Identical Twin or Fraternal Twin? (Korean vs. Japanese Innovation Strategy)

Reaction Paper #3

 

Japan: S&T Strength and weaknesses in the 21^st century (Ed Lincoln, NYU)

Perspective on technology innovation: Korean experience (Yongrak Choi, KORP)

Anticarcinogenic function of selenium (An-Sik Chung, KAIST)

April 24, 2008

 

Identical Twin or Fraternal Twin?

 

(Comparative study of National Innovation Strategy of Japan, S. Korea, Taiwan and Singapore)

 

National innovation systems (NIS) of Asian countries have many similarities. Wong (1999) described the similarities of these countries that 1) political stability during their economic developing stage, 2) prudent macroeconomic policies, 3) export-orientation industrial policy, 4) public policies leading to high savings rate and 5) heavy investment in human resource development. Especially, these countries’ high R&D expenditure rate and strong human capital in science & technology fields are taking a top position in the world as shown in the figure 1.

Figure 1  Comparison of R&D among OECD countries

Source: World Bank (http://www1.worldbank.org/devoutreach/january07/article.asp?id=395)

 

However, are there any differences among these countries’ NIS? How can we categorize them in groups based on their similarities and differences?

According to Wong (1999)’s analyses of Japan and newly industrialized economy (NIE) countries in Asia, two main stream of technological capability development routes are implemented in these countries: 1) reverse product life cycle and 2) reverse value chain (refer to table 1).

Table 1 Comparison of National Innovation Strategy of Japan and NIE

	Japan	Korea	Taiwan	Singapore
Period of rapid growth	1980s	1990s	1990s	1990s
NIS model	Large Firm Vertical Integration Model	Large Firm Internalization Model	SME-PRI Innovation Network Model	DFI-Leveraging Model
Technology Catch-up strategy	Reverse Product Life Cycle (1960s~70s)	Reverse Product Life Cycle (1980s~90s)	Reverse Value Chain Strategy, followed by Process Specialist	Process Specialist Strategy, followed by Reverse Value Chain Strategy on a smaller scale

 

Identical Twin (Japan and Korea: reverse product life cycle)

The reverse product life cycle strategy for national innovation system is focusing on developing technology capability of “supplying new end products” by cultivating human capital of applied science and engineering. For example, Japan and Korea have focused on developing engineering capability than basic science capability for innovation (Lincoln & Choi’s lecture, 2008), in consequence, they have very similar industrial structure. Vertically integrated industrial structure and national champion strategy were practiced to develop new “competitive products” which are marketable in developed countries. The advantages of this industrial structure are reducing transaction cost and prevent unnecessary competition in domestic market and focusing on international market. By protecting their domestic market with high tariff and trade barriers, Japanese and Korean national champions (e.g. Chaebol) were guaranteed their monopoly or oligopoly benefit in their domestic market for their ‘end products’ and based on this sustainable and high benefits, they have focused on cultivating their technical competencies for developing new products for international market. For example, electronic industry was cultivated in this ways. During 1970’s Japanese electronic companies (e.g. Matushida, Sharp, Toshiba) shared exclusive benefits in domestic market with transistor radio, tape recorder, color TV, and white home appliances. Based on accumulated capital in domestic market, these national champions collaborated with government to develop a new generation end-product: Memory and high-tech electronic devices. Japanese government took an important role to develop new generation technology by providing exclusive patent policy for global competitor and moderating knowledge transferring to domestic players. Then, Japanese electronic corporations developed new generation of memory and they started selling this new ‘end-product’ to global market with great success.

On the other hand, Korea also practiced very similar innovation strategy during 1980’s and early 1990’s in electronic industry. Samsung, Goldstar (currently LG), Daewoo, and Hyundai took over electronic technology from governmental research centers (e.g. ETRI) and started their laboratory level research. However, by collaborating with Japanese companies and Korean government supports, these Korean chaebols concentrated implementing “new generation of production line.” Due to the lacks of technological capability for developing end products, Korean companies invested to new production line to catch up with the production technology based on their “reverse product life cycle” strategy. Instead of developing whole product life cycle, they focused on the “production” itself since they have cheap and skilled engineers and labor workers. Similar to the Japanese case, or somewhat more actively, Korean government also helped national champions to cultivate their technology competences for developing new end-products. For instance, during the economic crisis on 1998, Korean government forced to merging and restructuring electronic industry. LG & Hyundai merged and became Hynix and Samsung should move their automotive plants to keep memory plants, and Daewoo electronics were sold out to foreign investors. From these chaotic restructuring processes, Korean government built up two major memory producers (Samsung & Hynix), LCD producers (Samsung & LG-Philips), Mobile producers (Samsung & LG), and Telecommunication companies (SK & KT). Consequently, these newly dressed up national champions developed their own products by utilizing their production line technology and merged into global market.

 

Fraternal Twin (Taiwan and Singapore: reverse value chain)

             Compared with large vertically integrated industry development with reverse product life cycle strategy of Japan and Korea, Taiwan and Singapore have developed their innovation capability by focusing on reverse value chain strategy.

             Wong (1998) described Taiwan industrialization process as evolving OEM, ODM, OBM and OIM which can explain the effort of developing reverse value chain strategy and innovation capability for developing it. .

It is by now well known that Taiwanese firms were among the first and largest OEM subcontractors to many firms from the advanced countries in a wide range of industries, ranging from bicycle assembly to electronics and computer assembly. Over time, Taiwanese OEM firms had also made significant progress into ODM activities, particularly in the PC-related industries. An increasing number of Taiwanese ODM firms had also gone on to become OBMs, good examples being ACER in PCs, and Giant in bicycles. It is indeed fair to say that it is the Taiwanese that have invented the ODM and OBM concept, and more recently, the concept of OIM as well. A significant number of Taiwanese firms have also pursued the Process Specialist route.

Nowadays, this reverse value chain strategy is widely adopted in China. China is a world largest OEM, ODM provider and the effectiveness of the strategy is proven. The advantages of this strategy are 1) developing innovation capability in a short time, 2) hedging risks of developing end products (e.g. sales & marketing) and 3) less initial investment for innovation.

             In Singapore, the reverse value chain strategy is more directly controlled by government. Singapore government encouraged Multi-national-companies (MNC) to install their manufacturing line in Singapore than get OEM or OEM product itself. The encouragement of subcontract with MNC is to develop Process Specialists among local firms.

 

Challenges of Identical Twin and Fraternal Twin

             In a vertically integrated national champion system, the most challenging thing for developing innovation capability is limitation of cultivating innovative human capital. As Dr. Choi pointed out during the lecture, Korean government and Chaebols almost monopolize the valuable resources and human capital for innovation. New technology entrepreneurs frequently encounter a lot of regulations which are not favor to them. For example, the Keiretzu system deters the free competition in high technology products in domestic market. Many small and medium sized MP3 player manufacturers had to abandon their business for dumping practice of national champion’s keiretzu company, and they had to turn their eyes to global market where they don’t have strong specialization. In addition, many valuable technology researchers and engineers don’t want to go SME or start their own business for the unfairness of domestic market. Eventually, this national champion and keiretzu supply chain strategy is harmful to leap up the innovation capability of the country. This can be proved by the small number of enterprising activities in research institute or universities in Japan and Korea. Even though they spend a lot of money to develop and drive enterprising activities, the innovation activities in research and high tech engineering field would not be increased, if the industrial structure would not be flattened and the rules of competition would not be fair in domestic market.

             The biggest challenge for reverse value chain strategy is hard to get “economy of scale” advantage. The practice of OEM/ODM/OBM/OIM means highly dependent on large MNCs. The specialized value chain means ‘fragmentation’ of industrial structure. In this situation, it is not easy to consolidate the resources for innovation. In an under-structured industry, human capital development for large scale innovation is not easy to achieve for its limitation of resources.

 

Time to balance

             Reverse product life cycle and reverse value chain strategy for innovation have their own strengths and weaknesses. However, those systems have common pitfall in developing human capital for sustainable innovation. In product life cycle strategy practicing countries like Japan and Korea, vertically integrated and oligopoly industrial structure prohibits the creative activities of potential innovators, meanwhile reverse value chain strategy practicing countries (Taiwan and Singapore) have limitation of resource allocation for innovators.

             Recently, these identical twin and fraternal twin is evolving into integration innovation strategy. Japan & Korea is investing a lot to developing new frontier technology as well as they promote fair competition in their domestic market and global market. Taiwan and Singapore is trying to develop their own technological capability by adopting many foreign educated human resources. Then, we can say that it’s time to balancing their national innovation system to leap up again as a global innovator.

             A healthy forest is composed with diverse plants. Big trees (national champions), small and medium size plants (SMEs) and grasses (Entrepreneurs) are altogether making a healthy forest. Even though Japan and Asian NIE countries strategy were different, their objective is only one: Developing their country as holistically healthy one as a healthy forest.

             Through the CAS 587 classes and lectures, I have learned that innovation is very hard and tough one but it deserve to study and practice to develop a country. Although there are lots of different strategies with according to different resource limitation in each different countries, their objective of practicing innovation is only one that developing a country, an organization or a person as a holistically healthy one, then we have to continue learning from others to develop and keep our healthy economy.

 

References

 

Wong, P.K., 1999. National Innovation Systems for Rapid Technological Catch-up: An analytical framework and a comparative analysis of Korea, Taiwan and Singapore, Centre for Management of Innovation & Technopreneurship, National University of Singapore