Investigates strategies and policies for Korea to pursue, particularly in science and technology, in light of a rising China.
Strategic Choices in Science and Technology
Korea in the Era of a Rising ChinaBy Somi Seong Steven W. Popper Kungang ZhengRand Coporation
Copyright © 2005 RAND Corporation and the Korea Institute of Science and Technology Evaluation and Planning
All right reserved.ISBN: 978-0-8330-3746-6Contents
Preface....................................................................................................................................iiiFigures....................................................................................................................................xiTables.....................................................................................................................................xiiiSummary....................................................................................................................................xvAcknowledgments............................................................................................................................xxxiAbbreviations..............................................................................................................................xxxiiiCHAPTER ONE Introduction..................................................................................................................1Objective of the Study.....................................................................................................................3Approach...................................................................................................................................3Scope of the Analysis......................................................................................................................4Outline of the Report......................................................................................................................4CHAPTER TWO Korea's Main Economic Concerns About a Rising China...........................................................................7Are China and Korea Competitive or Complementary?..........................................................................................7Can the Mutually Beneficial Korea-China Trade Relationship Be Sustained in the Long Run?...................................................9Will Korea and China Be Increasingly Competitive in the Near Future?.......................................................................12Was Korea Squeezed Out of Markets in Industrialized Countries While Gaining Market Share in China?.........................................16Squeezed Out of the China Market?..........................................................................................................20Is Korea's Manufacturing Sector Being Hollowed Out?........................................................................................21The Threat May Have Been Covered Up by the Past Decade's World Economic Boom...............................................................23External Risk Factors: China's Overheated Economy..........................................................................................25Narrowing Technological Gap Between Korea and China........................................................................................26CHAPTER THREE Current Technological Capability: S&T Indicators and Trends.................................................................27International Comparison of Technological Capabilities.....................................................................................27Country-Level Aggregate Indices of S&T Capabilities........................................................................................28Korea Is Currently Ahead of China in Aggregate S&T Capability..............................................................................31High R&D-to-GDP Ratio and High Gross Tertiary Science Enrollment Are the Major Contributors to Korea's High STCI Score.....................31Limitations of Aggregate Indices...........................................................................................................33On an Absolute Scale, China Is Ahead in R&D Investment and Human Resources.................................................................34Major S&T Indicators for China.............................................................................................................36Rapid Growth in R&D Investment.............................................................................................................36Relatively Little Funding for Basic Research...............................................................................................38Scientific Paper Publication Outperforms Basic Research Investment.........................................................................38Some Studies Assert That China Is Already a "Research Powerhouse"..........................................................................40China Has an Absolute Advantage in Scientists and Engineers, and the Supply Is Abundant and Increasing.....................................42Success in Educational Reform Further Strengthens China's Human Resource Advantage.........................................................43Patent Data Show China Has Limited Invention Capabilities..................................................................................45The Chinese Industrial Sector Is Not the Major Player in Invention-Type Patents............................................................47China Is Behind in Overseas Patent Activity................................................................................................47Korea Is Relatively Strong in International Patent Activity................................................................................49The Increase in China's High-Tech Exports Is Mainly Due to Foreign-Invested Companies......................................................52Limited R&D Capability with Increasing Potential...........................................................................................54CHAPTER FOUR China's National Innovation System and R&D Strategies........................................................................55China's National S&T Strategy..............................................................................................................55China's Core Development Strategy: "Rejuvenating the Nation Through Science and Education".................................................56S&T and Education Are the Two Pillars of China's Economic Development......................................................................57China's National Innovation System.........................................................................................................59Main Actors and Institutional Arrangement of the Chinese NIS...............................................................................60The Key Universities and the Chinese Academy of Science Are | Major Knowledge Creators.....................................................60The CAS As a Reformed Research Powerhouse..................................................................................................62Universities As Major R&D Performers.......................................................................................................64The Chinese Indigenous Industrial Sector Is a Relatively Weak Link in the NIS..............................................................68China's S&T Policy Governance Structure....................................................................................................75Hierarchical and Centralized...............................................................................................................75Comparison with Korea's New S&T Policy Governance..........................................................................................76China Promotes R&D in a Few Focused Areas..................................................................................................77Next-Generation Emerging Technologies in China: IT, Biotechnology, and New Materials.......................................................78Comparison with Korea's Focus on Future Technologies.......................................................................................79China's Major National R&D Programs........................................................................................................79The National Basic Research Program (973 Program)..........................................................................................81The National High-Technology R&D Program (863 Program).....................................................................................82The Torch Program..........................................................................................................................84Interaction with the Foreign Sector........................................................................................................86FDI Contributed Significantly to China's Economic Development..............................................................................86Education and Training by Foreign Invested Enterprises (FIEs)..............................................................................87Technology Transfer from Foreign Sources: "Market for Technology"..........................................................................88R&D Centers of Foreign Multinational Corporations in China.................................................................................90Setting Technology Standards: The Large Domestic Market As Leverage........................................................................91Overseas M&A Activities by Chinese Companies...............................................................................................93Global Network of Overseas Chinese.........................................................................................................95Impact of Foreign Competition..............................................................................................................96A Stronger Industrial Sector with an Extensive Global Network..............................................................................97Evaluation of China's NIS and the Direction of Its Strategy................................................................................97CHAPTER FIVE Future Prospects and Options for Korea.......................................................................................101Future Prospects for S&T Progress in Korea and China.......................................................................................102Where Is Korea Positioned in the Technology Race?..........................................................................................102How Does China Evaluate Its Global S&T Progress?...........................................................................................105Future Prospects for the Technology Gap Between Korea and China............................................................................106How Is Korea Paving Its Way to the Future?.................................................................................................108How Is China Preparing for Future Emerging Technologies?...................................................................................111Korea and China Are Similar in Their Preparations for the Future...........................................................................112Options for Korea and Their Policy Implications............................................................................................112Fortify Strengths in R&D Intensity but Obtain R&D Efficiency Too...........................................................................113The Government's Role in Future-Oriented Long-Term Research................................................................................114Next-Generation Technologies and Generic Technologies......................................................................................114From an IT-Focused Strategy to Diversification into Biotechnology and Nanotechnology.......................................................115Accelerate the Pace of S&T Progress Through More Active Global Networking..................................................................116Should Korea Be More Engaged in the China Market?..........................................................................................117Engaging with China and Taking Advantage of China's Strength...............................................................................117How Much Should Korea Focus on the China Market?...........................................................................................117Diversifying into Other Geographic Markets, Especially Advanced Countries with More Sophisticated Demand...................................118Education for Creativity and Innovative Thinking...........................................................................................119Reform the Formal Education System to Promote Creative Learning............................................................................119Develop Highly Qualified Scientists and Engineers by Supporting Broader Access to Higher Education.........................................119Education to Overcome the Dichotomy of Growth and Distribution.............................................................................120Investment Beyond Production and Technology................................................................................................121Understanding the Uses of Technology and the Subtleties of Customers' Needs................................................................121Selling Knowledge Versus Selling Commodities...............................................................................................122Better Living Environments to Compete for, Maintain, and Recruit International Experts.....................................................123Openness May Have to Be Korea's Strategy No Less Than China's..............................................................................124Summary of the Options and Their Linkage to the Next Chapter...............................................................................125CHAPTER SIX Future Scenarios..............................................................................................................127Using Scenarios Analytically...............................................................................................................127A Simple Model of Korea's National Economy.................................................................................................129The Role of China in Korea's Future........................................................................................................129The Need for Sustaining Technological Levels...............................................................................................131The Nature of the Korean Labor Force.......................................................................................................133Strategies and Scenarios...................................................................................................................134Analytical Models and Policy over the Long Term............................................................................................134Four "Strategies" for Korea................................................................................................................136Analytical Results.........................................................................................................................139Strategy Performance Under Different Assumptions...........................................................................................139Exploring the Implications of Uncertainty..................................................................................................142Toward Robust Strategies in the Face of Deep Uncertainty...................................................................................145Challenges to Robustness and Characterizing Uncertainties..................................................................................149Challenge Scenarios to Probe Robustness of Candidate Strategies............................................................................151Discussion and Conclusions.................................................................................................................157CHAPTER SEVEN Conclusion..................................................................................................................159Strategies for Korea.......................................................................................................................161Support R&D Intensity but Obtain R&D Efficiency Too........................................................................................161Engage with China..........................................................................................................................161Reform Education...........................................................................................................................162Pursue Openness............................................................................................................................163Future Scenarios...........................................................................................................................163APPENDIXA. Additional Specifications for the Model of the Korean National Economy..................................................................167B. Major National S&T Programs in China: Objectives and Resources..........................................................................169References.................................................................................................................................175
Chapter One
Introduction
China's economy has grown at a phenomenal rate in the past two decades, providing new and vast market opportunities for Korea as well as other countries. China has become the biggest recipient of foreign direct investment in the world, the largest trading country in Northeast Asia-surpassing Japan-and a major export market for many Asian countries including Korea, Japan, and Taiwan. Beyond its economic performance, China also has played an increasingly important role in world politics including its central role in the Six- Party Talks to solve the problem of North Korea's nuclear program.
As China becomes more powerful both economically and diplomatically, many see it as presenting a formidable threat as well as an opportunity. Koreans are no exception to this mixed feeling toward China. Even if we confine our interest to the economic arena, Korea's list of potential threats from China is considerable: the hollowing out of the manufacturing sector; job loss; loss of shares of the world market and the China market; and competition from China in technology and commercialization.
The impact of China's economic rise on the Korean economy has been significant. Korea's exports to China grew more than 13-fold between 1992 and 2003, and China became the largest export destination for Korea in 2003, accounting for 18.1 percent of the country's total exports. China's importance as the destination for Korean exports surpassed that of the United States, its largest trading partner during the past 30 years. Korean companies and individuals have also joined the investment rush into China to explore the business opportunities in a country growing at breakneck speed and to utilize the abundant and relatively cheap, yet disciplined, labor force for manufacturing. In 2002, Korea was the third-largest investor in China, after Hong Kong and Japan. In 2003, over 40 percent of Korea's foreign direct investment (FDI) went to China, making China the largest destination for Korea's FDI.
As Korea's economic relationship with China continues to develop, the possible threats and shocks emanating from China could become as significant for the Korean economy as the positive effects of the relationship. Therefore, it is crucial for Korea to understand the opportunities and challenges that China's economic rise provide. In this context, the Korea Ministry of Science and Technology (KMOST) asked the RAND Corporation, through the Korea Institute of Science and Technology Evaluation and Planning (KISTEP), to assess the benefits and risks involved in Korea's economic engagement with China and to draw policy implications for Korea, with particular focus on the science and technology progress of both countries.
Objective of the Study
The objective of the study is to analyze the relative strengths and vulnerabilities of Korea's current and future science and technology (S&T) capabilities-especially in relation to China's growing economic strength and S&T capabilities-and to assess their implications for Korea's S&T policy over the next ten years.
We attempt to answer the following questions: What factors and strategies would enable Korea to maintain its economic dynamism while increasing its activities in China? What role should the government play in technology advancement, compared with that of the private sector, for Korea to maintain a leading edge in selected areas of technological and R&D capability?
Approach
Using trade, investment, and research and development (R&D) data, we analyze the general economic relationship between Korea and China at the industry as well as the aggregate level to uncover general trends and the macro configuration of the technological capabilities of both countries. Next, we analyze the main drivers of change in China's S&T progress compared with those of Korea in the framework of the national innovation system. Micro-level analysis of institutional arrangements, relative strengths of each R&D performer such as industry, university, and research institutes, and national strategies and programs will complement the macro analysis.
Based on the data analysis and micro-level qualifications, we develop a simple model of the Korean economy and alternative S&T strategies that Korea could follow. Then we show how those strategies may affect Korean prosperity, explicitly considering the many uncertainties that Korea will confront in the future. In our analysis of future scenarios, we introduce an approach to minimize the maximum regret associated with pursuit of one or another of the strategies-that is, how each strategy would perform relative to the strategy that would be optimal for the set of circumstances that defines the scenario.
Scope of the Analysis
Our analysis focuses mainly on a comparison between Korea and China. We often introduce Japan as a third country in the comparison because it is needed to peg the other end of the scale against which Korea is being gauged. Especially when we analyze the economic capabilities of Korea and China, we assume a world with at least three countries including Japan and often introduce the United States and the rest of the world in addition.
As the configuration of technological leadership among Japan, Korea, and China changes, the economic relationship among these countries will also change. This study, however, does not cover how Japan's economic and technological performance influences Korea's options. We leave full-blown analysis of the three-country interactions as a topic for future research.
Outline of the Report
In the next chapter, we define Korea's main economic concerns about China's rapid industrial development and growing S&T capabilities and examine the validity of those concerns based on the evidence. We look at how Korea's concerns are related to its own science and technology capability and strategies and highlight aspects of competition and cooperation between Korea and China. We derive implications about the two countries' relative technological capabilities and trends.
In Chapter Three, we evaluate the current S&T capabilities of Korea and China in terms of quantitative measures and statistics. We address several questions: How is Korea's S&T potential evaluated in aggregate country-level S&T capability indices? How does it differ from China's? What are the main contributors to Korea's S&T capability? What are the relative weaknesses and strengths of each country as reflected by major S&T indicators? We compare the major trends in China's S&T activities with those of Korea and other countries to understand how those trends will influence China's future S&T progress.
Chapter Four analyzes factors that will change China's science and technology capability in the future. Using the theoretical framework of China's national innovation system, we explore the main drivers of rapid economic growth and science and technology progress. Our exploration consists of a micro-level analysis of the structure and motivation of China's national innovation system. We explain how different R&D performers, institutional arrangements, factor and product markets, and government R&D programs interact with each other and influence the pace and path of S&T progress in China. Finally, we put China's national innovation system together with its national economic goals and strategies and the contribution of the foreign sector.
In Chapter Five, we examine where Korea and China have positioned themselves in the race for technology progress, how S&T progress in the two countries will be oriented in the future, and what Korea's options are for making the best of its opportunities in the face of future challenges. We put together the analytical results in the previous chapters, ideas gleaned from the literature, and our understanding of Korea and China to suggest a collection of options from which Korea could choose. We focus on the micro characteristics of each strategy and the relevance of each strategy as an option for Korea.
In Chapter Six, we group the options suggested in the previous chapter into four broader strategies: a "Base" strategy, an "Openness" strategy, an "R&D-focused" strategy, and an "Education-focused" strategy. Using the metric of average annual rate of growth in GDP per capita for Korea during the period leading to 2015, we show how the payoff for each strategy changes across large ensembles of alternative future states. Our model explicitly considers changes in technological competitiveness, price competitiveness, and external shocks such as a change in China's macroeconomic performance.
Chapter Seven summarizes the results and concludes the report.
Chapter Two
Korea's Main Economic Concerns About a Rising China
Although they are enjoying new market opportunities in China, Korean policymakers and industrial experts are worried about the threat from China. Korea's extensive economic engagement with China could very well make the old saying come true: A sneeze in China means flu in Korea. Even if we confine the discussion to the economic arena only, the list of potential threats encompasses the hollowing out of Korea's manufacturing sector, loss of jobs and market niche in China because of China's increased manufacturing capabilities, and an unpredictable market environment caused by competition with world-class companies operating in China. There is also concern about the Chinese economy overheating and the shockwaves that would be felt if China's bubble burst or the country went into an abrupt recession. Indeed, the sponsor of our study was also motivated, in part, by the above concerns.
In this chapter, we analyze the threats that a rising China might present to examine whether they are supported by evidence and how they are related to Korea's S&T capability and strategies.
Are China and Korea Competitive or Complementary?
Korea has been enjoying the opportunities presented by China's growing market. Korea's share of China's total imports increased from 1.1 percent in 1990 to 10.5 percent in 2002. As China rapidly expanded its share of the world market, Korea also improved its world export position. As Figure 2.1 shows, Korea's share in the world export market improved from 2.03 percent in 1991 to 2.53 percent in 2002, while China rapidly improved its share from 2.03 percent to 5.08 percent during the same period.
So far, Korea and China have been complementary rather than competitive in the area of trade. As Table 2.1 shows, Korea's major export products to China are components and other intermediate goods, whereas China's export to Korea are characterized by electronics products, textiles, and agricultural and mineral products. According to the Korea International Trade Association, 69.4 percent of Korea's export to China consisted of materials, components, and equipment in 2002. While China is exporting final goods to major markets, Korea is exporting intermediate goods to China and in this way actually exports indirectly to the industrialized world.
Can the Mutually Beneficial Korea-China Trade Relationship Be Sustained in the Long Run?
The answer is not certain. For example, even though Korea's major export items to China are equipment and components, Korea does not have a comparative advantage in those items. The revealed comparative advantage (RCA) index of Korea's general industrial machinery and that of electric parts were 0.47 and 0.82 respectively as of 2000.
In fact, Korea imports core components and high-tech equipment from Japan and other industrialized countries, and this has been the main source of Korea's trade deficit with Japan, which is larger than its deficit with its other trading partners. Industrialized countries such as the United States and Japan are the dominant players in the production of core components and equipment (Table 2.2).
Korea's weakness in parts and components is captured by the World Bank's RCA index of component production as reflected in the 2001 export statistics. Korea has an RCA in only nine component product groups out of 60. The World Bank statistics do not indicate the technological contents of each component. However, quantitatively, Korea is far behind others. The United States has 40, Japan has 34, and China has 12 component product groups whose RCAs exceed unity. Component product groups with RCA exceeding unity for Korea includes steam boilers (6.68), electrothermic appliances (3.27), telecommunications equipment (2.70), outboard motors, not elsewhere specified (nes) (1.95), electric power machinery (1.94), electronic components, nes (1.58), textile machinery, nes (1.58), foundry equipment (1.32), and office and adding machinery (1.18). Korea has a revealed comparative advantage in 15.0 percent of the 60 parts and component products. This is even lower than the average percentage for other East Asian countries, which had 17.8 percent (excluding Japan). Out of 60 parts and component products in the World Bank study, the United States, Japan, and China have RCAs larger than unity of 66.7 percent, 56.7 percent, and 20.0 percent respectively.
Note that the above statistics do not consider the technological contents of the components that each country is exporting. Therefore, Korean equipment and component companies may have a comparative advantage in only a small number of components but may still be more profitable than Chinese companies.
This is one of the limitations of trade data. Trade statistics do not tell us about the level of value-added of the exports or the profitability of the trade. Our analysis of technological capability and company-level competence in the following chapters will complement this limitation.
Will Korea and China Be Increasingly Competitive in the Near Future?
If the past is any indication, competition between Korea and China will increase in the future. For example, Korea, China, and Japan all have an RCA in the information technology (IT) equipment industry (see Figure 2.2), and it is also the largest export industry for all three countries (Table 2.3).
Korea's world market share of IT equipment increased from 3.6 percent in 1995 to 5.9 percent in 2000 (Figure 2.3). During the same period, China's market share has almost doubled from 3.5 percent to 6.6 percent. Japan's market share in world IT equipment export has been declining rapidly but still at 11.4 percent as of 2000, which is almost as high as the sum of Korea and China's market shares. For Japan, both RCA and export market share indicate that Japanese companies are less dominant in IT equipment export market than before. This might reflect not only the restructuring of the IT industry in Japan but also the increased overseas production by Japanese companies.
The export similarity index (ESI) is often used in studies of international trade as a proxy to measure the extent of rivalry of two countries in the export market. As Figure 2.4 shows, Korea's ESI with China and with Japan increased in the IT equipment industry, reflecting that Korea has caught up with Japan while China is gaining on both Korea and Japan.
Of course, indicators based on trade data should be interpreted carefully because of their inherent limitations. For instance, there is usually an aggregation bias. At the aggregated level, the export structures of different countries looks more similar than they really are. If we look at more disaggregated product levels, each country's targeted products or customer groups might be quite different. Thus, even though Korea, China, and Japan are all specialized in the production of IT equipment, the spectrum of IT products produced by each country and their technological content might be quite different, and their export products could be complementary rather than competitive.
However, a company or a country often expands its product portfolio into the same product groups or industry as another because of technological closeness or similar demand characteristics. Therefore, the industry-level analysis is useful for seeing the economic relationship among countries.
(Continues...)
Excerpted from Strategic Choices in Science and Technologyby Somi Seong Steven W. Popper Kungang Zheng Copyright © 2005 by RAND Corporation and the Korea Institute of Science and Technology Evaluation and Planning. Excerpted by permission.
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