Macro-level dynamics

2.3.2.1 Features of institutional conditions

Other literature on catch-up focuses on the institutional influences in industrial catch-up (e.g., Freeman 1987, Westphal 1990, Amsden 1991, Lall 1994, Mowery and Oxley 1995, von Tunzelmann 1995, Kim 1997a, Ernst and Guerrieri 1998, Wong 1999, Viotti 2002, Mazzoleni and Nelson 2007, Maio 2008, Khan and Blankenburg 2009). These studies illustrate that Asian latecomer firms’ rapid catch-up occurs not only through their own efforts, but also by institutional conditions. The common institutional features that led to successful industrial catch-up are summed up in the three macro-level conditions identified by Mazzoleni and Nelson (2007): a) ample flow of human resources between the catching-up and advanced countries, b) strong governmental support, such as R&D

39 His study seems to be the first research that apparently raises the issue of ‘learning’ and ‘unlearning’ in latecomer pharmaceutical firms.

investment and various incentives, and c) loose operation of an intellectual property rights (IPR) system.

Ample flow of human resources

Koreans with overseas training and PhD holders who returned to local Korean companies such as Samsung are a critical factor that strengthened absorptive capacity (Kim 1997b). Similarly, formal and informal networking between local Taiwanese companies (e.g., Acer) and Taiwanese engineers in technologically advanced regions (such as Silicon Valley) provided a channel of technological learning that fostered the Taiwanese computer industry (Kim and von Tunzelmann 1998, Ernst 2000).

Governmental leadership and industrial policies

The successful catching-up countries (the US, Japan, Korea and Taiwan) were active in the use of industrial policies to protect and foster infant industries, especially target industries (Mazzoleni and Nelson 2007). Biotechnology is the most recent case of a targeted sector in Asian NIEs. In the literature on Asian NIEs,⁴⁰ governmental leadership is actualised in two institutional dimensions: strengthening national absorptive capacity, and market creation through domestic market protection and export support.

To strengthen national absorptive capacity, the main institutional actions taken were to concentrate on the establishment of necessary innovation elements, such as the supply of qualitative human resources and the establishment of GRIs as the mediators of technology acquisition and diffusion.⁴¹ As some latecomer countries deepen the transitional phase, national support since the 1990s has extended to fostering research-oriented universities and technology-intensive start-ups. Such institutional elements can be seen as a national resource commitment for promoting active technology absorption (Viotti 2002).

Market creation can occur through industrial policies linked with trade policy. In general, the Asian NIEs instituted various performance-based incentives for efficient national resource management, such as direct and indirect subsidies for R&D, high entry barriers to the domestic market such as tariffs and regulations, procurement and export support through financing, and focusing on targeted industries (Lall 2000). From a macro-level

40 It is often compared with other regions’ catching-up processes and performance (e.g., South America).

41 GRI – e.g., ITRI (Industrial Technology Research Institute) in Taiwan and KIST (Korea Institute of Science and Technology).

view, these incentives were intended to actualise an industrial policy that combines export-oriented industrialisation (EOI) with import-substituting industrialisation (ISI).⁴² By linking technological and market-side industrial policies, Korea and Taiwan were able to couple upgrading absorptive capacity with profit creation within a relatively short period of development. Linking these policies can be seen as the institutional driver of the formation of stepwise catch-up cycles of duplicative imitation, creative imitation and innovation stages over the last 40 years.

Loose IPR regime

In the past, latecomers could access forerunners’ technologies with loose IPR restrictions in the catching up period, as long as they did not encroach on the markets of advanced countries (Mazzoleni and Nelson 2007). Interestingly, licensing was considered a tool for creating economic profits through technological transfer rather than a means of aggressive IPR protection for forerunners (ibid.).

2.3.2.2 Innovation systems in transition

Some recent literature on Asian NIEs’ innovation systems focuses on the changing institutional setting in the transitional phase. In general, this change can be thought of as the reconfiguration of innovation elements and their relationship, moving from a system of utilising external knowledge to a system of internally generating innovation source.

Two interrelated perspectives on this institutional change occur in the literature: a) the successful transition of latecomers’ innovation systems, and b) institutional rigidity and flexibility in dealing with the transitional phase.

a) Successful innovation system transition

Dodgson et al. (2008) discuss a morphological (structural) reconfiguration of the NIS, drawing on the Taiwanese case of transition from technology use to technology generation. They compare the network formation of the present burgeoning biotechnology industry with previous industrial cases of ICTs. While the industrial network of ICTs was established to exploit imported technologies and is thus capable of catching up, the biotechnology network was formed to create its own knowledge base led by domestic research institutes. The new establishment of science parks and intermediary agencies support this knowledge base creation. While the authors illustrate

42 When the incentives provided to firms resulted in dissatisfactory performance in exports, the government retracted the incentives offered, and thus the inefficiency of allocating input resources could be eliminated.

By contrast, South American countries have been open-ended in forming efficient incentive structures, in general (Westphal 1990).

the overall transition of the NIS, they also note that there is a lack of a cohesive network between innovation actors.

The emergence of Singapore as one of the top three Asian countries in aerospace technology (Matthews and Zhang 2010) is a substantial example of a successful transition of a latecomer SIS in a high-technology sector (Vertesy 2013).⁴³ There were several factors that led to a ‘transition without interruption’ of the industry (ibid., p. 137).

One of these was institutional capability – the government’s guidance of the direction of industrial transition and support for relevant innovation elements. The Singaporean government strategically considered the participation of the high-technology industry’s global value chain by focusing on a specific segment, that is, component supply and the field of maintenance, repair and overhaul (MRO). This specialisation strategy was strongly backed by active investment in infrastructure and local R&D, as well as incentives to attract foreign manufacturers. The stable management of the air force in a small independent country and its geographical advantage as an airline hub also underpinned the strategy of focusing on MRO (ibid., pp. 127-128 and p. 135).

The other driver is the strong possibility of technological accumulation in the MRO field within a short learning period, compared with the aerospace industry in general. While aircraft manufacturers have long development cycles, MRO-related products and services have no need for long development times (ibid., pp. 127 and 135).

Overall, this case shows an effective way of overcoming the transitional phase and establishing a competent SIS through a smart and flexible industrial policy (ibid.).

Singapore strategically combined its prior technological capability accumulated in the pure learning stage of maintenance and repairs to meet small domestic demand within the context of an industry’s changing global value chain. Therefore, it was possible to incrementally upgrade technology and make a smooth transition to market profit. In contrast, the aerospace industry in Indonesia, which attempted to develop its own aircraft based entirely on public support, struggled to penetrate the global market (ibid.).

b) Institutional flexibility/rigidity of innovation systems

Some literature provides a more problematic view of latecomers’ reconfiguration of innovation systems toward knowledge creation. To begin with, Kim (2000) broadly describes the systemic transmutation of the imitative Korean NIS (K-NIS) into a barrier that delayed the transition to an innovation-generating NIS. The government failed in coordinating various policy activities in the transition. The Chaebol were seen as

43 The other two countries are Japan and Korea (Matthews and Zhang 2010).

candidates for further restructuring. They were increasingly regarded as an obstacle to fostering small and medium enterprises (SMEs). The education policies intended to support industrial technology led to a lack of research capability in the universities.

Moreover, in terms of organisational culture, the proliferation of a top-down style, bureaucratic and militaristic characteristics, and short-term efficiency prioritisation also contributed to the delayed transition.

Interestingly, the rigidity of the Korean NIS can be traced by the implicit criticism in comparative studies between Korea and Taiwan. Wang (2007) argues that Taiwan's transition is based on upgrading a ‘neo-Marshallian network-based’ collective learning system comprising SMEs, public research institutes, and multinational corporations (MNCs). In contrast, Korea's transition is based on the acceleration of ‘Schumpeterian scale-based technological development’ led by a few large conglomerates (Chaebols) that are vertically integrated.⁴⁴ The preponderance of resource allocation into Chaebols and the lack of network-based technological learning are indications of the systemic rigidity of the Korean NIS. They make adoption of the Korean catch-up model difficult for other latecomer countries.

Wong (2005) uses the case of fostering biotechnology to identify a procedural problem in the Taiwanese transition. He argues that the emerging innovation network of biotechnology in Taiwan has evolved with a lack of ‘cohesive collaboration’ due to the failure of the coordinative function of the government. He stresses the need for qualitative change in the manner of governmental intervention in the transitional phase:

Second, measuring the role of governments in promoting biotechnology innovation solely in quantitative terms, more or less intervention, is problematic when we consider that what has always mattered most in the developmental state model – and not just the East-Asian variant – are the types of interventions initiated by governments, and furthermore, how well these initiatives match up with specific political, economic, social, and technological imperatives…in understanding the transitional dynamics of the developmental state in Taiwan (Wong 2005, p. 185).

In an innovation system, qualitative change in government intervention is associated with the effective transformation of the innovation actors and their network, changing knowledge utilisation for indigenous knowledge-generating innovation actors and

44 The Taiwanese structure seems to be particularly suggestive regarding the industrial structure of the KoPI led by SMEs, which is likely to be closer to that of Taiwanese major industries than that of Korea led by Chaebols.

networks. For example, the top-down style of governmental leadership, which is effective in facilitating imitative learning, is not suitable for the promotion of biotechnology innovation (Wong 2005). Instead, biotechnology innovation takes place in an increasingly pluralistic institutional context among non-state innovation actors embedded in a local private and global research network (ibid.).

Overall, the literature shows that a latecomer’s NIS faces increasing institutional challenges during a transition.

2.3.2.3 Changing institutional conditions

Overall, the common institutional features of rapid catching up were reviewed in the frame of innovation systems. These features can converge in a streamlined institutional environment for industrial development, thereby leading to efficient and rapid national-level resource operations. Technological capability building has been led by selected private firms with institutional guidance from government.⁴⁵ Chaebols were formed in this circumstance. Little conflict of interest between the private and public actors and between different institutional contexts (e.g., between the industrial development and the welfare system) disturbed Korea’s rapid industrial development.

Some recent literature covers emerging institutional issues identified in the transitional phase (e.g., Kim 2000, Wong 2005). This literature mainly focuses on macro-level structural changes of innovation systems towards the fostering of internal knowledge generation and cohesive industrial networks. Institutional rigidity is also suggested as a potential difficulty in the reconfiguring of innovation systems.

However, empirical analysis of the reconfiguration of innovation systems is still limited to a macro-level general interpretation and policy suggestions. That is, the micro-dynamics of the change, such as the impact of S&T policies on technological learning practices, have rarely been addressed, particularly in the context of science-based industry in Korea.