Technological Capacity Building Model in South Korea, Taiwan and China: Comparative Analyzes

Phi Hong Minh¹

Abstract: Building technological capabilities is a core factor to ensure rapid and sustainable growth, to facilitate the process of narrowing the income and productivity gap with developed countries. As forerunners in East Asia, two typical successful models of technological catch-up are Korean chaebol-based model and Taiwanese SMEs-based network model. Following Korea and Taiwan, Chinese technological learning model possesses both Korea’s big business-based and Taiwan’s network-based characteristics, along with unique ways of building technological capabilities. Initially from the technology-absorbing channel that relies heavily on FDI, China’s strategies of acquiring technologies at all costs is raising security concerns from the U.S. and Western countries. Beside the US’s and Western’s moves to prevent China from accessing sensitive technologies, China’s dominant state roles and non-market characteristics are obstacles China must resolve to move forward more strongly and sustainably.

Key words: Technological capability building model, absorptive capacity, R&D capabilities, South Korea, Taiwan, China

1. Introduction

South Korea and Taiwan are the two late industrialized economies that have achieved rapid and sustainable growth for a long time and recovered steadily from the economic crises. Three-decade being behind as a late open economy, China is continuing its development path with remarkable achievements in economic growth. Many scholars point out that the underlying causes of the three economies’ economic miracle are the success in building national capacities in science, technology and innovation, realizing catch-up with technologically leading nations, and approaching the technological frontier.² The development history of the late industrialized economies after the World War II shows that many countries have tried to improve their national capacities, but very few of them have caught up with international technology frontiers to become newly industrialized economies with high incomes. A number of studies point to the limitation of technology accumulation and lack of incentives for high-risk activities to fostering technological capacity building, which are bottlenecks in many countries’ growth.³ Meanwhile, China’s rapid technological catch-up but coercion and lack of transparency are raising concerns from advanced industrialized countries, especially the United States and Europe, about the risk of losing source technologies or lose the technology leadership position to China. The following sections of this article explores the technological capacity building model in the three economies of South Korea, Taiwan and China with the most typical features. Based on this, the article makes some analysis comparing the three models, which are valuable experiences of technology capacity building for late industrialized countries, like Vietnam.

2. South Korean model

The path of South Korea’s technological capacity building is basically quite close to the Japan’s model, which is less reliant on foreign direct investment (FDI), and efforts to develop technology on its own based on external financial support, focusing on large corporations (chaebol) as the leaders implementing technology upgrades, while quickly adapting and exploiting new technological waves as well as market trends to make the breakthroughs. The South Korean model is characterized by high levels of debt and a close connection between public banks (under state control) and chaebol to facilitate the process of scale- based industrialization and technological learning. The source of technology for industrialization, especially in the development of key industries, is mainly based on the import of foreign technology package (including design, production line, and equipment), of which fund is mostly from foreign loans, especially from the USAID program of the United States. As a result, South Korea’s external debt increased sharply from 10.7% of gross national product (GNP) in 1965 to 44.4% in 1980 and peaked at 62.1% in 1985.⁴ Along with the technology import channel, the South Korean Government issued policies to develop human capital, protect fledgling industries in accordance with the roadmap, encourage R&D, endow taxes and sponsor chaebols to open research and development (R&D) centers for the purpose of gradual upgrading from acquisition, assimilation, diffusion to improvement and eventually obtaining technology innovation capability. Along with upgrading technological capacity, the government implements export promotion policies to build global competitiveness for domestic enterprises.

At the beginning, South Korea conducted conventional catch-up industrialization pathway from light and labor-intensive industries to capital-intensive heavy industries, then quickly moved into information and communication technology (ICT) industries when the wave of ICT technology emerged in the 1980s and 1990s. The Korean way of achieving technology is highly nationalistic and self-reliant, which used foreign loans and aids to import technology, and implemented a reverse engineering cycle to learn and build technological capacity for domestic businesses. Korea’s technology upgrade model was analyzed in detail in Lim (1997) and Lee and Kim (2001). Accordingly, in the three development stages of technology (including introduction, development, maturity), the enterprises would enter the market once the technology developed and then got a foothold; after that, the enterprises (or the state) would try to buy advanced technology packages, gradually build technological capacity according to the roadmap as follows: technology acquisition  -->  assimilation   ->     improvement    ->  technology innovation.

The state would continue to encourage the process of technology diffusion throughout the economy (transferred from chaebol to small and medium enterprises (SMEs) through the subcontracting mechanism), promoting competition in the domestic market, and encouraging exports to build international competitiveness. The competitive pressure on the international market would continue to stimulate the businesses to increase their efficiency and invest in new technologies innovation. Looking at the capacity building model of the new industrial economies (NIEs) that Hobday (1995)⁵ introduced, South Korea attempted to leapfrog from OEM to building its own brands (OBM); and, when building brands, OEM and ODM would be completed on order. Along with the absorption channel of imported technology, South Korea designed science and technology policies (S&T) to build its own R&D capacity, such as establishing research institutes, technology centers, and scientific cities.

In the 1970s, acquiring technology or conducting R&D was primarily done by government research institutions and then re- supplied to private businesses at almost free or cheap prices. Later, recognizing the need to build endogenous technological capacity, South Korea issued a National R&D Program in 1982 to facilitate private R&D activities through tax support and human resources development. As a result, private R&D’s expenditure increased rapidly from US $ 526 million (equivalent to 0.81% of GDP) in 1981 to US $ 13.5 billion (2.6% of GDP) in 1996, and 26.3 US $ billion (2.9% of GDP) in 2005. The share of public sector in R&D spendings also decreased from 64% in 1976 to 19% in 1990.⁶

3. Taiwan’s model

Despite a similar approach to South Korea in the role of the state in promoting industrial policies, Taiwan, instead of focusing on large corporations, prioritizes the development of SMEs and opens the door with orientation towards FDI, also designed the technological capacity building support system for SMEs early. Unlike South Korea, the banking system in Taiwan is not really the main capital support channel for industrial development. State support mainly comes from fiscal measures, technical assistances from public research institutes, and coordination in the direction of industrial development. The Taiwan’s concentration on SMEs stems from Sun Zhongshan’s “People’s welfare” principle and fears that the development of large enterprises may challenge the leadership of the Chinese Nationalist Party, which are mainly from the Mainland China.⁷

Therefore, in contrast to the chaebol as core in South Korea’ model, SMEs in Taiwan became the main pillar of the economy, contributing 65% of total exports and attracting about 80% of the labor force in 1985.⁸ Taiwan was more open than South Korea in its approach to multinational companies (MNCs), but placed restrictions on FDI such as ownership and localization regulations to encourage MNCs to facilitate Taiwan SMEs to joins their supply chain in the form of subcontractors, collaborative partners, agents, etc. As a result, Taiwan’s SMEs gradually become the secondary factories for large corporations from the United States, Japan, and the European Union, and highly integrated with MNCs in terms of financing, production and marketing.

Taiwanese enterprises mostly follow the technological catch-up model by moving up in the value chain, from assembly based on the advantage of cheap labor cost and to Hobday (1995)’s OEM à ODM à OBM ordinary pattern. In the first phase, SMEs started with executing OEM contracts for MNCs and attempted to integrate with global production networks to access new knowledge and then upgraded to higher levels (ODM, self-designed)) in the global production network. However, due to joining the supply chain as subcontractors and collaborating with large firms, Taiwanese enterprises became dependent on MNCs, and weak in their own branding capabilities. It can be seen that some businesses have been successful and developed into ODMs big brands but those still rely heavily on performing subcontracting activities for MNCs (such as Foxconn, TSMC).

In Taiwan, the government plays an important role in setting up a competitive business environment, building public institutions specialized in supporting SMEs or promoting science and technology, especially establishing non-profit research institutes such as the Industrial Technology Research Institute (ITRI), National Science and Technology Projects (NSTPs), and Institute of Information Technology (III), etc. which aim at promoting R&D and supporting technical transfer and technological capacity upgrading for SMEs. Taiwan has also established a center-satellite manufacturing system to construct dense networks of linkages, which foster learning process, technical transfer and strengthen SMEs’ capabilities, as well as develop domestic supply chains. From the end of the 1980s to the beginning of the 1990s, through research institutes, the government launched a series of creative associations in many fields such as laptops, color televisions, semiconductors, communications, so on to promote industrial upgrading on the island. Taiwan also featured a model of industrial parks and science parks that helped promote the linkages between the research institutions and the businesses, deploy research results to the market. For example, the establishment of Hsinchu Science Park (HSP) (1980) and TSMC (1987) and especially taking advantage of the dot.com crisis in the United States in the 2000s attracted a large number of overseas Chinese on opening startups in high technology fields, helping to promote R&D activities in Taiwan.

As a result, Taiwan’s R&D spending on GNP (gross national income) increased from 1.04% in 1986 to 2.0% in 1995, while the share of the government in R&D spending dropped sharply from 60% to 40% in the same period 1986-1995.⁹ Overall, Taiwan’s policy of building technological capacity and promoting innovation shows the huge role of the government in forming competitive and innovative ecosystems based on research institutes, universities, or academic community as the backbone to promote R&D activities and transfer R&D results to businesses, heightening technological capacity of the dominant SMEs in the economy. With a dense network of SMEs engaging in different fields, and closely connected with MNCs, the Taiwan’s model has a prominent feature of network connectivity. Due to the network characteristics, the market entry cost of Taiwanese enterprises is low, easily joins or withdraws from the market, and becomes more flexible in the face of shocks from external markets.

4. China’s model

There are many advantages in China’s process of economic and technological catch-up due to the context of increasing globalization and liberalization of the global economy as well as the speedy development of science and technology, especially the ICT revolution. The advantage of China’s territorial and population size has helped businesses quickly find economies of scale. Different from the focus on private enterprises in the other East Asian economies, the Chinese government concentrates its resources on state-owned enterprises (SOEs), which posscess crucial roles in the previous Chinese centrally planed economy. As a late-opening country, China’s model of developing and building technological capacity has the Korean characteristics of the close relationship between the government and SOEs due to the important role of SOEs in realizing the strategic objectives of the state, and combined the Taiwanese characteristics of creating network-bassed manufacturing and learning. At the same time, it has its own unique characteristics. China’s method of catching up with technology follows several key strategies:

The first strategy is to promote technology learning, transfer and spread through FDI. This strategy is associated with the opinion of the leader Deng Xiaoping who uses foreign resources (capital and technology) for the development of China. Since the mid-1980s, China has opened a series of export processing zones and open coastal cities with many incentives to attract FDI for export purposes. FDI can accelerate the process of building technological capacity for China under two major channels. The first channel is naturally the spread of management knowledge and technology in the production network. China encourages the MNCs’ investment in each sector-oriented special zone to form industrial clusters, which the MNCs play the leading role in inducing relevant suppliers to set up their supply chains. Chinese enterprises can join these supply chain in the form of production cooperation with MNCs and receive technology transfer from those.

The second channel is more coercive, deriving from the state: the Beijing government requires MNCs to intensify the participation of domestic producers in the production cycle, even to sign technology transfer agreements as a condition for market access. The government also appoints local businesses to join such agreements of technology transfer. Workers working in foreign enterprises (FIEs) are then encouraged to work for local businesses to bring technological knowledge and production experiences to increase technological capacity for domestic enterprises. As a result, domestic enterprises step by step upgrade their technology capacities, and then they able to autonomously produce for the domestic market and gradually strengthens global competitiveness.

The second strategy is to encourage domestic enterprises to outsource technology or establish production links with strong technology partners to accelerate the learning process and step by step upgrade technologies. Taking advantage of the appeal of a rapidly growing large market, Chinese businesses seek to establish joint increase technological capacity and become a global brand. This strategy can be seen in TCL company which successfully acquires technology and brand identity thanks to a joint venture with Thomson (France) specializing in television production under the brands of Thomson and RCA (USA). Another example in the mobile phone industry, Ningbo Bird outsources and coordinates technology with a British company, and two Korean companies to have their own R&D capabilities, so that the company can spontaneously developed its own production capability and became China’s largest mobile phone manufacturer between 2003-2005.¹⁰

The third strategy is to increase the endogenous creative capacity with many policies of scientific and technological development right from the beginning of opening and reform. In the 1980s and 1990s, there was a Key technologies R&D program (in 1982), the 863 Program (1986), the 973 program (1998), the Torch program (1998), etc. In 2006, Chinese government introduced the 15-year National Medium- and Long- term Plan for the Development of Science and Technology (2006-2020) to construct endogenous innovation capacity. In 2009, Zhongguancun Science Center was established aiming at becoming a technology center like Silicon Valley to attract talent and promoting high-tech R&D. Most recently, the “Made in China 2025” program (MIC 2025), launched in 2015, has been  ventures with  foreign companies. As domestic companies increasingly expand, Chinese companies continue to merge with major brand MNCs or their affiliates to ¹⁰ Cheong, K.C.; Wong, C.Y. & Goh, K.L. (2016), “Technological catch-up with Chinese characteristics: what can Southeast Asia learn from China?”, The Round Table-The Commonwealth Journal of International Affairs 105(6), 667-681. Designed to let China become the world’s stronghest manufacturing powerhouse at intermediate level by 2035 and play as leading role in global innovation by 2050. Each of these major strategies has plans to develop key industry groups with strong financial support and incentives from the state to help domestic businesses meet the most advanced technology standards. In addition, since 2008 Beijing has implemented the “Thousands Talents Plan” to attract talents in the fields of science, technology, business and finance to contribute to China’s economic development. Currently, China is making efforts to create incentive mechanisms, increase connections between academia and businesses to build an enterprise-centered national innovation system, under the market’s orientation.

The fourth strategy is to encourage the establishment of businesses with support from academia (universities and research institutes). Although the number is not big, this method is accelerating, focusing mainly on high-tech fields such as Lenovo, Founder, Dongguan, Tsinghua Tongfang. This link facilitates commercializing institutions’ R&D results to the market, as well as creating opportunities for checking the suitability of new technologies and products on the market. This method is of forward engineering, in contrast to the Korean model of technological capacity creation based on reverse engineering process¹¹. 

Fifth, with the goal of acquiring technology at all costs, China implements a “going out” strategy which promote domestic businesses to invest abroad to acquire strategic assets, especially focusing on Merger and Acquisition (M&A) channel for core technology companies or major brands. This policy was introduced by President Jiang Zemin in 1993, but it has been intensified since 2001 when China joined the World Trade Organization (WTO). Then, taking advantage of the US economy and the Western countries’ recession after the 2008 global financial crisis, this strategy was further encouraged by the Beijing government to attain foreign assets and technology at cheap prices. In addition, China also requires foreign companies that want intellectual property protection to register intellectual property in China, and this is the channel for China to gain know-how and technological knowledge, which might be transferred to domestic businesses.

Due to its large-scale characteristics and diverse strategies, China has many forms of technology upgrading, but it can be attributed to two main channels: the absorption of foreign technology and the building of endogeneous innovation capacities. The process of building technological capability from external technology in China has brought some features of the OEM à ODM à OBM sequencing model and reverse engineering process that both Taiwan and South Korea have implemented, while bringing distinctive characteristics. These specific points basically follow the learning model that Wang and Zhou (1999) suggested for China to promote technology transfer and learning from FDI, as the following roadmap: Transfer à Digestion à Absorption à Innovation à Dissemination (TDAID).

That is, the government will endeavor to expedite the technology transfer process from FIEs to domestic businesses; the domestic enterprises will try to learn how to operate (digestion) and then understand it (absorption) for the application in their production and business activities, and continue to create new products from that technology to meet the domestic market (innovation). Once the technology has been mastered by Chinese enterprises, it will be encouraged to be innovated and transferred to other companies promoting the spread of technology in the domestic market (dissemination). Meanwhile, the endogenous creative roadmap takes place in the usual way, with the nature of a forward engineering, in fact it is promoting R&D activities to create new technologies and then apply them into production system (processes: research à development à design à production).

Overall, the Chinese model takes full advantage of a fast-growing giant market with strong state intervention to accelerate external technology transfer as well as build internal innovation for Chinese enterprises, creating opportunities for them to operate technology on a large scale and with low input costs; then low-end products are made and tremendous price competitiveness are introduced. This advantage helps China increasingly expand its market, increase sales and expand company potential and brand power. In parallel with outside technology absorption channels, China always has a strategy to develop key industries towards establishing large industrial clusters in each geographical area, and promptly design S&T policies to create endogenous innovative capacity for domestic businesses. As a result, China has become the world’s manufacturing factory with increasingly upgraded technology capabilities, and the supply chain system is non-stop improving and irreplaceable.

5. Comparative remarks

Comparing the opening and industrialization process, South Korea and Taiwan started early from the 1950s and 1960s and became high-income economies; while China implemented reform and opened its economy later in the late 1970s and early 1980s, and it is now on the path of narrowing the income gap with the leading economies. Because of the different opening times, the international context and technological trends at those times had strong impacts on the way, route and learning model of each economy. Despite their distinct global landscape, the three economies have effectively taken advantage of market opportunities and the technology waves to promote the learning and technological capacity of domestic firms. The main characteristics of the three models are shown in Table 1.

A big common point in all three models is that there is a clear intervention from the state to gradually build national competitiveness, heavy investment in education, focus on developing science, technology and innovation (STI), promotion of R&D and improving the national innovative system (NIS), timely responses to political and economic shifts and especially effective capture and adaptability to global technology’s development trends. In the model of South Korea and Taiwan, the government acts through market dynamics by institutional setting and incentive mechanisms for resources allocation towards technological and innovative capacity building.

Sources: Author’s compilation

The development models of South Korea and Taiwan represent two different ways of catching up. The South Korean state’s high- debt model nurtured the chaebol, which were mediated by the state-owned banks that supported their high-debt and high-volume production methods. By mass-producing a less diversified product, the Korean chaebol excelled at taking advantage of the economies of scale in dealing with large volume orders and devoting resources to the technological improvement of single products. By contrast, the Taiwanese state adopted a pro-stability and low-debt approach through which an SME-based economy was created. In the process, the SMEs’ technological upgrading depended much more on collaborative networks and external resources, such as the state and transnational linkages. These two types of catching up continue to exist and to be transformed on a global scale as these two economies march into the liberalization era.

However, there are differences in the role of the government between South Korea and Taiwan. In the beginning, both economies managed to build public research institutes to support technological capacity for businesses, and in fact had a leading role in building capacity for domestic enterprises especially in high technology and ICT industries. However, a number of South Korean public research institutes later transferred key R&D platforms to big businesses (chaebols) in the 1980s and gradually focused on training, consulting and coordinating R&D activities with enterprises. In Taiwan, organizations and research institutes continue to play a central role in R&D but choose to focus on areas where the private sector has not performed well. In general, with increasing capital, competitiveness, and technological and innovative capacity, large enterprises in both economies gradually take on the main role of R&D. Meanwhile, from its position as a late industrialized nation, China is making great efforts to develop technology and innovation at all costs from every channel and every opportunity that can be seized.

China is also trying to develop NIS at a very fast pace to gain endogenous innovative capacity. Due to the characteristic being at the stage corresponding to the technological capabilities of South Korea and Taiwan in the 1980s and 1990s with great ambitions, China’s technological development efforts show the strong will and dominant role of the state. These efforts demonstrate a top- down approach, and result in the presence of the state in both direct and indirect channels. Greatly being different from either South Korea and Taiwan, the Chinese Government can directly intervene to the market via SOEs. In other words, if the state’s intervention in the two forerunning economies is mainly at the macro and meso level (at the sectoral and institutional level), Chinese government can intervene at all three macro-, meso-, and micro-levels. That excessive intervention may bring certain benefits in the early stages, such as manipulating spare resources to conduct specific objectives, but in the long run, it may lead to market distortions due to insufficient allocation of resources stemming from the overwhelming power of interest groups.

Regarding the way of technological catch- up, the South Korean model mainly relies on chaebol to promote the localization process of imported technologies (reverse engineering); Taiwan model was designed as a network on the basis of dominant SMEs connecting with MNCs and performing OEM-ODM-OBM sequential technology learning. Meanwhile, the Chinese model, due to its enormous size, has both a large enterprise-focused characteristic like South Korea (both SOEs and private enterprises), and a Taiwan’s network, as well as unique characteristics. Unlike the self-learning characteristics of South Korea and Taiwan, the method of learning in China is mainly based on FDI (through both natural and forced channels), accelerated the learning process of domestic enterprises, promoted endogenous innovative capacity through fostering start-ups owned by institutes/universities. In the South Korean model, chaebol’s competitiveness depends on itself; Taiwan’ model is based on the influence of network linkages; and China’ model is characterized by both with the back support of the state.

Currently, South Korea is leading the world in R&D spending on GDP (4.55% in 2017), Taiwan has surpassed the OECD average (3.3% compared to 2.37% of OECD), and China is close to OECD level (2.15%). It is R&D capacity that has brought sustainable growth and resilience after market shocks in South Korea and Taiwan. For China, raising this index from 0.2% in 1990 to 2.15% in 2017 in less than 30 years is really very fast, and quite close to the roadmap of South Korea and Taiwan. However, due to the weak marketization, even though the growth rate of Chinese R&D spending has now exceeded that of both South Korea and Taiwan, the commercial value of patents and the commercialization of China R&D activities in China are still lower than the previous two economies. China’s approach to technology has also raised concerns among its partners, especially the United States, about the possibility of losing core technologies and strategic resources to China, and they are seeking to stop this trend. Another problem is the large capacity gap between regions (inland-coastal disparity), industries and business groups in China compared to South Korea and Taiwan.