the military depots where

technicians manually repaired and assembled few automobiles based upon imported Japanese and

American military vehicles. Saenara was a first Korean company to establish an assembly line in 1962.

The company evolved into Daewoo Motors. Hyundai began in 1967 assembly Ford cars, Asia Motors in

1969 assembling Fiat, and Kia Motors in 1974, producing Mazda models. Almost all automobile firms

entered as independent players in the industry. Further Hyundai Construction, apart from existing auto

producers helped Hyundai build capabilities.

The Korean government imposed crisis situations on the industry, say by introducing ‘domestic content’

schedule in 1966 to encourage localization of products, whereby transforming operations from semi-

knock-down (SKD) to complete-knock-down (CKD) arrangements. Government offered preferential

financing and tax concession for producers to expand production facilities.

Hyundai formed a task force in 1967, and in 1968 entered into an overseas assembly agreement with Ford

Motors to assemble on semi-knock-down kits basis. Ford trained Hyundai engineers and shared explicit

information to build latter’s capability. At the same time, Hyundai constructed a crisis situation by

setting ambitious goals to accelerate plant construction, and to acquire production capability in shortest

possible time, and eventually through trial and error, and hard work, the capabilities evolved from SKD to

CKD.

of 10

In 1973, government formed Automobile Industry Long-term Promotion Plan to build indigenous

capabilities of developing locally designed cars. Specific arrangement included: protection of local

market from new entrants and from new foreign knockdown imports, a significant tax reduction for

locally designed cars, promotion of vertical integration leading to new business opportunities, preferential

financing, tax concession, and an administrative decree to guarantee a large market share for Korean

model (p.112).

In 1973, Hyundai presented a plant to make 80,000 cars, as compared to its current capacity of 5000 cars.

Another crisis planted. To build capabilities, Hyundai approached 26 firms in five countries for various

technologies, where its engineers toured facilities and gained tacit knowledge. It also signed licensing

agreement with Italdesign and Mitsubishi, and hired management from British Leyland to put the learning

together in the form of automobile design. This task of assimilating knowledge on its own from multiple

sources are indeed risky, but helped Hyundai learn a great deal about the industry. Hyundai developed its

first product- Pony in 1975 with 90% indigenous components. On the other hand, Daewoo acquired most

of knowledge from General Motors, through a joint venture. It hardly built its own capabilities. As a

result, by 1982, Hyundai was operating at 67.3% of its capacity, as compared to 19.5% for Daewoo.

Finally, Daewoo broke away from GM in 1992. The company had an R&D lab since 1978 and opened

advanced engineering and research institute in 1984 to develop its own engines and transmission. The

company also had joints labs with Korea Advanced Institute of Science and Technology, and Pohang

University of Science and Technology. In 1986, opened the Hyundai American Technical Centre

At the time of oil crisis, Hyundai once again proposed to developed next generation front engine and

front-wheel technology to target the US market, and ramp up its production capacity to 300,000 units per

year. In 1981, Mitsubishi gave Hyundai the technology, without having any management control for its

10% stake in the company. Through 1985, Hyundai signed 54 licenses, as compared to 22 by Deawoo.

Hyundai finally launched the front wheel driven car in US market in 1986. Figure 4 summarizes the major

milestones of Hyundai’s technology journey. In each subsequent product launch, the company has shrunk

the development time from seven years (1976-83) to eventually one year (1995), and moving to

completely indigenized parts.

To sum up the Hyundai case, the company tapped existing knowledge through literature review

(internalize) and poaching experienced personnel (socialize), further mobility of trained people across

companies lead to diffusion of knowledge, for unlike in Japan, Korea doesn’t have lifetime employment

guarantees. Secondly, crisis construction helps overcome inertia generated from success.

ELECTRONICS INDUSTRY

The growth of electronics industry in Korea too could be attributed to Cheabol, rather than MNEs or joint

ventures. Between 1968 and 1994, the total production went up from $19.6 million to $22 billion, while

exports grew from $3.7 million to $13.1 billion in same period. LG Electronics pioneered the industry in

1958, while Samsung joined in 1969, Daewoo in 1983, and Hyundai in 1994.

The state encouraged entry of domestic players in 1960s by promoting import-substitution, tight control

of foreign investment and contraband goods in black market. It passed Electronics Industry Promotion

Act in 1969 to promote the industry as a leading exporter. This included preferential financing, tax

of 10

concession, foreign loan guarantees, and control of entry by new firms. Once again crisis induced rapid

learning by local firms.

LG started by hiring an expert German engineer, importing b/w televisions to do reverse engineering, and

in 1965 got into a licensing agreement with Hitachi of Japan for assembling b/w TVs, and learning by

trial and error. Samsung was refused technology licensing by major players for getting into microwave

products, and adopted learning by doing to eventually gain the tacit knowledge. Soon the company

secured contract from JC Penny to supply low-cost ovens. Samsung took two years to build a prototype,

and LG did it in eight months after that. Again shows that once any Korean company acquires a new

technology, the diffusion is rapid owing to employee movement and support institutional measures for

technology transfer.

KIST played a pioneering role in developing prototypes of computers, robots, and computer-aided design/

manufacturing. This was followed by Cheabols intensifying their R&D efforts, by opening foreign labs,

acquiring companies, and investing in own basic and applied R&D, apart from tying up with local

universities and government research labs. The story of development of flat panel display (active matrix)

demonstrates how Hyundai and Samsung developed own capabilities with minimal support from

incumbents.

To sum up the Korean experience in electronics industry, when the technology was matured and simple,

the firms followed reverse-engineering, and for complex technologies, they resorted to foreign licensing

and poaching expert technical personnel. The intensified their R&D efforts to reduce reliance on foreign

license providers, by setting up R&D facilities in advanced countries, and by acquiring firms.

SEMICONDUCTOR INDUSTRY

In the semiconductor industry, between 1966 and 1994, the production grew from almost zero to $14.8

billion, and exports to $11.7 billion, with the industry dominated by Samsung, Hyundai and LG. There

already where leading semiconductor player present in Korea exploiting its cheap labor for assembly and

packaging operations. In 1975, the government formulated the six-year plan to promote the

semiconductor industry, and before that established Korea Advanced Institute of Science and Technology

(KAIST- 1971).

Korea Semiconductor was the first private entirety setup in Korea in 1974, which was acquired by

Samsung to get into the semiconductors industry and then followed by journey of getting into DRAM

technology. Samsung built internal competition between its facility in Korea and California. Table 3

summarizes the major milestones along the journey. The desire to remain independent was the hallmark

of Korean efforts in this industry too. Unlike the automobile and electronics industry that developed

gradually, the semiconductor industry took a quantum leap, which was built on the platform of electronics

industry. Also the semiconductor industry is more a case of business initiatives, as compared to the state

initiative.

IMITATION AND INNOVATION IN SMALL FIRMS

In Korea, with the government’s efforts of promoting large enterprises, the SMEs were neglected in 60s

and 70s. Some of the initiatives take later to promote SMEs include: compulsory lending by banks,

promotion of venture capital industry, promotion of technical extension centers and training institutes.

of 10

However they lacked the supporting institutes. Most of the firms learnt through imitative reverse-

engineering foreign products, enabled by energetic technical entrepreneurs. With minimal government

support, knowledge transfer happened through arrival of technical personnel from others firms, learning

by observation, and foreign supply of core equipments.

APPENDIX

Table 1: Elements of Technological Capabilities (Kim, 1997: 5)

Production capability

Production management to

oversee operation of established

facilities

Production engineering to

provide information required to

optimize operation of

established facilities, including

raw material control, production

scheduling, quality control,

troubleshooting, and adaptations

of processes and products to

changing circumstances

Repair and maintenance of

physical capital according to

regular schedule and as needed

Investment capability

Manpower training to impart

skills and ability of all kinds

Investment feasibility studies to

identify possible projects and

ascertain prospects for viability

under alternative design

concepts

Project evaluation to establish

or expand facilities, including

project management, project

engineering, procurement,

embodiment of physical capital,

and start-up

Innovation capability

Basic research to gain

knowledge for its own sake

Applied research to obtain

knowledge with specific

commercial implications

Development to translate

technical and scientific

knowledge into concrete new

products, processes, and

services

Table 2: Industrial and S&T policies (Kim, 1997: 48)

Policies 1960s and 19702 1980s and 1990s

Industrial policy Deliberate promotion of big businesses

Export orientation

Promotion of heavy and chemical industries

Repression of labor to maintain industrial

pace

Promotion of SMEs

Export orientation

Antitrust and fair trade

Trade liberalization

Intellectual property rights protection

Shifting emphasis on R&D and manpower

development

Science and

technology policies

Restrictions on FDI and Foreign Licenses

(FLs)

Promotion of capital-goods import

Promotion of Government Research

Institutes (GRIs) in lieu of university

research

Promotion of GRIs

Promotion of FDI and FLs

Extensive diffusion networks

Promotion of university research

Promotion of corporate R&D activities

Promotion of national R&D projects

of 10

Figure 1: Integration of technology trajectories of advanced and catch-up countries (Kim, 1997: 89)

Figure 2: Sources of technological learning in newly industrialized countries (Kim, 1997: 92)

of 10

Figure 3: Evolution of technology transfer in catching-up (Kim, 1997: 101)

Figure 4: Major milestones in journey of Hyundai (Kim, 1997)

Year: Major milestones

1967 Task force setup to build automobile capabilities

1968 Entered Overseas Assembly Agreement with Ford on SKD basis

of 10

1973 Korean government formulated Automobile Industry Long-term Promotion Plan

1973 Hyundai submitted its master-plan to government to have a capacity of 80,000 units

1975 Launched Pony, with 90% local content

1978 Established its R&D laboratory for face-life of existing compact and sub-compact cars

1979, March Team appointed to look into long-term plan to computerized design and manufacturing

1981 Secured license from Mitsubishi for front drive technology (FF)

1984 Opened Advanced Engineering and Research Institute for own design and transmission

1984 Appointed task force to design own engine. 300R&D personnel

1985, Feb Completed FF plant, tripling capacity from 150,000 to 450,000

1986, Feb Launched FF Excel in US market

1989 Opened Hyundai American Technical Centre

1992 Able to perfect its alpha engine (goes into Accent)

1995 R&D centre setup in Japan

Table 3: Major milestones in journey of Samsung (Kim, 1997)

Year: Major milestones

1974 Acquired ailing Korea Semiconductor Co. to enter into semiconductor space

1982 Started its Semiconductor R&D lab, focusing on MOS technology

1982 Setup a task force to get into 64K DRAM, after being refused a license by leading players

1982 Licensed 64K DRAM technology from ailing Micron Technology of US

1983 Setup R&D outpost in Silicon Valley and hired Korean engineers to work on VLSI tech

1984 Launched 64K DRAM, making Korea third country to do so, after US and Japan

Imitation to Innovation (Linsu Kim, 1997)

Business

Transcript of Imitation to Innovation (Linsu Kim, 1997)