How Korea is transforming into a creative economy

Over the last half-century, the Republic of South Korea has achieved an economic transformation that many would have considered impossible. In just 50 years, it has gone from a country ravaged by war and poverty to a world-class, high-tech OECD economy known for its consumer electronics such as smartphones or flat screen TVs and its manufacture of products such as cars, ships and oil and gas platforms—Korea is currently building the world’s largest semisubmersible platform.

Strengthened by this success, Korea is now aiming for the next phase. In 2013, the country’s president, Park Geun-hye, announced the plan to move the country towards a “creative economy”. The plan, which notes that “the Korean economy has reached the limits of the catch-up strategy which had driven economic growth for the last 40 years” aims to promote a new growth model based on innovation and entrepreneurship. For a country that has built its success on the ability to manufacture rather than innovate, this represents an important shift in the growth model.

Korea has many reasons to believe it can achieve this goal. Its citizens are among the most connected in the world (84% Internet penetration rate in 2012), it benefits from the highest broadband speeds (22Mo/s) and its youth topped the OECD’s 2012 PISA test in creative problem-solving skills. The country is also one of the easiest places to open a business. According to the World Bank, only 5 days are needed to register and open a business—compared with the OECD average of 10. Korea ripe for a knowledge economy.

The path to transformation presents a series of challenges, however, most notable of which is a situation of concentrated markets. The Korean success—which brought per capita GDP from 10% of the US’s in 1962 to 50% in 2012—was achieved by a relatively small number of very large, world-leading global brands such as Samsung, LG and Hyundai. Known as  chaebols (chae in Korean means wealth or property and pŏl means faction or clan), these companies are crowding out the R&D space. According to the Korea Industrial Technology Association, large companies accounted for 74% of private R&D investments while SMEs and venture firms accounted for only 13%  and 11%, respectively. In addition, small SMEs face difficulties in attracting talent—most graduates set their sights on entering the chaebols—as well as gaining access financing (as of 2012, early-stage funding for Korean start-ups was almost nonexistent).

Another important challenge will be to bring the universities into the innovation game. Despite high PISA scores (students aged 15-16 years), Korean universities perform poorly in terms of ranking and productivity when compared with the OECD average. In 2013, only one Korean university made it into the world’s top 50 ranking and, with less than 4% of international co-patenting over the period 2007-2009, Korean innovation is still relatively closed—somewhat of an anomaly for the worlds’ 14th largest economy.

The Korean government has taken important steps to address these challenges. Recent measures include financial support and tax incentives from the start-up to the exit phase (eg establishment of a $489m crowd-funding system), creation of a stock exchange for start-ups (the Korea New Exchange) and institutional reforms such as the creation of the Ministry of Science, ICT and Future Planning to promote and coordinate policy implementation.

The private sector is acting, too. In partnership with the government (60% public, 40% private), it is setting up a $1bn financial vehicle to promote, assist and accompany start-ups as they innovate, using some of the money for intellectual property rights to protect SME’s innovation. Encouraged by the government’s effort to level the VC playing field between national and international actors, foreign investment is also starting to arrive. The Silicon Valley-based $1.3bn venture capital firm BlueRun now has a Korean branch, for example. Innovation has also started to flow in, with large international companies such as GE now using Korea as a base to design some of their innovative products (many of the engineers behind the Quirky products—a crowd-source platform for innovation—are from GE Korea).

Korea has managed to deliver an economic miracle in less than half a century. To continue that success will require nothing short of an economic transformation. Can lightning strike the same place twice?

This article is published in collaboration with GE LookAhead. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Amir Kohen is an author at GE LookAhead.

 Image: A man uses his mobile phone in front of a giant advertisement promoting Samsung Electronics’ new Galaxy S5 smartphone, at an art hall in central Seoul April 15, 2014. REUTERS/Kim Hong-Ji.