Abstract

In the past, the development model adopted by the Korean IT sector involved following the footsteps of Japan, while adding a dose of Korean toughness to the mixture. However, having witnessed the bleak ten years that Japan experienced in the 1990s, the suitability of following the Japanese model is being challenged. After the Asian financial crisis, the resources of the IT sector have become yet more concentrated among a handful of the more competitive chaebol. These chaebol have developed into huge, multinational conglomerates whose influence is global; however, their influence on the Korean economy runs deep. Samsung and LG aggregately accounted for more than 13% of Korea's GDP, and their share price performance has a dramatic impact on the overall performance of the Korean stock market.

In response to the ongoing process of economic globalization, many enterprises are focusing on strengthening their competitiveness; players are improving the quality of human resources, encouraging the government to improve the investment environment, or  boosting proximity to their markets. Samsung has invested over US$3 billion in more than 26 subsidiaries in China. The headquarters for Samsung's China operations is in North China; most of its facilities in South China are engaged in export manufacturing, while in Central China, Samsung has taken advantage of the emergent semiconductor and LCD panel industry clusters in the region. The scope of Samsung's operations in China includes wireless communications, semiconductor packaging and testing, display, consumer electronics, and home appliances. Besides manufacturing, Samsung is gradually moving its R&D and design operations to China as well. The moving of production offshore by Korea's leading business groups has led directly to an increase in structural unemployment in Korea. Yet the expert managers cultivated by large corporations such as Samsung, along with incubation catalyzed by government training mechanisms, have triggered wave after wave of start-ups in Korea. For example, in mobile communications and semiconductors, small and medium-sized design houses are becoming increasingly prominent in the CDMA (Code Division Multiple Access) mobile phone and DRAM (Dynamic Random Access Memory) design services industries; there is potential for significant growth in this area in the future.

If the impeachment of Roh Moo-hyung is approved by the constitutional court, there is a strong possibility that Korea will return to the protectionist policies that characterized successive administrations prior to Kim Dae-jung. Restrictions may be placed on moving of production offshore by Korean companies and market liberalization may be slowed to protect domestic industry. For Korean manufacturers, the protectionist policies would have a negative impact on their overseas investment. Given the huge scale of Korea's large conglomerates, their ongoing internationalization, and the increasingly intense level of competition, it will be difficult to return to protectionism. For Korea's SMEs (Small and Medium-sized Enterprises), which have come to play an increasingly important role in the economy, the adoption of protectionist policies by the government would complicate their decision-making. Continued investment in Korea by foreign companies would depend on whether the government continues to provide incentives for foreign investment and if the government moves ahead with the process of building an attractive investment environment. Regardless, the communications sector is anticipated to remain attractive to foreign investors due to its strong growth potential. The potential impact on Taiwan's IT industry would be limited as the structures of these two national industries have already been determined.

A decision by the constitutional court to overrule the impeachment will be equivalent to an endorsement of Roh Moo-hyung, who can then be expected to press ahead even more vigorously with reforms, putting Korea on the fast track for industrial restructuring. As Korea is transformed from a country whose industrial structure is dominated by manufacturing into a new economy of knowledge-intensive industries, the impact Taiwan, which is also attempting to upgrade industries and transform industrial structure, could be substantial.

Close scrutiny of the policies espoused by the Roh administration, such as the Ten Growth Engine Industries Plan, reveals that, with a handful of exceptions, the vast majority of projects seek to build on bases where Korea's leading business groups are already strong. The government will need to put yet more concrete tactics to the test to strike a balance among the warring bureaucracies seeking control, or to parry the competition from Japan or China and become a central power in Northeast Asia. Korea's bold reforms, despite their flaws, offer food for thought for other East Asian nations in their attempt to transform industrial structure.