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The State’s Role in Globalization: Korea’s Experience

from a Comparative Perspective

Article  in  Politics & Society · June 2017

DOI: 10.1177/0032329217715614

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PASXXX10.1177/0032329217715614Politics & SocietyKwon and Kim

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The State’s Role © 2017 SAGE Publications
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DOI: 10.1177/0032329217715614
https://doi.org/10.1177/0032329217715614
Korea’s Experience journals.sagepub.com/home/pas

from a Comparative Perspective

Kyung Mi Kim
Korean Institute of Political Studies, Seoul National University

Hyeong-Ki Kwon
Seoul National University

Abstract
By analyzing how Korea has upgraded its industrial capabilities in the course of
corporate globalization, this article holds that some versions of developmental state
work better in the globalization process. Globalizing national corporations, neoliberal
optimism notwithstanding, does not necessarily result in upgrading domestic
innovation capabilities. In the United States, free-market firms may benefit through
offshoring, but they create holes in the industrial linkages or industrial commons at
home, enfeebling US capability for innovation. By contrast, the Korean government
successfully upgraded domestic firms’ innovation capabilities and reduced the
possibility of deindustrialization in the course of globalization by moving from classical
developmentalism to a new form of development based on inclusive and collaborative
networks. Korea’s earlier classical developmentalism focused on mobilization of
physical capital, funneling it exclusively to a few firms.

Keywords
globalization, Korea, developmental state, industrial commons, neoliberalism

Corresponding Author:
Hyeong-Ki Kwon, Seoul National University, Gwanak-gu, Gwanak-ro 1, Seoul, Korea.
Email: kwonhk@snu.ac.kr
2 Politics & Society 00(0)

As competition has increased worldwide, corporations in national core industries have

disintegrated their value chains and reorganized fragmented value chains across
national borders in order to utilize the advantages of local production, including low
wages, high-tech parts, and various specialties of parts suppliers. Apple’s iPod, for
example, is designed and made in the United States, with SDRAM made in Korea,
video processors made in Taiwan, and display drivers made in Japan. Apple assembles
the product in China and sells it in American markets or abroad.1 As corporations
recompose their value chains across national borders for competitive advantage, the
global reorganization of production effects changes to the national economy, including
the hollowing out of domestic jobs and the dissolution of current interfirm relations.
Neoliberal globalists remain optimistic, holding that offshoring of national corpo-
rations and deindustrialization at home is no cause for worry. It is “actually a sign of
strength, not weakness,”2 because offshoring results in lower input prices and increased
profits, which will be invested in new competitive areas, thus creating new employ-
ment and further economic growth.3 Despite neoliberal predictions, however, not all
nations fare well in the course of national corporations’ globalization. Some countries
upgrade their current industrial competitiveness, while others do not. For example,
although Korean and US core industries have similarly globalized in the 2000s, Korean
overseas production is less likely to produce deindustrialization effects at home.
Why do some countries succeed in upgrading their industrial competitiveness in the
process of globalizing national corporations, while others do not? How can the likeli-
hood of a win-win scenario be increased? How did Korea upgrade its domestic indus-
trial capabilities while its national corporations globalized?
Exploring Korea’s adjustments in the course of its corporations’ globalization,
compared with US counterparts, this article holds that the globalization of national
corporations does not inevitably lead to a hollowing out of domestic industries, or to
an automatic upgrading, as neoliberals argue. We demonstrates that some countries,
including the United States, lose many factors of “industrial commons”4 in the course
of globalization, while Korea upgrades to knowledge- and technology-intensive sys-
tems by building a new industrial ecosystem. The article holds that a version of the
developmental state that focuses on improvement of collaborative networks and inno-
vative capabilities can work better in an increasingly globalized context to nurture the
industrial commons at home than the free market and classical developmental states,
which mobilize and allocate physical capital inputs in exclusive ways. As we shall
examine, Korea was able to upgrade its industrial competitiveness because it replaced
traditional developmentalism with a new version of the developmental state that
focuses on nurturing inclusive innovation networks.
This article examines the globalization of Korean core export industries, particularly
the electronics and automobile industries, in contrast with US counterparts. The pri-
mary data include intensive and extensive personal interviews with key people in lead
firms, suppliers, and trade associations in the Korean automobile and electronics indus-
tries, as well as government officials. Preliminary interviews were conducted from May
2010 to March 2011, and from April 2013 to June 2016 for deeper research. Personal
interviews include twenty-eight persons in government and government-affiliated
research organizations, twenty-seven persons in private companies, and seventeen
Kim and Kwon 3

persons in trade and labor associations. To trace the processes of globalization, we also
examined daily newspapers in Korea and the United States This article uses extensive
quantitative data, including OECD data and surveys developed by Korean and interna-
tional organizations.
The article first critically reviews prevalent notions about the globalization of pro-
duction and suggests a theoretical alternative. It then studies how, and to what extent,
Korean core industries’ globalization differs from US models. Next, it examines the
politics of transformation, including how Korea has changed its traditional industrial
system and upgraded its industrial capability in the globalization process.

Prevalent Theories and an Alternative

This section briefly reviews prevalent ideas regarding the globalization of national
corporations and its effects on home economies, including pessimistic nationalism,
optimistic neoliberal globalism, and a new developmentalism. A theoretical alternative
focuses on the state’s role in upgrading the industrial commons at home.
In advanced countries such as the United States, Germany, Japan, and Korea, working
people worry about the hollowing out of their domestic jobs as corporations globalize. In
Korea, the United States, and Germany, employers sometimes threaten to move produc-
tion overseas if labor and government are not favorable to them.5 In direct response to the
threats of offshoring, a few suggest old-style nationalistic policies, including protection-
ism and redressing unfair trade.6 Some American states, for example, have passed legisla-
tion that restricts offshore outsourcing to some degree.7 However, old-style nationalism
may not work because global production networks are more efficient and innovative than
traditional single-nation-based production. Korean electronics firms in the early 1990s
had to go abroad in order to compete with Japanese rivals who combined high technology
with cheap labor in Southeast Asia. Isolated protectionism costs too much, with loss of
learning opportunities in rapidly changing technology and innovation.
With opportunities to utilize various resources and to learn rapidly changing tech-
nologies, neoliberal globalism may serve industries better. Neoliberals, following
comparative advantage theory, hold that globalization of national corporations is good
for both home economies and host countries, free of state intervention and open to
free-flowing capital.8 According to neoliberals, for developing countries like India,
offshoring is not exploitation but provides workers with jobs and a chance to develop
human capability; for developed countries, offshoring reduces input prices and
increases profits that will be invested in new competitive areas and create more jobs.
Neoliberals dismiss worry about job loss through offshoring because the loss of indus-
trial jobs and closing of factories in the course of globalization are a process of cre-
ative destruction: low-skilled jobs at home are offshored to developing nations; and
offshoring then saves input prices and frees up the domestic economy to upgrade to
higher-value-added production. Neoliberals hold that in order to optimize dynamic
advantage, the allocation of resources should be driven only by the free market, and
state intervention should be reduced to the minimum. Neoliberals such as Howard
Pack and Kamal Saggi hold that industrial policies, whether new or old, are irrelevant
in the course of globalization.9
4 Politics & Society 00(0)

Global networks and openness are needed to access better resources and better
opportunities to learn. However, a national economy is not automatically upgraded to
a higher innovation-oriented economy by free markets. In the United States, for exam-
ple, corporations’ increased profits, resulting from saved input prices in the course of
globalization, were not necessarily reinvested at home to upgrade the domestic indus-
trial system. The US trade deficit in advanced technology products expanded, from a
$35 billion trade surplus in 1990 to a $81 billion deficit in 2013, because, as Gregory
Tassey observes, domestic research and development in American corporations
declined with the rapid growth of US corporations’ offshore R&D.10 Although US
corporations might have earned higher profits by using foreign intermediates, many
industrial commons, such as parts suppliers and skilled workers, disappeared.11
Neoliberals like Jagdish Bhagwati overlook industrial linkages and their effects at
the system level. Bhagwati holds that service jobs in the potato chip industry are the
same jobs in the high-tech microchip industry if they earn the same wage or profit.12
However, the problem faced by the United States in the course of offshoring may not
be the retrogression of individual education or individual capabilities, but a failure at
a system level—the dissolution of industrial linkages or the loss of industrial com-
mons as complementary capabilities, which industrial actors utilize when they trans-
form new ideas into new products on the market. According to Pisano and Shih, a
smart US researcher in digital cameras may come up with an innovative idea, yet may
struggle to realize and commercialize the idea at home because many parts and design
capabilities related to digital camera production go abroad, reducing interaction with
other key players.13 Much learning and innovation takes place as individuals or com-
panies move ideas beyond design and prototype. Much upgrading of industrial capa-
bilities takes place as researchers at research institutes and designers, engineers, and
technicians at various test centers and parts companies interact throughout the produc-
tion process. The current problem for US industries is that, as corporations shift their
technologies abroad, the United States loses many industrial commons, such as com-
monly available resources and capabilities including training, local banking, and mul-
tiple suppliers, and thus loses capacity for future learning and innovation.14
In contrast to the United States, the trade surplus of Korea in the advanced technol-
ogy industries has increased in the 2000s while its corporations significantly increased
overseas production. Korea has increased domestic employment and, more important,
has significantly upgraded its industrial capability, from an inputs-oriented economy
to a knowledge-intensive economy.
The article focuses on the “industrial commons” as collective capabilities in the
industrial ecosystem.15 The industrial commons are a key source of competitiveness
for national industries. The challenge is how to organize or upgrade the industrial
commons in the course of corporations’ globalization. We hold that a version of the
developmental state can play a critical role in upgrading the industrial commons in the
course of corporations’ globalization. Unrestrained free markets, in which corpora-
tions go abroad for their individual short-term profits without considering collective
innovative capabilities at home, can lead to the loss of the industrial commons. In the
case at hand, Korea could upgrade its industrial competitiveness, even in the course of
corporations’ globalization, because it shifted to nurturing collective learning and
Kim and Kwon 5

innovative capabilities by inclusive collaborative networks, from classical develop-

mentalism that prioritized the mobilization of physical and capital inputs to a few
corporations. Without these changes, such upgrading of the industrial commons at
home would not be possible. Traditionally, large Korean original equipment manufac-
turer (OEMs) had no interest in collaborating with home suppliers. They were more
interested in using, say, Japanese parts and assembling them for exports.
This article, which emphasizes the state’s role in the course of national corporate
globalization, is slightly different from the theory of the twenty-first-century develop-
mental state in that we focus on industrial linkages and the industrial commons rather
than on individual human capabilities and education.16 Twenty-first century develop-
mentalism emphasizes the shift of economic growth from large capital-oriented accu-
mulation to human capability-centered innovation. According to twenty-first-century
developmentalism, since the 1990s economic growth has been shaped not by physical
capital and increased labor inputs, but by new ways of arranging innovative ideas and
information, where individual citizens’ capabilities are the most important source for
economic growth. Hence twenty-first-century developmentalism emphasizes social
supports, education and democratic institutions that contribute to the expansion of citi-
zens’ capabilities.
Although we agree with twenty-first-century developmentalist claim that the driv-
ing forces for economic growth have shifted from physical capital accumulation to
learning and capability expansion, we question the simple causality of individual citi-
zens’ capability and economic growth. For example, the decline of US industrial com-
petitiveness in the course of globalization is not due to degeneration in US education
or to US citizens’ lack of new ideas. Rather, it is harder for US citizens to materialize
and commercialize their new ideas. The amount spent on education may not necessar-
ily translate into improved economic growth or industrial capabilities.17 The causal
relation, from increased social supports to growth of citizens’ capabilities and to eco-
nomic growth, is too naïve. France and Japan experienced economic recession and fell
into a “social anesthesia state,” because the state redirected budgets from industrial
development to social policies, thus reducing public investment in R&D.18 By con-
trast, northern European countries, including Sweden and Denmark rejuvenated their
economies not because they increased traditional social welfare but because they suc-
cessfully increased their innovative capabilities by changing to social investment.19
Social supports and education to nurture individual capabilities are important in
improving industrial capabilities. Yet more important in the course of globalization is
how to organize diverse industrial capabilities and how to improve learning capabili-
ties at the system level.

Korean Globalization and Its Effects from a Comparative

Perspective
In the course of national corporations’ globalization, not all nations experience the
hollowing out of domestic industries, or their automatic upgrading. Deindustrialization
or upgrading domestic industries is a possibility, not an inevitable outcome.
Globalization of Korean core industries, particularly the automobile and electronics
6 Politics & Society 00(0)

Figure 1.  Employment in Automobile and Electronics Industries in Korea and the United
States.
Source: Korean Statistical Information Service; United States Bureau of Labor Statistics.21

industries, has not resulted in more domestic deindustrialization than in the United
States. The differences in the effects lie in how nations upgrade their industrial com-
mons at home while corporations globalize. This section examines to what extent
Korean globalization differs from the United States in its effects on home economy.
The globalization of Korean industries—particularly core export industries such as
electronics and automobiles—has generated more employment at home, not a hollow-
ing out, in contrast to the deindustrialization outcomes of US counterparts. Investigating
flagship industries rather than general foreign direct investment (FDI) is helpful not
only because declining industries, such as clothing, tend to be replaced by more value-
added industries even without globalization, but also because globalization of flagship
industries has more significant effects on national economies. In particular, electronics
and automotive industries have led overseas production in Korea since the mid-1990s.
For example, according to the Export-Import Bank of Korea data, the outflow FDI of
the automobile and electronics industries increased from $113 million in 1992 to $2.57
billion in 2008, whereas the outflow FDI of declining and labor-intensive industries,
including clothing and footwear, increased to only $458 million in 2008 from $181
million in the early 1990s.20
However, despite the massive outflow of Korean automobile and electronics indus-
tries, as seen in Figure 1, employment in Korea did not fall, in contrast to US counter-
parts. Employment in Korean automobile and electronics industries grew by 58.85
percent and 100.38 percent, respectively, from 1995 to 2015. By contrast, US employ-
ment declined in both automobile and electronics industries by 22.68 percent and
33.78 percent in the same period.
Neoliberal optimism sees offshoring as a win-win situation, in which advanced
countries save costs and upgrade their economies by reinvesting the saved money
at home. However, all nations have not automatically upgraded their industrial
Kim and Kwon 7

Figure 2.  High-Technology Trade Balance, 2000–15.

Source: UN Comtrade Database, 2016.

capabilities. Figure 2 compares changes in trade balance in high-tech industries,

including aerospace, electronics and telecommunications, pharmacy, scientific instru-
ments, and nonelectrical machinery, as defined by the OECD and Eurostat. Korea
shows relatively stable growth of trade balance in the high-tech industries, whereas the
competitiveness of US high-tech industries significantly declined. Korea achieved a
steady growth of trade surplus in high-tech industries, by 374 percent, from a trade
surplus of approximately $11 billion in 2000 to $52 billion in 2010. By contrast, since
the early 2000s, trade in the United States plummeted into a $180 billion trade deficit
in 2015.
What makes the difference? Korea was able to upgrade its industrial and innovative
capabilities at home, while the United States lost its industrial capabilities in the course
of globalization. As researchers at MIT and Harvard Business School reveal, many
holes were opened in the US industrial ecosystem as US corporations went abroad
individually, pursuing their own interests in the free market.22 Most innovative ideas
in high-tech products, including semiconductors, flat-panel displays, light-emitting
diodes (LEDs), optical coating, advanced batteries, precision bearings, optoelectron-
ics, wind turbines, ultra-heavy forgings, and so on, originated in the United States but
now have vanished or are vanishing rapidly because key factors of the existing indus-
trial commons are disappearing in the course of corporations’ globalization.23
In this situation, according to the MIT and Harvard research teams, brilliant young
Americans may have difficulty commercializing their ideas in the United States, such
as a creative development for a digital camera, because complementary capabilities
such as testing and making prototypes are missing in the United States. According to
MIT research, start-ups in areas such as Silicon Valley, Austin, Texas, and Cambridge,
Massachusetts, excel in new ideas for products development but often falter in scaling
up their products for commercialization, because they lack production technology,
multiple parts suppliers, and long-term capital. Lacking complementary capabilities
8 Politics & Society 00(0)

Table 1.  Changes in Contributors to Economic Growth in Korea.

1971–80 1981–90 1991–95 1996–2000 2001–6

GDP growth rate (%) 7.0 8.4 7.5 4.3 4.5
Growth Rate (%) Capital Stock 13.0 10.8 13.0 8.1 5.3
Labor 3.5 2.1 2.2 0.6 0.3
TFP 0.6 4.0 2.5 1.8 2.8
Contribution Rate (%) Capital Stock 57.1 34.2 44.8 47.8 33.6
Labor 34.4 18.3 21.9 9.9 4.7
TFP 8.5 47.4 33.3 42.3 61.7

Note: Contribution rates of capital stock, labor, and total factory productivity expressed as a
percentage of GDP.
Source: KIET, “Hankook Sanupjungchaekui,” Table 2.

outside the firm, America’s most innovative start-ups often result in an exit through
merger and acquisition, not an IPO, and go abroad. Similarly, most firms outside the
innovation hubs struggle to improve their innovative capabilities because “they do not
find any complementary capabilities they can draw on in the industrial ecosystem as
they try to develop new components: little outside funding, few connections with com-
munity colleges, weak trade associations, no research consortia.”24 The disappearance
of many valuable complementary capabilities in the United States, including multiple
suppliers and training and test centers, increasingly enfeeble US industrial capabilities
for innovation.
By contrast, Korea has upgraded its industrial learning and innovative capabilities,
not through the neoliberal free market, but through the state’s efforts to upgrade the
industrial ecosystem. As seen in Figure 2, Korea is one of the most successful coun-
tries in continuously upgrading high-tech industries in the course of national corpora-
tions’ globalization from 2000 to 2015. In particular, Korea has successfully
transformed from a traditional input-oriented economy to a technology-intensive and
knowledge-based innovation system. As seen in Table 1, according to a government
industrial research institute, the Korea Institute for Industrial, Economics and Trade
(KIET), traditionally capital inputs were the main driver of Korean economic growth.
However, in the 2000s, total factor productivity, due mainly to innovation in the pro-
duction process, spurred economic growth from 8.5 percent in the 1970s to 61.7 per-
cent in the 2000s and became a major force of economic growth.25
Recognizing the limitation of input-oriented growth strategy in the 1990s, particu-
larly in the financial crisis of 1997, the Korean government shifted its policy priority
from traditional capital concentration on a few mass producers, for the realization of
scale economies, to building the industrial ecosystem for innovation. The Korean gov-
ernment in the 2000s did not simply increase support for R&D in private companies
but, more important, focused on building an effective ecosystem.26 As we shall exam-
ine later, Korean government R&D funds aimed at building consortia, where public
research institutes, including Korean Automotive Technology Institute (KATECH),
Electronics and Telecommunications Research Institute (ETRI), and Korea Institute of
Kim and Kwon 9

Table 2.  Number of Korean Suppliers Who Joint-Globalized with Hyundai and Kia.

1997 2000 2002 2004 2006 2008 2010 2011

First-Tier Supplier 17 19 57 116 172 218 232 233
Second-Tier Supplier 11 14 29 96 147 190 196 197
Total 28 33 86 212 319 408 428 430

Source: Hyundai Motor Group.33

Industrial Technology (KITECH), in most cases coordinate collaborative researches of

large OEMs and parts suppliers. In contrast to simple R&D tax credits and cash sup-
port directly awarded to individual corporations in the United States, the Korean gov-
ernment focuses on expanding and reinforcing the existing industrial linkages and
networks via research consortia.
Through Korea’s transformation from classical developmentalism to inclusive
developmentalism, it has achieved parallel development of parts and materials and
upgraded collective capabilities in the course of globalization. In the mid-1990s,
export competitiveness of parts suppliers (−27.7 percent) was significantly lower than
that of automakers (92.9 percent).27 However, Korean small- and medium-size enter-
prises (SMEs) grew more rapidly than large corporations from 2000 to 2011, even
according to research conducted by the leftist Economic Reform Research Institute
(ERRI). Although the profit rate of large lead firms (6.84 percent) is higher than that
of SMEs (5.33 percent), on average the growth of turnover and assets in SMEs is
higher by 1.4 times and 2.3 times, respectively, than those of large corporations.28 The
parts suppliers also grew. For example, in 1995, only 8 percent of auto parts suppliers
employed more than 100 workers, whereas in 2009 approximately 49 percent employed
more than 100 workers.29 Suppliers also became more specialized. The number of
specialized firms, which earn more than 50 percent of sales from parts and materials,
increased from 483 in 2002 to 3,353 in 2010.30 In addition, the R&D capabilities of
SMEs have significantly increased. The number of SME research institutes increased
from fewer than 100 in 1990 to 14,014 in 2007, and 33,454 in 2015. The number of
R&D researchers in the SMEs increased from almost nothing in 1990 to 62,792 in
2005, and more recently to 147,378. R&D researchers now constitute to approximately
48 percent of total private companies’ researchers, on par with large assemblers and
SMEs.31
It is because of such improvement of domestic industrial capabilities that the glo-
balization of Korean corporations has not generated deindustrialization at home.
Korean firms have built close connections between overseas and home production, in
contrast to US globalization practices. As Korean parts suppliers continuously devel-
oped their own capabilities at home, Korean OEMs could bring their home suppliers
overseas, whereas in their initial offshoring OEMs went abroad independently, as
American OEMs did. Table 2 shows that Korean automakers sent home suppliers all
over the world. and they produced overseas. Korean lead firms in electronics used
joint globalization slightly earlier in the mid-1990s than automakers did.32
10 Politics & Society 00(0)

Through collaborative globalization resulting from domestic collaboration, Korean

overseas production is closely integrated with home production. Even though they
bring their own suppliers overseas, Korean automakers and first-tier suppliers still use
parts produced at home, which engender more exports of parts as Korean corporations
globalize. For example, Hyundai in Beijing outsourced 80 percent of parts locally in
China in 2006. However, the high share of locally outsourced parts comes from 65
Korean joint-globalized suppliers of the total 89 parts suppliers at Beijing Hyundai.
These 65 Korean suppliers in China imported parts from Korea totaling approximately
50 percent of their parts.34
Many Korean suppliers whom we interviewed report that their overseas production
does not reduce their domestic operations; to the contrary, it increases the domestic
volume of production, because they still makes the technologically advanced core
parts in Korea, while foreign plants produce relatively simple parts and assemble them
with parts imported from Korea.35 The reason that Korean firms keep their production
at home and are interested in further upgrading is that most Korean suppliers believe
that their competitiveness lies in the close relations with their customers, their subtier
suppliers, and neighboring research institutes at home. In a personal interview, a vice-
president of a car-seat manufacturer explains why it keeps and upgrades home produc-
tion while expanding overseas production:

The reason is that our competitiveness comes from here. Technological capabilities
matter for competitiveness. Foreign countries, where we produce, are less prepared for
the good infrastructure we want. I traveled for research in more than twenty countries.
But few countries are fully equipped with all parts including materials, components, and
assembly. For example, China may be proud of making satellites, but they do not make a
specific strong bolt that we want for our seat. There are many missing parts, including
antistatic seat fabric, and so on.36

As a result, the globalization of Korean corporations has not resulted in deindustrial-

ization, unlike their US counterparts.

Politics of Transformation
This section examines how Korea upgraded its industrial commons in the course of
corporations’ globalization. Traditionally, Korean interfirm relations were not collab-
orative but adversarial and exploitative. However, in the 2000s, when Korean core
industries globalized massively, Korean OEMs improved their innovation capabilities
based on collaboration with home suppliers. In the early stage of globalization, Korean
OEMs went abroad independently because they did not have competent home suppli-
ers. However, in the 2000s, they went overseas together with their home suppliers and
built national collaborative relations on foreign soil. In the course of globalization,
Korean key actors, including large OEMs, parts suppliers, research institutes, and the
state, could upgrade the industrial capabilities at home. How could Koreans upgrade
their home base in the course of globalization, when their US counterparts could not?
Kim and Kwon 11

This article maintains that the state initiated and coordinated the upgrading of the
industrial commons at home. Korea’s upgrading was not a natural result of private
companies’ actions in the free market, but an outcome of the state’s conscious efforts
to upgrade, and private companies’ adaptation in their interaction with the state and
other actors. This section examines the politics of reflexive actors who reinterpret the
existing interests and reconstitute their strategies in the course of globalization. In
order to explore how Koreans upgraded, this section first examines the traditional
model of Korean developmental state, and then explores how Koreans have trans-
formed to a new innovative system of collaboration in the course of globalization.

Traditional Growth Strategy: Exports of Assembled Products Based on

Imported Parts
Relations between firms in Korea have traditionally been, as mentioned above, adver-
sarial rather than collaborative. In the past, few large OEMs were interested in devel-
oping and collaborating with parts suppliers, unlike Japanese OEMs. Large
corporations’ pursuit of profits in the free market system may not have resulted in
upgraded and collaborative relations. Before we look at upgrading by state initiative,
in this section we examine the traditional Korean developmental system and why the
traditional subcontracting relations were adversarial.
Large Korean OEMs focused on free trade with foreigners, rather than collabora-
tive relations with home suppliers, because the key parts of their export products were
imported from foreign countries, mainly Japan. This export-led growth based on
imports of parts was due to the low development of parts and intermediate industries.
Unlike Japanese industrialization, in which large OEMs sourced parts and intermedi-
ates from domestic suppliers, Korean industrialization had no parallel development of
final products and parts industries. According to Korean economist Song’s calculation
of interindustry linkages, the proportion of imported inputs directly needed for outputs
in the entire industries was 28.1 percent in Korea in 1985, whereas it was only 6.9
percent in Japan.37 For core export industries, including electronics and auto, the
dependence on imported parts was more serious.38
As seen in Figure 3, from 1976 to 1994 the growth of exports in the Korean auto-
motive industry paralleled imports of parts from Japan. In particular, automotive
exports in Korea increased from $97,670,000 in 1980 to $4.47 billion, an average
growth of 34.4 percent per year, while the imports of parts from Japan increased from
$72,350,000 to $508,000,000, an average growth of 46.3 percent per year.
This traditional Korean industrial structure, characterized by the low level of
domestic industrial linkages and dependence on foreign parts, resulted from industrial
policies of the Korean developmental state that focused on nurturing large export cor-
porations. Traditionally, Korea achieved rapid economic growth by exports of large
conglomerations, so-called chaebol. This export-led growth strategy was constructed
mainly by the Korean government’s aggressive export promotion policy, rather than
by free market and gradual industrialization. Before the government’s active policy of
12 Politics & Society 00(0)

Figure 3.  Traditional Trade Structure in the Korean Automobile Industry, 1976–98.
Note: Unit for automotive exports, US$ 10 million, unit for imports of parts, US$ 1 million.
Source: UN Comtrade Database, 2016.

export-led growth, Korean large corporations were more profitable in the import sub-
stitution industries. They were not interested in jumping into exports.39 For export
growth, the government favored large corporations, which could realize the economy
of scale and compete with foreign companies in the export market.
The reason for the Korean government’s lopsided support for large corporations is
that it wanted to gain political legitimacy by rapid economic growth. But the govern-
ment recognized, around 1963–64, that because of the small size of the domestic mar-
ket, the existing import substitution strategy would not work. The export market would
be necessary, and in order to compete in the export market, corporations would need
to realize economies of scale.40 Thus, the government itself mobilized a large amount
of capital through domestic savings and foreign loans, and provided it exclusively to a
few large export corporations at significantly favorable interest rates. The classical
developmental state in Korea nurtured aggressively large export corporations through
exclusive credit rationing, which deterred a parallel development of small and medium-
size parts suppliers.41
In addition, by allowing large assemblers of final products to import freely the
inputs needed for their exports, the classical developmental state in Korea further
deterred the development of parts suppliers. In response to the government’s demand
for export growth, large corporations, whether in electronics or in automotive, called
for free imports of parts and machines needed for export products, because foreign
parts, particularly Japanese parts, were less expensive and higher quality than domes-
tic parts. For competitiveness in the export market, Korean import of inputs and parts
was exempted from duty.42
Hence Korean large assemblers of final products had keen interests in importing key
parts and intermediates rather than developing collaborative relations with domestic
suppliers. Later, the government tried to increase domestic production of parts in order
to improve the trade balance, but large assemblers opposed the policy or tried to avoid
Kim and Kwon 13

it because it was more profitable to assemble imported parts than to use domestic parts.
Oh Wonchul, a key bureaucrat in the Park Jung Hee regime, who built Korean heavy
industries in the 1970s, remembers how strongly the large assemblers like the Shinjin
automobile company opposed the government policy of import substitution of parts:

[Shinjin automobile company earned great profits] but it did not contribute to the
development of our automobile industry. All of their attention was engaged in importing
chunks of parts as an SKD, and simply assembling and selling them. . . . The Ministry of
Commerce and Industry could not leave the situation like this. Thus we ordered Shinjin
to localize parts at least 32 percent until 1967, but Shinjin tried not to do it, giving one
excuse or another. Finally it reached only 23.6 percent of localization of parts. . . . They
were not interested in the localization of parts [kooksanwha in Korean]. They were
wholly immersed in making money.43

Not just automobile companies, including Hyundai and Asia, but also electronics com-
panies were uninterested in localization of parts, and were absorbed in making money
by assembly of imported parts.44 Even up to the early 1990s, simply assembling the
parts imported from foreign countries was more profitable than developing their own
models and using domestic parts. That is why many people opposed Samsung’s enter-
ing into the automobile industry: Samsung would use foreign parts and ruin domestic
efforts to improve the parts industry.45
The classical developmental policy of export-led growth based on imported parts,
discouraged the development of parts suppliers and further worsened the industrial
structure of dependence on foreign parts. Underdevelopment of small- and medium-
size parts suppliers in Korea occurred not only because the Korean government strate-
gically allocated massive capital to large export companies, excluding the SME parts
suppliers, but also because the large assemblers were not interested in nurturing and
collaborating with domestic parts suppliers. Traditional subcontracting relations in the
electronics and automobile industries, as Whitley describes, were adversarial and
exploitative, unlike the cooperative relations of Japanese subcontractors.46 Because of
their traditionally exploitative relations, Korean suppliers were too small and too
underdeveloped to work together.
However, as seen in Figure 4, the Korean industrial structure of dependence on for-
eign parts has changed since the mid-1990s. A comparison of Figures 3 and 4 shows
that export of Korean cars and parts has significantly diverged from the imports of
Japanese parts since 1995; the annual average growth rate of automotive industry
exports versus the growth rate of Japanese parts imports diverges 63.2 to 1 between
1995 and 2015. With Korean automotive exports in the 2000s, when Korean core indus-
tries globalized in earnest, Korean parts suppliers were internationally competitive and
significantly increased exports. The next section examines how this was possible.

Politics of Transformation
This section explores how Koreans transformed the traditional practice of exclusively
nurturing a few large corporations into more inclusive and collaborative networks, and
14 Politics & Society 00(0)

Figure 4.  Trade Structure in the Korean Automobile Industry, 1991–2015.

Source: UN Comtrade Database, 2016.

turned from underdevelopment of industrial linkages to a well-developed industrial

ecosystem. The free market, in which large assemblers pursued their own interests,
could not change the traditional system of exports of final products based on imported
parts. The state initiated and drove the changes, and reflexive actors redefined their
interests in interactions with other actors.
The Korean government did not discard its industrial policies, although some
scholars argue that it changed to a neoliberal state following the Asian financial crisis
of 1997. The Korean government has continuously used strategic industrial policies of
promoting domestic industries, as seen in laws and policies including the 1998
Industrial Development Law, the 1997 Special Law for Promotion of Venture
Industries, and the Promotion Policy for Next Generation Industries in 2003.47 In par-
ticular, the Special Law for Parts and Materials was enacted for a limited period of ten
years in 2001, but based on the evaluation of its successful outcomes in 2011, it has
been extended another 10 years until 2020.
However, the priority of Korean government’s industrial policies shifted from
exclusive allocation of physical inputs to nurturing inclusive and collaborative net-
works in the late 1990s and 2000s. In the past, the Korean government focused on the
accumulation of capital that was provided exclusively to large export corporations to
realize scale economies. However, the government’s direct financial support for large
conglomerations no longer exists, although there are offices for key industries in the
Department of Industry.48 By contrast, the Korean government significantly increased
policy finance for innovative and technology-oriented SMEs. In addition, support has
increased for R&D activities of private corporations, particularly in the parts and
materials industries. For example, the Korean government has rapidly increased its
R&D investment since 2000 by 10.1 percent on average per year. The share of
Kim and Kwon 15

government and public R&D support for small and medium-size firms significantly
increased from 15 percent in 1991 to 62 percent in 2009.49 More noteworthy is Korea’s
new version of developmentalism, which expands and improves collaborative net-
works via innovation consortia, rather than simply gives R&D tax credits and cash
directly to individual corporations, as in the model.50
Why has the Korean state changed its priority of industrial policy, from nurturing
large assemblers of export products to upgrading the industrial ecosystem for an inno-
vation-oriented economy? First, since the late 1980s, the industrial policymakers and
political leaders began to recognize the problem of final assembly-oriented industrial-
ization based on foreign inputs including parts, materials, and machines. In this for-
eign input-dependent and large assembler-centered industrialization, export of final
assembled products, such as automobiles, caused a chronic foreign trade deficit of
intermediate inputs, as seen in Figure 3.51
In addition, the Korean government began to recognize the limits of a physical
input-oriented economy, based on low wages and low technology. For example, elec-
tronic export products in the 1980s were in most cases standardized and low-technol-
ogy products assembled with low-wage labor. However, as competition in world
market increased, Korean core industries including electronics and automotive faced a
severe problem because domestic wages grew rapidly, particularly after the democra-
tization of 1987. Further, China and Southeast Asian countries were catching up rap-
idly by using low wages and assembly jobs. Korean industrial experts began to think
that Korea needed to upgrade its industries to a more technology-intensive and value-
added system.
In the 1990s, reflecting on the problems of classical developmentalism, the Korean
government began to place substantial industrial priority on improving value-added
and innovation-oriented capabilities through more balanced development of backward
linkages and by nurturing collective innovation capabilities through collaborative rela-
tions. In the mid-1980s, the government’s technology policy was still oriented toward
large corporations, as seen in the public consortia with Samsung and LG for develop-
ment of 16M DRAM, rather than a parallel development of parts and materials.
However, in the 1990s, industrial policymakers began to recognize that in the absence
of parallel development of parts and materials, the strategy of deepening technological
capabilities only by large assemblers faced limits.52 The Korean government began to
think seriously of the unbalanced industrial development, in which Korea imported
more intermediary parts and materials from Japan, as large corporations in the assem-
bly industries exported more.53 Facing the financial crisis of the late 1990s, the Korean
government aimed not only at reversing the trade deficit of parts from Japan, but more
important, changing the fundamental industrial structure by promoting parts and mate-
rials industries.
Particularly, as Japanese rival corporations combined their high technology and
Southeast Asian low wages in the late 1980s and early 1990s, Korean corporations in
the electronics and automotive industries lost international competitiveness. Industrial
policymakers recognized that given the assembly-oriented industries dependent on
foreign, particularly Japanese intermediates, Korean core industries could not compete
16 Politics & Society 00(0)

with these rivals. In order to compete with Japanese global production networks,
Korean firms had few choices, which included using foreign low wages at overseas
production or upgrading domestic parts.
Industrial policymakers in Korea recognized that upgrading the parts and materials
industries was urgently needed to improve industrial competitiveness. However, the
free market could not succeed in it; the government’s active policy was needed.54 In a
personal interview, a director at the Materials and Components Policy Division in the
Ministry of Trade, Industry and Energy reports why the government began to focus on
development of parts and materials:

In the past, our industries developed by depending on Japanese technology and parts. In
other words, we developed final product assembly industries, using and following
Japanese technology. The limitation of such final assembly-oriented industrialization
came to surface even in the late 1970s. Since then, we began to use the kooksanwha
(localization of parts) policy. This policy continued until the 1990s. [However, it achieved
only partial success; the parts were still underdeveloped] . . . Until the late 1990s, the
traditional kooksanwha policy had been relatively neglected. However, the awareness of
developing parts and materials continuously grew. We thought that if the development of
parts and materials were left to the free market, they would develop very slowly or they
would not catch up Japanese rivals, because small and medium-size firms did not have
independent capabilities and the OEMs might be not cooperative.55

In order not only to reverse the trade deficit trend of parts, but also to upgrade their
industrial competitiveness in the course of corporations’ globalization, Korean policy-
makers recognized that they needed to restructure existing assembly-oriented indus-
tries to innovation-oriented systems by collaboration with parts and intermediates.
This shift of priority to focusing on parts and materials could be realized by gaining
the president’s attention and support in the Asian financial crisis of 1997. A former
deputy director of industrial planning at the Ministry of Commerce, Industry, and
Energy (the former name of the Ministry of Trade, Industry, and Energy), who was a
main drafter of the Special Law for Parts and Materials in 1999–2000, recalls the
Korean state’s turning point in industrial policy:

Facing the financial crisis, we began to think seriously that the existing growth model
based on final assembly industries by large corporations was really problematic. Of
course, in the past, we were concerned with the trade deficit with Japan. . . . [However,]
although we had an idea to promote parts and materials in the past, the idea was not so
effective. However, in a crisis, gaining the president’s support, we began to think it over
more fundamentally. As we used the phrase “paradigm shift” in the first draft, we thought
over not just import substitution of parts but more important, we thought, they had to lead
the industrial development when the existing assembly industries faced the limits of
growth.56

Since the late 1990s, the Korean government has shifted its industrial policy from
building national champions in final assembly industries to parallel development of
Kim and Kwon 17

Figure 5.  Trend of Domestic Expenditure on R&D as a Percentage of GDP.

Source: OECD statistics, Main Science and Technology Indicators.

parts and materials industries, by further considering the necessity of building close
industrial linkages in the course of globalization.
How has the Korean government implemented its policies to change from an
inputs-oriented to an innovation-oriented system? First, the government focused on
support for R&D activity, instead of mobilizing physical inputs. As seen in Figure 5,
Korea increased its R&D activity more dramatically than any other advanced coun-
tries, from 0.56 percent in 1979 to 1.7 percent in 1991, and to 4.29 percent in 2014, the
highest percentage in the OECD countries. In the 1970s, R&D activity in Korea was
insignificant because the traditional growth strategy in Korea was input-oriented, par-
ticularly capital-input-oriented growth based on simple technology. However, since
the mid-1980s, Korea began to focus on technology-oriented growth and dramatically
increased its R&D spending in the 2000s.
However, this R&D growth in Korea is mainly related to the government’s shift in
the priority of industrial policy to build innovation-oriented systems. The government
R&D support engendered private R&D activities rather than replaced them. As many
empirical studies show, the growth of government R&D spending is closely related to
the growth of private firms’ R&D investment.57 Many corporations in our personal
interviews reported that in order to get government R&D support, they also had to
invest in R&D and employ more engineers and researchers, not only because they had
to develop a preliminary idea and proposal, but also because they must implement
their own proposals.58
Korean government R&D is characterized by a developmental strategy, compared
with those of other countries. Almost all advanced governments finance R&D.
However, the modes and goals of public R&D spending vary widely. As seen in Table
3, Korean government uses a majority of its R&D budget for economic development
or industrial technology development by 50.7 percent, followed by 25.5 percent for
18 Politics & Society 00(0)

Table 3.  International Comparison of Government R&D Budget Distribution, 2014.

United United
Korea States Japan Germany France Kingdom
Defense Budget R&D 13.5 51.2 4.4 3.9 6.6 16.9
Civil Budget R&D 86.5 48.8 95.6 96.1 93.4 83.1
Economic Development 50.7 10.3 25.5 22.5 15.4 15.9
Health & Environment 13.6 53.3 8.2 10.5 10.6 33.5
Education & Social Policy 8.1 3.6 0.7 4.4 5.5 5.0
Space Programs 2.9 16.9 6.2 4.9 10.5 3.8
Non-Oriented Research 24.7 15.9 22.3 17.9 23.5 14.1
General University Funds — — 37.1 41.1 27.4 27.7

Note: Unit is the percentage of R&D in the total government budget.

Source: OECD Main Science and Technology Indicators Database.

Japan and 22.5 percent for Germany. By contrast, the United States uses 48.8 percent
for civil purposes, of which only 10.3 percent is used for economic development. The
United States has reduced public spending of R&D for industrial technology develop-
ment in the 2000s.59
More important than the size of R&D for economic development is support for
improving collective capabilities. In the United States, for example, R&D tax credits
and research support for university researchers may play a pivotal role in encouraging
new patents and innovative start-ups. However, innovative start-ups often falter in
scaling up to commercialization because of a lack of complementary capabilities to
see the process through. States and cities in the United States also give more than $80
billion each year directly to individual companies to ensure local employment and to
compete for attractive companies. The US R&D tax and cash supports do not expand
and reinforce the existing industrial linkages and collective capabilities. Public
resources channeled to individual companies tend to end up a few years later with the
closing or relocation of the plant, leaving a vacuum in the community.
By contrast, Korean industrial policy focuses on expanding and reinforcing the
industrial linkages and building a collaborative ecosystem through innovation consor-
tia. The Korean government mainly used research consortia, in which public research
institutes, OEMs, parts suppliers, and universities work together. The Korean govern-
ment and public research institutes work as convener, although private companies are
in the driver’s seat in the consortia research project. In order to develop the industrial
ecosystem, the government first conducts a study on demands, and then offers public
research institutes such as Korean Evaluation Institute of Industrial Technology to
recruit participants and coordinate projects, such as development of a chassis module
corner. Even in the process of a demand survey, industrial technocrats work together
with trade associations and industrial experts at universities.
For example, according to personal interviews with participants in the process of
drafting the Special Law for Parts and Materials, officials and industrial experts in
Kim and Kwon 19

trade associations, government research institutes, and universities worked together,

analyzing the value chains of every product in detail, to determine how much value
belongs to Korea when a Korean final product is exported. They then sought solutions
to questions such as, who can make the parts, which parts are more important, what
kinds of technology and skills do Korean parts makers need, and what kinds of support
do they need.60
Notably, the Korean government has connected large customers and parts suppliers
in so-called customer-related projects of developing parts and materials. For example,
a head of the Materials & Components Planning Team in the Korea Institute for
Advanced Technology (KIAT) identifies the customer-related method as one cause for
success:

We have conducted many customer-related projects since the early 2000s. Only when
parts makers have their customer’s firm commitment of purchasing the parts that they
will develop do we support the project. In the past, parts makers developed without any
plan of how to commercialize. . . . In these customer-related projects, we assess the
performance and market situation, particularly foreign competitors’ situation, with the
parts maker together and sometimes change the proposal and target.61

Actually, customer-related projects achieved greater success at commercialization

than when financial support was simply provided for R&D: the rate of commercializa-
tion of Korean government supported R&D projects for SMEs is approximately 40
percent, whereas the rate of commercialization of customer-related R&D projects is
77.8 percent.62
Notably, the collective learning and innovation capabilities of the consortia surpass
American R&D tax credits and cash-awards directly to companies. Consortia partici-
pants report that the collaborative networks developed through the consortia are most
important for them, not simply the size of the R&D fund. A medium-size lens maker
for Samsung smart phones emphasized in our interview the importance of participa-
tion in the government research consortia:

The reason we participate in the public R&D projects is not simply the amount of cash,
but we want to enter and keep the close networks available through government research
institutes and the many customers and related research institutes. Once we conduct a
collective project, they may offer another project related to us.63

The formal innovation networks supported by the Korean government and informal
networks of private firms and research institutes are mutually reinforcing and tend to
improve the industrial commons in the collective ecosystem. For example, a semicon-
ductor parts maker that had long-term relations with Samsung could participate in a
new government-sponsored World Premium Materials research project with Samsung
SDI because other participants recognize this company’s specialty of melting and
alloying materials.64 The managing director of a supplier that originally made Samsung
electronics parts reports how participation developed in a new consortium for develop-
ment of automobile parts because of their existing industrial networks:
20 Politics & Society 00(0)

As we keep contacts with public research institutes to conduct government projects, they
know what we are doing. Thus they came to know our work on developing an anti-
drowsiness camera. Because the government considers this technology important for our
industries, they offered us research support. . . . In this project, Hyundai MOBIS, and
other automobile suppliers participate because our firm alone cannot develop the part. We
need an automobile, and then we need to develop software. That is why and how we
collaborate.65

In contrast to simple R&D tax credits and cash giveaways directly channeled to indi-
vidual firms, the new version of Korean developmentalism focuses on nurturing learn-
ing and innovation abilities by expanding collaborative networks in which formal and
informal networks reinforce each other. Both Korean government and public institutes
work as conveners and coordinators of these networks. With these domestic networks
nurtured by the government, Korean lead firms bring their home suppliers overseas,
while Korean firms on foreign soil have connections with their home base, continu-
ously upgrading their home production.
On the other hand, without major lead companies’ interests and cooperation, gov-
ernment efforts alone might not succeed in developing a collaborative ecosystem.
Traditionally, Korean large OEMs, which simply assembled and exported final
products with foreign parts, were not so interested in collaborating with domestic
parts suppliers. However, in the 2000s, Korean OEMs became interested in upgrad-
ing and collaborating with home suppliers. Why have Korean lead firms changed
their attitudes?
First, Korean lead firms felt the disadvantages of depending on foreign, particularly
Japanese, parts suppliers which wielded power over them. In order to avoid an unfa-
vorable power game with advanced foreign suppliers, Korean lead firms felt the need
to develop independent technological capability. Se-Young Jung, former president of
Hyundai Motor Company, reflects in his personal memoir:

If we make the machines, we can fix them when they are out of order. If we produce by
ourselves the parts, which we have bought from foreign companies, we can achieve price
competitiveness. In actuality, in the cases in which we localized the parts which were
imported from foreign countries, the prices fell by 30 to 50 percent. If we localize the parts,
we come to know the costs of producing the parts very well, and thus, we are more likely to
avoid price gouging by foreign parts suppliers. That’s to kill two birds with one stone.66

The situation was similar in the electronics industry. A general manager of the
Korea Electronics Association (KEA) succinctly explains why Korean lead electronics
companies changed their attitude to develop home suppliers:

Of course, the government supported the import substitution of parts. But that is not the
whole story. . . . Now, they [large lead firms] felt they needed domestic collaborative
suppliers even more, because they experienced the power game of Japanese high-tech
suppliers. Once our domestic suppliers developed a high-tech part, they reduced the
price. Considering the long-term business relations with Japanese suppliers as well as
Kim and Kwon 21

their reduced price, our large firms chose them and our suppliers died out. Then, the
Japanese suppliers raised the price again.67

Korean lead firms attempted to avoid the power game by foreign parts suppliers ini-
tially by internalizing parts production. However, Korean lead firms adopted nurture
and collaboration of home suppliers not only because of government prohibition
against internalizing the parts manufacture but because Korean suppliers have
improved their capabilities through government support.68
Furthermore, in the course of their globalization, Korean lead firms needed more
home suppliers. In order to overcome the latecomers’ disadvantages in the course of
globalization, Korean lead firms made more efforts to develop home suppliers and to
collaborate with them. On foreign soil, Korean lead firms had difficulty in building
efficient and reliable parts supply networks, especially with local suppliers in develop-
ing countries. For example, Korean corporations, such as Samsung, LG, Daewoo, and
Hyundai, faced problems with local suppliers in Mexico, including delivery time, vol-
ume, quality, and price.69
Korean corporations also had a latecomer’s disadvantage in using global suppliers.
When Korean corporations in core export industries moved overseas, foreign competi-
tors from advanced countries such as Japan, the United States, and Germany, already
occupied the supply base of global suppliers and excellent locals. If they used the same
suppliers as foreign competitors, Korean firms believed they could not compete.
According to a report of the Korean executive of the Industrial Development Agency
in Northern Ireland, Korean lead firms such as Samsung and LG had difficulty in
building their parts supply networks in the United Kingdom because British electron-
ics suppliers already had close relationships with Japanese corporations there.
Although British suppliers agreed to deliver parts to Korean firms, Korean corpora-
tions believed that they could not compete with Japanese and other advanced competi-
tors with the same suppliers.70
The general manager of Hyundai explains in our interview why Hyundai built
nationally oriented global networks with the home suppliers they brought overseas,
instead of using global suppliers as well as locals in China:

When we went to China, there were many global players [suppliers], but we strategically
used our domestic partners in order to improve our competitiveness. Why did we bring our
partners to China? It’s because of our differentiation strategy. We purchase about 70
percent of parts from our partners. The price competitiveness of our cars depends on our
partners. If we use the same companies that our competitors use, there is no difference
with them. This year, we reached the production level of one million cars in China. By
contrast, Volkswagen produced 40 or 50 million cars. We could not reduce price simply by
volume. We need another strategy to compete with our competitors (emphasis added).71

In order to contend with early movers in globalization, latecomer Korean lead firms
could not use the same global suppliers as their competitors. Furthermore, Koreans
have relatively small volume. Korean corporations had to reflect on their relative posi-
tion as latecomers in globalization and search for a new differentiation strategy. Thus,
22 Politics & Society 00(0)

reflecting on their position in the course of globalization, Korean lead firms began to
make more effort to upgrade home suppliers and collaborate with them.
On the other hand, Korean parts suppliers initially hesitated to collaborate with and
follow their home customers overseas. However, as Korean lead firms provided a
stable volume of sales, as well as assistance in technology and finance, more home
suppliers now want to follow their customers overseas.72 Furthermore, at home, they
have developed many close relations with customers and their own suppliers, conduct-
ing many consortia of developing parts with government research labs, customers, and
university labs. Now, parts suppliers in Korea take advantages of both normal contacts
for collaboration and national research projects, which reinforce each other. Parts sup-
pliers, which have normal contacts with their customers and public research labs, build
new government-sponsored consortia by bringing new participants with related tech-
nology, through which a collaboration community at home is now expanding.73

Conclusion
Globalization of industries now seems inevitable because of growing international
competition in the world economic system. Most national core corporations attempt to
dissolve their vertically integrated production systems and recombine the best ele-
ments of input across national borders. However, against the prevalent views on glo-
balization, including neoliberal optimism and nationalist pessimism, national
corporations’ globalization does not inevitably result in either a natural upgrade or a
hollowing out of domestic industries. As seen in the cases of Korea and the United
States, domestic politics of key players determine whether globalization results in de-
industrialization or upgrading domestic industries.
In particular, this article holds that the state’s role of building the industrial eco-
system really matters in the course of globalization. In order continuously to upgrade
industrial innovation capabilities at home, companies and individuals need indus-
trial commons as complementary capabilities, including customers, parts suppliers,
related technology labs, and skilled labor. However, these industrial commons are
not so likely to be built by free markets as neoliberals assert. Contrary to neoliberal
optimism, the saved profits resulting from offshoring are not automatically rein-
vested in upgrading industrial capabilities at home. As seen in the United States, the
saved profits can be invested all over the world rather than in the United States, as
corporations pursue their financial interests. These uncoordinated and financially
dominant decisions in the free market can create many holes in the domestic indus-
trial linkages or industrial commons, which enfeeble the industrial capabilities in
future rounds of innovation. By contrast, as seen in the case of Korea, more state
action is needed for upgrading the industrial commons in the domestic ecosystem.
As shown, the classical developmental state focuses solely on physical assets and
allocation of capital inputs to a few firms, excluding most SMEs. Korean firms now
succeed because of the new developmental state that nurtures collective learning and
innovation capabilities by expanding inclusive collaborative networks. This new
Korean developmentalism also differs from that of the United States, which is based
Kim and Kwon 23

on simple R&D tax credits and cash awards directly to individual firms. Without the
Korean government’s revised developmentalism, Korean lead firms would create
many holes in the domestic industrial linkages in the course of offshoring, because
traditionally Korean lead firms have not been interested in collaboration with home
suppliers. In the course of globalization, a new version of developmental state can
be vital for building the industrial commons, rather than depending on the free mar-
ket, in order to upgrade industrial capabilities at home and to maximize the benefits
of corporations’ offshoring.

Acknowledgments
We would like to thank the editors of Politics & Society for very helpful comments on the earlier
version of the article. We also profited from insightful comments from Gary Herrigel.

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship,
and/or publication of this article.

Funding
The author(s) disclosed receipt of the following financial support for the research, authorship,
and/or publication of this article: This work was supported by the Ministry of Education of the
Republic of Korea and the National Research Foundation of Korea (NRF-2016S1A5A2A01
023345).

Notes
  1. Peter Dicken, Global Shift: Mapping the Changing Contours of the World Economy (New
York: Guilford Press, 2011), 13–74; Dick K. Nanto, “CRS Report for Congress: Globalized
Supply Chains and U.S. Policy” (Washington, DC: Congressional Research Service,
January 27, 2010), 4–8.
 2. Ramana Ramaswamy and Robert Rowthorn, “Does Manufacturing Matter?” Harvard
Business Review (November–December 2000).
  3. For neoliberal globalism, see Thomas L. Friedman, The World Is Flat: A Brief History of
The Twenty-First Century (New York: Farrar, Straus & Giroux, 2007); Diana Farrell et al.,
Offshoring: Is It a Win-Win Game? (San Francisco: McKinsey Global Institute, 2003);
Harold L. Sirkin, Michael Zinser, and Douglas Hohner, “Made in America, Again: Why
Manufacturing Will Return to the United States,” Boston Consulting Group (August 2011);
online at http://www.bcg.com/documents/file84471.pdf; Ramaswamy and Rowthorn,
“Does Manufacturing Matter?”; Jagdish Bhagwati, “The Manufacturing Fallacy,” Project
Syndicate (August 27, 2010).
  4. The industrial commons means shared capabilities in the industrial ecosystem in which
suppliers, customers, partners, skilled workers, and local institutions such as universities
and research institutes work as complementary capabilities. Many firms depend on the
commons when they create new ideas and transform their ideas to new products on the
market. The industrial commons are a key source of competitiveness for national industries.
For industrial commons and ecosystem, see Gary P. Pisano and Willy C. Shih, Producing
Prosperity: Why America Needs a Manufacturing Renaissance (Boston: Harvard Business
24 Politics & Society 00(0)

Review Press, 2012); Suzanne Berger, Making in America: From Innovation to Market
(Cambridge, MA: MIT Press).
 5. Louise Story, “As Companies Seek Tax Deals, Governments Pay High Price,” New
York Times (December 1, 2012); Segye Ilbo [Korean newspaper] (June 27, 2003); Maeil
Kyungjae [Korean newspaper] (March 23, 2004).
  6. American Nationalist Party, “Negative Effects of Globalization,” from http://www.nation-
alistpartyamerica.com; Clyde Prestowitz, The Betrayal of American Prosperity (New York:
Free Press, 2010).
  7. Ron Hira and Anil Hira, Outsourcing America: What’s Behind Our National Crisis and
How We Can Reclaim American Jobs (New York: Amacom, 2005), 180.
  8. See the sources given in note 3.
  9. Howard Pack and Kamal Saggi, “Is There a Case for Industrial Policy? A Critical Survey,”
World Bank Research Observer 21, no. 2 (Fall 2006): 276.
10. Gregory Tassey, “Rationales and Mechanisms for Revitalizing United States Manufacturing
R&D Strategies,” Journal of Technology Transfer 35 (2010): 283–333.
11. Berger, Making in America, 20, 204–5.
12. Bhagwati, “The Manufacturing Fallacy.”
13. Pisano and Shih, Producing Prosperity, 71–72.
14. Ibid.; Berger, Making in America; the special issue “Reinventing America,” Harvard
Business Review (March 2012).
15. See note 4.
16. For twenty-first-century developmental state theory, see Michelle Williams, “Introduction”
and “Rethinking the Developmental State in the Twenty-First Century,” in M. Williams,
ed., The End of the Developmental State? (London: Routledge, 2014). Joseph E. Stiglitz,
Justin Yifu Lin, and Celestin Monga, “Introduction: The Rejuvenation of Industrial Policy,”
in Joseph E. Stiglitz and Justin Yifu Lin, eds., The Industrial Policy Revolution I: The Role
of Government beyond Ideology (London: Palgrave Macmillan, 2013); Peter B. Evans,
“Constructing the 21st Century Developmental State: Potentials and Pitfalls,” in Omano
Edigheji, ed., Constructing a Democratic Developmental State in South Africa (Cape
Town: HSRC Press, 2010); Peter B. Evans, “In Search of the 21st Century Developmental
State,” Working Paper no. 4 (Sussex: Centre for Global Political Economy at the
University of Sussex, 2008); Peter B. Evans and Patrick Heller, “Human Development,
State Transformation, and the Politics of the Development State,” in S. Leibfried et al.,
eds., The Oxford Handbook of Transformations of the State (Oxford: Oxford University
Press, 2015).
17. Peter Evans also agrees on this point. See Evans, “The Korean Experience and the Twenty-
First-Century Transition to a Capability-Enhancing Developmental State,” in Ilcheong Yi
and Thandika Mkandawire, eds., Learning from the South Korean Developmental Success:
Effective Developmental Cooperation and Synergistic Institutions and Policies (New York:
Palgrave Macmillan, 2014), 37.
18. Jonah D. Levy, “The Transformations of the Statist Model,” in S. Leibfried et al., eds., The
Oxford Handbook of Transformations, 402–3.
19. Jingjing Huo and John D. Stephens, “From Industrial Corporatism to the Social Investment
State,” in Leibfried et al., eds., The Oxford Handbook of Transformations, 410–25; Gunnar
Eliasson, “Divergence among Mature and Rich Industrial Economies: The Case of Sweden
Entering a New and Immediate Economy,” in Timo J. Hämäläinen and Risto Heiskala,
eds., Social Innovations, Institutional Change and Economic Performance (Cheltenham:
Edward Elgar, 2007), 214–79.
Kim and Kwon 25

20. The Export-Import Bank of Korea database is online at https://stats.koreaexim.go.kr/odi-

sas.html.
21. Korean Statistical Information Service database, online at http://kosis.kr/eng/statistic-
sList/statisticsList_01List.jsp; United States Bureau of Labor Statistics database, online at
https://www.bls.gov/data/.
22. Berger, Making in America; Pisano and Shih, Producing Prosperity; see also Michael E.
Porter and Jan W. Rivkin, “The Looming Challenge to U.S. Competitiveness,” Thomas
A. Kochan, “A Jobs Compact for America’s Future,” and Gary P. Pisano and Willy C.
Shih, “Does America Really Need Manufacturing?,” in the special issue “Reinventing
America,” Harvard Business Review (March 2012).
23. For the disappearing or “endangered species” of US high-tech industries that had their
roots in the United States, see Pisano and Shih, Producing Prosperity, 8–13; Porter and
Rivkin, “The Looming Challenge to U.S. Competitiveness”; Kochan, “A Jobs Compact for
America’s Future”; Pisano and Shih, “Does America Really Need Manufacturing?”
24. Berger, Making in America, 13.
25. KIET, “Hankook Sanupjungchaekui Gwaguwha Hyungjae Grigo Mirae” [The past, present
and the future of Korean industrial policy], e-KIET Sanup Kyungjaejungbo 379 (2008):
2–3.
26. Kiwan Kim, “Jungboo Yungugaebaltujaui Hyunwhangjindankwa Hyokwajukin
Tujabanghyang Mosaek” [The assessment of current government’s investment of R&D
and exploration of effective investment direction], in Korea Development Institute (KDI),
ed., Woorikyungjaeui Sunjinhwarul wuihan Jungboo Yukhalui Jaejungrip [Readjustments
of government role for our economic advancement] (Seoul: KDI, 2007), 267.
27. Export competitiveness = {(export − import)/ (export + import)} x 100. See Joongoo Park
and Hongsuk Kim, Hankook Jadongcha Sanup ui Sekyewha Julyak [Korean auto indus-
try’s globalization strategy] (Seoul: KIET, 1997), 30, Table 3-1.
28. Pyungryang We, “Daegiupkwa Chungso Giup Ganui Kyungyoung Kyukcha Boonsukkwa
Sisajum” [An analysis of business differences of large corporations and SMEs], Economic
Reform Report no. 2011-25 (Seoul: ERRI, 2011).
29. Korea Auto Industries Cooperative Association (KAICA), 2011 Jadongcha Sanup Pyunram
[2011 Korean auto industry annual review] (Seoul: KAICA, 2011), 27; Kwanghee Kim,
Hanil Jadongcha Boopoom Sanup [Korean and Japanese auto parts industries] (Ulsan,
South Korea: University of Ulsan Press, 1998), 30.
30. KIET, Boopoom Sojae Mirae Bijun Soorip Yungoo [A study of the establishment of future
vision in parts and materials] (Seoul: KIET, 2012), 27.
31. Korea Institute of S&T Evaluation and Planning (KISTEP), “Woorinara Mingankiup
Yungoogaebalhwaldong Hyunhwang” [The current situation of our private companies’
R&D activity], KISTEP Statistics Brief, no. 22 (2015).
32. Seoul Shinmoon [Seoul daily] (March 4, 1990); Hankook Kyunjae [Korean economic
daily] (November 25, 1995); Seoul Shinmoon (March 18,1996).
33. Hyundai Motor Group, 2015 Hyundai·Kiajadongcha Dongbansungjang Chujinhyunhwang
[2015 Hyundai Kia automobile partnership trend] (Seoul: Hyundai Motor Group, 2015).
34. Sung Chun Jung and Hyong Kun Lee, Hanil Kiupui Dongasia Saengsan Network
Beekyoyungu [A comparative study of the production networks of Korea’s and Japan’s
automobile industries in northeast Asia], Policy Analysis 07–10 (Sejong: Korea Institute
for International Economic Policy, 2007), 171–73.
35. Interviews with engine parts makers, June 23, 2010, and a muffler maker in China, July 12,
2011.
26 Politics & Society 00(0)

36. Interview with vice-president at Dae Won seat maker, July 6, 2010.
37. Byung-Nak Song, The Rise of the Korean Economy (Oxford: Oxford University Press,
1990), 121–22.
38. For exports depending on imported parts in electronics, see ibid., 119–22; for exports
of automobile assemblers based on imports of parts, see Wonchul Oh, Hankookhyung
Kyungjaegunsul: Engineering Apurochi [Korean-type economic construction: engineer-
ing approach], vol. 4 (Seoul: Kia Economic Research Institute, 1996), 94–95, 109–115;
KAMA, Hankookjadongchasanup 50nyunsa [The 50 years history of Korean automobile
industry] (Seoul: KAMA, 2005), 138–70.
39. Chung-Yum Kim, Policymaking on the Front Lines: Memoires of a Korean Practitioner,
1945–1979 (Washington, DC: World Bank, 1994), 38–40.
40. Song, The Rise of the Korean Economy, 121; Kim, Policymaking on the Front Lines, 1–40;
Haeran Lim, Korea’s Growth and Industrial Transformation (London: Macmillan Press,
1998), 113–14.
41. Hirohisa Kohama and Shujiro Urata, “Korea: Export Promotion Policies for the Electronics
Industry,” in Ryuichiro Inoue, Hirohisa Kohama, and Shujiro Urata, eds. Industrial Policy
in East Asia (Japan: JETRO, 1993), 149.
42. Lim, Korea’s Growth and Industrial Transformation, 112, 116–19.
43. Wonchul Oh, Hankookhyung Kyungjaegunsul, 109–10.
44. Ibid., 112–13.
45. KAMA, Hankookjadongchasanup 50nyunsa, 209, 321.
46. Richard Whitley, Business Systems and Organizational Capabilities (Oxford: Oxford
University Press, 2007), 15.
47. Dae-yeob Yoon, “Crisis of Export-Led Development and the Politics of Industrial Policy,
1980–2007: Idea, Institution, and Developmental Governance” (PhD dissertation, Political
Science, Yonsei University, 2011).
48. Interview with former vice-minister of the Ministry of Knowledge Economy, June 22,
2015.
49. Ministry of Science, ICT, and Future Planning, Yungugaebalhwaldong Josa Bogoso
[Survey of research and development in korea] (Seoul: MSIFP, 1992 and 2010).
50. Story, “As Companies Seek Tax Deals, Governments Pay High Price.”
51. Dohoon Kim, “Hankook Sanupbaljunkwa Hyanghoo Kwajae,” [Korean industrial devel-
opment and future tasks], Korean Economic Forum. 6, no. 4 (2014): 20.
52. Lim, Korea’s Growth and Industrial Transformation, 132–33.
53. Three personal interviews with former and current directors at the Ministry of Trade,
Industry & Energy, April 10, 2015; May 26, 2015; and June 17, 2015; interview with for-
mer vice-minister of Knowledge Economy, May 22, 2015.
54. Interview with former director, Office of Industrial Planning in the Ministry of Industry
and Energy (former title of the Ministry of Trade, Industry and Energy), April 1, 2015.
55. Interview with director, Materials and Components Policy Division in the Ministry of
Trade, Industry, and Energy, April 10, 2015.
56. Interview, May 26, 2015
57. Daesung Choi, Kiupe Daehan jungboo R&D Toojajiwonui Jungchaekhyokwa
Boonsukyungoo [Research analysis on the policy effects of government R&D investment
on firms], Research Report no. 2014-030 (Seoul: KISTEP, 2014), 5; Kiwan Kim, “Jungboo
Yungoogaebaltoojaui,” 277.
58. Interview with director in the MK Electron, Co. Ltd., November 19, 2015.
59. Kiwan Kim, “Jungboo Yungoogaebaltoojaui,” 285–87.
Kim and Kwon 27

60. Interview with managing director of the Korean Association of Machinery Industry on
June 24, 2015; interview with director of the Ministry of Trade, Industry, and Energy, May
26, 2015.
61. Personal interview at KIAT on June 4, 2015.
62. Seoul Kyungjae (February 2, 2010).
63. Personal interview at Sekonix Co., Ltd., November 12, 2015.
64. Interview with director in the MK Electron, Co. Ltd., November 19, 2015.
65. Personal interview at Sekonix Co., Ltd., November 12, 2015.
66. Jung Se Young, Miraenun Mandunun Guteeda: Jung Se Youngui Wegil 32 Nyun [Future is
what we make: Jung Se Young’s single path of 32 years] (Seoul: Haengrim Press, 2000),
278.
67. Interview with KEA, June 1, 2011.
68. Interview with Hyundai general manager of purchasing on August 24, 2010; interview with
KATECH on May 31, 2010.
69. Maeil Kyungjae (May 30, 1997); Hankook Kyungjae (November 25, 1995).
70. Maeil Kyungjae (January 3, 1997).
71. Interview with general manager of procurement, planning and strategy of Hyundai, August
24, 2010.
72. Interview with Namyang, July26, 2011; interview with Daewon, July 6, 2010; interviews
with Hyundai, July 1, 2011, and October 29, 2015.
73. We have visited many suppliers who expand new research networks by conducting gov-
ernment-sponsored projects. Interviews with general manager at Sekonix, November 12,
2015; interview with director at MK Electron, November 19, 2015.

Author Biographies
Kyung-Mi Kim (rudal07@snu.ac.kr) earned a PhD at Seoul National University in February
2017. Her dissertation, “Politics of the Recomposition of the Developmental State: The Korean
Experiences from a Historical-Comparative Perspective,” discusses the changes and continuity
of Korean developmental state.
Hyeong-Ki Kwon (kwonhk@snu.ac.kr) is a professor of political science at Seoul National
University. His research interests are in changes of national economies in the course of global-
ization, including the United States, Germany, Japan, Ireland, and Korea. His publications in
comparative politics include Fairness and Division of Labor in Market Societies (2004) and
articles in major journals including Politics & Society, Theory & Society, Comparative Political
Studies, Comparative European Politics, Contemporary Politics, and Economic & Industrial
Democracy.

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