Invest KOREA

Still lingering is the dark shadow of the export restrictions that the Japanese government imposed last August, Korean government officials as well as business people are searching very hard to find effective ways to overcome once and for the obstacles in trade. The Korean government initially set out the list of 100 strategically crucial commodities that should be supplied locally, with the list being chosen according to its industrial importance, substitutability, and the particular country of dependence.

Upon reading the list, it was easy to find that the government was putting extra emphasis on six key industries, namely semiconductors, automobiles, display, electric and electronic products, machineries and metals, and basic chemical products. Among the list of the 100 products, the government esteems that 20 items could be supplied fully within one year, and the rest be readily provided in five years. All of these daunting government projects are termed as programs for industrial innovation, and they require massive investments.

The government plans to inject KRW 7.8 trillion in a 7-year period for domestic substitution, as well as an additional KRW 2.5 trillion in encouraging M&A of technologically advanced companies. Also, the government is willing to provide preferential support for technology transfer and direct investment from abroad. The 2020 budget allocates KRW 24.9 trillion for R&D investment, up 17.3% up from the year before. The first priority is given to the local supply of the key industrial materials and parts, which were usually imported from abroad. Another key area for R&D investment is the so-called DNA projects, which is an acronym for data, 5G network and artificial intelligence. Also, the budget is targeting the innovation of the Big-3 industries, namely bio-health, future smart car, and system semi-conductor.

No one can degrade the government program as futile or needless. But there are two critical questions that should be asked before its implementation. First is whether the amount set out in the government budget is enough. The KRW 10.3 trillion package involved seems to be a big sum, but won’t be large enough to carry out the seven-year plan. It would definitely require much more funds for the multi-year projects; perhaps an amount twice or three times bigger may be required to carry out the program. Besides, the tax revenues for 2019 began to fall short of the initial plan, while the government budget is running a serious deficit on a record scale, making it more difficult to channel resources to the targeted areas without damaging fiscal soundness. Therefore, financing through public sources is becoming more difficult, and funding through private sources becomes inevitable. The other key question at hand is who should take the control of industrial innovation. Bureaucrats in the government lack professional expertise in the area of industrial commercial innovation. If government officials take command in innovation policy, the chances are very high of wasting precious resources without much of a tangible outcome. These two critical challenges, namely financing and taking control with full responsibility, are the crux of the innovation policy to its success.

The solution to this is fairly simple. The private business sector, not the bureaucrats, should take the helm of innovation. The initiative as well as the responsibility for all of the innovation projects should be put in the hands of the private sector, only with a proper reviewing system in the public body. The incentive for innovation should be given not to the bureaucrats but to the business sector. As all the fruits of innovation should be reaped only by the business innovators, the private sector should take all responsibility of the funding and the associated risks. The private business sector could cooperate with such public entities as the SME cooperatives, chambers of commerce or universities. The government can just facilitate the financing through various guaranteeing systems, and reduce the costs and barriers to the available funds. Also, the government can allow increased access to public research institutions when deemed necessary.

In this regard, it seems more than appropriate for the government to launch a five-year plan to help support the private sectors’ systematic efforts at industrial innovation. In the five-year plan, the government should set out, above anything else, a priority framework by which the government support would be provided step-wise to strategic fields of innovation. Another important element in the plan should be long-term programs to foster research in science and technology, as well as education, which are the perennial sources of innovation. Also, it should include comprehensive policies to allow SMEs to structurally get more competitive and efficient. Acknowledging that Korean SMEs are too undersized to become competitive, the policy of encouraging voluntary M&A among SMEs seems ever more urgent. Legal matters regarding share protection under M&A, distributing mechanism for profits and dividends, and matters regarding bequeathal and etc., should be carefully addressed in the promotional framework. It is very clear that the Chaebol system does not work for Korea anymore, and the time has arrived for SMEs. It is also clear that innovation should be the source of continued job creation and economic growth. If this is clear, then why not pour all our resources and capabilities to the innovative growth of SMEs?

By Professor Se Don Shin
Dean, Sookmyung Women’s University
seshin@sm.ac.kr

The opinions expressed in this article are the author’s own and do not reflect the views of KOTRA