Newly Industrialising Economies and International Competitiveness: Market Power and Korean Electronics Multinationals

Newly Industrialising Economies and International Competitiveness Market Power and Korean Electronics Multinationals

Doo-Jin Kim and Young-Chan Kim

Newly Industrialising Economies and International Competitiveness

Also by Young-Chan Kim GLOBALISATION AND KOREAN FOREIGN INVESTMENT (editor) JAPANESE INWARD INVESTMENT IN UK CAR MANUFACTURING

Newly Industrialising Economies and International Competitiveness Market Power and Korean Electronics Multinationals By

Doo-Jin Kim and

Young-Chan Kim

© Doo-Jin Kim and Young-Chan Kim 2006 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2006 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN-13: 9780230002043 hardback ISBN-10: 0230002048 hardback This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Kim, Doo-jin, 1954 Newly industrialising economies and international competitiveness : market power and Korean electronics multinationals / by Doo-Jin Kim and Young-Chan Kim. p. cm. Includes bibliographical references and index. ISBN 0230002048 (cloth) 1. Electronic industries“Korea. 2. Korea“Commerce. 3. Competition“Korea. 4. European Union“Korea. I. Kim, Young-Chan. II. Title. HD9696.A3K7643 2006 2006041681 382 .4562138095195“dc22 10 9 8 7 6 5 4 3 2 1 15 14 13 12 11 10 09 08 07 06 Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham and Eastbourne

To Chi-Hee Kim and Chang-Hee Suh with love

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Contents List of Figures and Tables

ix

List of Abbreviations

xi

Acknowledgements

xiii

1 Introduction

1

Beyond the market versus state dichotomy Meso (medium)-market, market power and international competitiveness with the significance of knowledge-intensive technology Methodological approaches

2 International Trade Regime, Big Business as ‘Market-makers’ and the Wealth of Nations From market-maker Beyond the market versus state dichotomy: the firm as emerging key actor in the wealth of nations International trade regime and the Korean electronics pathway ‘Big business’ organisation as market coordinator Conclusion and policy implications

3 International Competitiveness and the Shifting Contours between State and Corporate Power

1

4 10

20 20 23 39 47 50

52

Government–industry relations: the ‘international competitiveness’ context The Korean state as marketplace player and corporate governance in big business Going beyond strategic financing: against the Japanese ‘MITI paradox’ Conclusion

69 78

4 The Political Economy of Technology in Global Markets and Transforming Governance of Korean Chaebol

80

Introduction Evolving governance of Korean chaebol as global market players vii

52 56

80 82

viii Contents

The development of the Korean electronics industry in a global competitive context Conclusion

5 European Integration, National Champions and the Politics of EU Industrial Policy From comparative advantage to ‘comparative competitiveness’ European electronics and firms’ competitiveness in a global electronics context EU involvement in R&D and technology policy: the electronics industry Conclusion

6 EU Trade Policies, Korean FDI in the EU and the Emergence of Korean Electronics Multinationals EU trade policy and the single European market Japanese electronics FDI in the EU EU trade protectionism and motivations for Korean FDI Korean FDI in the EU and the emergence of Korean electronics MNCs Conclusion

7 Conclusion and Policy Implications The new source of the ‘wealth of nations’ Policy implications

97 128

130 130 138 154 159

161 163 177 188 208 218

220 220 231

Notes

236

Bibliography

245

Index

266

List of Figures and Tables Figures 4.1 4.2 6.1 6.2

Technological paradigm shift and Samsung’s market-driven strategy Samsung’s ‘convergence’ technology strategy EU anti-dumping impact on CTVs and Korean FDI EU anti-dumping impact on car radios and Korean FDI

115 121 206 207

Tables 4.1

Major electronics R&D centres: Samsung, LG and Daewoo 4.2 DRAM share in world market by company, 1998 4.3 Top ranking export goods by weight (1997): Korea, Japan and US 4.4 Business strategy factors: the Korean TFT-LCD and semiconductors 4.5 The market share of Korean mobile phones in the world market (2000) 4.6 Microwave oven production, 1999 4.7 TFT-LCD market share worldwide (1999/2000) 4.8 Mobile terminal and market share worldwide (as of third quarter 2001) 4.9 Semiconductor memory market landscape: DRAM & SRAM (2000) 4.10 World class brands: consumer electronics 4.11 VCR and DVDP demand worldwide 4.12 Major electronics MNCs’ ranking among the top 100 brands (2001) 5.1 The global consumer electronics industry: production, trade and consumption across the Triad (1988) ($ billion) 5.2 European vs. Japanese CTV production capacity 5.3 VCR market share by standard, 1983 5.4 VCR market share in Europe by company and country 5.5 European projects, M&A in semiconductors 5.6 Twelve IT round table members in 1981 ix

96 103 108 110 111 119 121 123 124 125 126 126

140 142 143 145 150 157

x List of Figures and Tables

6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10 6.11 6.12 6.13 6.14 6.15 6.16 6.17

VERs and similar restraint arrangements in the EU as of the early 1990s: consumer electronics products Complaining firms in EU anti-dumping cases: consumer electronics – ten cases (1980–9) Foreign direct investment from Asian NIEs by region EU anti-dumping cases against developed countries: 1980–90 Inward FDI stock as a percentage of GDP: 1980–95 Japanese foreign direct investment by region (%) Japanese FDI by industrial sectors (1951–2003) Korean FDI and major electronics companies in the EU Anti-dumping cases (PU) targeting Korean electronics products between the 1980s and 1990s: US vs. EU EU local content rule and FDI by Korean electronics firms EU anti-dumping measures and FDI by Korean electronics firms Anti-dumping duties on Korean semiconductors: EU and US Korean FDI in the EU by member state (as of 1999) Korean FDI in the electronics sector by region Semiconductors: the newly merged company vs. Samsung Electronics Pattern of outward FDI in the EU: Korea vs. Taiwan (%) The single market effect and enlargement potential (as of 2000)

167 171 175 177 178 181 181 190 193 194 198 202 210 211 212 213 216

List of Abbreviations AmCham ASIC CD CEE CPTs CRTs CTVs DoC DoD DRAM DRUM DVB DVDP EACEM EC EIAK EPB ESPRIT EU Eureka FCC FDI FKI GATT GPM GSRIs HAN Project HCI HDTV IT ITC JESSI JVC

American Chamber of Commerce Application Specific Integrated Circuits Compact Disc Central and Eastern Europe Colour Picture Tubes Cathode Ray Tubes Colour Televisions Department of Commerce (US) Department of Defense (US) Dynamic Random Access Memory Direct Agency against Unfair Merchandise Committee Digital Video Broadcasting Digital Video Disc Player European Association of Consumer Electronics Manufacturers European Community Electronic Industries Association of Korea Economic Planning Board (Korea) European Strategic Programme for Research on Information Technology European Union European Research Cooperation Agency Federal Communications Commission Foreign Direct Investment Federation of Korean Industries General Agreement on Tariffs and Trade Global Product Manager Governmental Sponsored Research Institutes Highly Advanced National Project Heavy and Chemical Industry High Definition Television Information Technology International Trade Commission (US) Joint European Submicron Silicon Initiative Japanese Victor Company xi

xii List of Abbreviations

KATC LCD LG LGE M&A MITI MNCs MNEs MOFE MWOs NICs NIEs NTSC OBM ODM OEM PAL PMO R&D S&T SCAN SDTV SEA SEM SEMATECH SIA SRAM STA TNCs VCRs VERs VLSI VRA VTRs WTO

Korean Association of Trade and Commerce Liquid Crystal Display Lucky-Goldstar (Korean chaebol) LG Electronics Merger & Acquisition Ministry of International Trade and Industry (Japan) Multinational Corporations Multinational Enterprises Ministry of Finance and Economy (Korea) Microwave Ovens Newly Industrialising Countries Newly Industrialising Economies National Television Systems Committee (US) Own-Brand Manufacture Own-Design and Manufacture Original Equipment Manufacture Phase Alternation by Line Programme Management Officer Research and Development Science and Technology Society for Coherent Anti-dumping Norms in Germany Standard Definition Television Single European Act Single European Market (American) Semiconductor Manufacturing Technology Corporation Semiconductor Industry Association Static Random Access Memory Semiconductor Trade Agreements Transnational Corporations Video Cassette Recorders Voluntary Export Restraints Very Large Scale Integrated (Circuits) Voluntary Restraint Agreement Video Tape Recorders World Trade Organisation

Acknowledgements This book offers an account of the question of how international trade regimes, and especially EU trade policies, have had an impact on the market power of Korean multinationals alongside the emergence of new technology, for example, knowledge-intensive technology (e.g. semiconductors). The project was originally conducted during the authors’ stay in the UK. Afterwards this research was considerably amended and updated thanks to research funded as part of serial publications sponsored by the SK group in Korea for D. J. Kim and the ESRC fund for Y. C. Kim in the UK. The purpose of the funding was to support some case studies mainly focused on the East Asian region. Given the compelling importance of international competitiveness since the Asian financial crisis, this book is designed to capture the major factors that led to the globalisation of Korea’s multinational companies from politicoeconomic and global economic perspectives. We would like to express our deep gratitude to the following people who have given us remarkable insights and motivation: Professor Alan Cawson of the University of Sussex; and Co-Director Professors Helen Wallace and Jim Rollo at the Sussex European Institute who willingly provided their personal comments and encouragement for the book. Doo-Jin Kim would like to thank a number of scholars and colleagues who have supported us in endeavouring to complete this book. The completion of his research owes a great deal to Professor Jin-Young Suh of Korea University whose intellectual engagement has made this book more intuitive. Also he would like to thank Jang-Jip Choi, Director of the Asiatic Research Centre of Korea University during Doo-Jin’s stay in Korea, which allowed him to concentrate on the preliminary work. Most especially, Doo-Jin Kim would like to thank the Korea Foundation that gave him the opportunity to make Korean studies more successful at Sciences Po in Paris. Young-Chan Kim would also like to thank Dr Robert Fitzgerald, Professor John Turner, Dr Judith Cherry, Professor Sea-Jin Chang and research staffs at the Samsung Economic Research Centre, KOTRA and KDI in Seoul, for their tireless support in completing the final version of the book. On a broad front, thanks must be extended to the various interviewees of Korean big companies, e.g. Samsung and LG, representing major xiii

xiv Acknowledgements

global Korean electronics multinationals. Without them this research would have been much more difficult to accomplish. The editorial staffs at Palgrave, especially Ms Rebecca Pash, Mrs Jacky Kippenberger and other colleagues have been very helpful throughout the whole process. Beyond that, we have been truly blessed by the love and support of our parents, brothers and wives: Chi-Hee Kim for D. J. Kim and Chang-Hee Suh for Y. C. Kim; and especially two sons: Seung-Gyum and YongGyum for Y. C. Kim, who had to put up with our writing this book. We could not have written it without their heartfelt love for us during our project. Finally, we have drawn much, both consciously and unconsciously, on the thoughts of others, to whom we are grateful. However, the judgements, conclusions and faults that remain are naturally our own.

1 Introduction

Beyond the market versus state dichotomy As is the case in advanced countries, in newly industrialising economies (NIEs), international trade can be considered an important source of the ‘wealth of nation’ within their domestic markets. In order for latecomers to survive (Hirst and Thompson, 1999), the notion of international competitiveness in conjunction with export-driven market-creation has tended to become the primary concern of the policy-makers in industrialising countries. In the case of East Asia, Lall (2001: 1502) suggests that ‘competitiveness is considered a matter of national economic survival’. With this over-riding importance of international trade to the NIEs, it appears that the South has no alternative but to rely on a high level of export-oriented output in order for its developing economies to survive. For example, in terms of trade to GDP ratio, Korea accounted for 69 per cent, compared to 17 per cent for the EU, the US 25 per cent, and Japan 19 per cent (Hirst and Thompson, 1999: 149). Despite a body of literature on the Smithian market mechanism, it cannot be denied that a variety of industrial policies and strategic trade policies, aggressively orchestrated by national governments, especially the ‘developmental state’ (Johnson, 1982; Amsden, 1989; Wade, 1990a; Woo-Cumings, 1999; Turner and Y. C. Kim, 2004), have contributed to a considerable extent to the advantages of ‘competitiveness’ in world markets. As can be seen in the conventional debates between the classical or neo-classical theorists and the familiar body of writing favouring ‘plan rationality’, or statist perspectives, when it comes to the analysis of economic development, it is generally acknowledged that the dichotomous concept of ‘markets vs. states’ has dominated an extensive literature on the social sciences with respect to the wealth of nations at 1

2 Newly Industrialising Economies and International Competitiveness

the macro-economic level (Evans, 1991; Henderson, 1993; Underhill, 2000; Dutt, Kim and Singh, 1994; Padoan, 1995; Dahrendorf, 1968; Turner and Y. C. Kim, 2004). In contrast, going beyond the markets– states dichotomy, along with the significance of new technology, the purpose of the research is to attempt to utilise the notion of big business as a ‘market-maker’ rather than a ‘market-taker’ (Spulber, 1999: 8) by bringing the big firms, especially the ‘new style multinationals’ involved in ‘the globalisation of markets through multinationals’ (Eden, 1993: 26) back into an analysis of international political economy (IPE). To explore this issue, the research examines how, and to what extent, international trade regimes, especially EU trade policies, have had an impact on the market power of Korean electronics multinational companies (MNCs) alongside the emergence of new technology involving knowledge-intensive technology, e.g. semiconductors in the electronics industry. As for NIEs, given the new international trade regimes that appeared after the early 1980s, it seems apparent that latecomers needed to pay much more attention to the compelling significance of international competitiveness in conformity with the requirements that govern the wealth of individual nations, and specifically in the case of new industrialising economies that have had to face up to a gradual withering-away of government-led interventions in domestic and international markets. As a consequence, this has triggered a reconsideration of the nature of the seemingly successful development states in terms of ‘marketshaping’ activities (Best, 1990: 11) in newly emerging instances of market failures ‘where markets do not work perfectly’ (Stigler, 1975). From the stance of NIEs, along with a gradual intensification of regionalism, in some cases such market imperfections have been viewed as originating in the trade regulations initiated by the advanced countries, especially the European Union (EU). When it comes to the indigenous role of the developmental state, it is argued that it may reflect ‘a transformation of the state in symbiosis with the transformation of economic structure’ (Underhill, 2000: 823) rather than a retreat of the state from the international arena (Eden, 1993; Palan and Abbott, 1999). In the meantime, be it a so-called market-shaper or a unit-of-analysis predominantly reiterated by ‘realists’ at domestic and international levels of analysis, it seems likely that the most recent years have been characterised by a substantial withdrawal of the developmental state in international markets. Simultaneously, given a critique of market and price competition as the starting point for economic analysis, neoSchumpeterian theorists have sought to pay much more attention to

Introduction 3

‘New Competition’ that governs the wealth of a nation depending upon ‘competition from the new commodity, the new technology, and the new type of organisation’ other than price competition (Best, 1990: 11). Compared with the old mode of market mechanism, concerning ‘the rules of the market game’ ‘for Schumpeter, it is not the market but the firms that demand centre stage’ (Best, 1990: 18), in the sense that the firms cannot be viewed simply as ‘market-reacting’ agents (Best, 1990). Until recently, following the changing nature of the industry, big organisations have tended to replace and refashion part of the market mechanism in the making of the meso-market, particularly industrial markets. According to Cawson et al. (1990: 15), neo-classical economists have not understood firms as ‘organisations in their own right’ by defining them as ‘fictitious individuals, as members of organisations’. It seems likely that they have not given major place to the economic roles of big corporations, even though there are extensive economic analyses that have explored the importance of imperfect competition among big firms and the strategic economic activities of MNCs on a global scale (Hood and Young, 1979; Caves, 1982; Dunning, 1988, 1989, 1993, 1997). Moreover, given the globalisation of markets, along with the emergence of ‘the new style’ MNCs of the 1990s as global corporations (Dunning, 1988; Turner and Y. C. Kim, 2004), a variety of investments, trade and technology flows within the Triad economies have been increasingly dominated by MNCs with global strategies, thus reaching up to 80 per cent of overall trade within Triad countries (Eden, 1993: 47–8).1 In this context, on the basis of the new technological paradigm in parallel with the phenomenon of globalisation of technology, individual MNCs incorporating knowledge-intensive technology have begun to emerge as market coordinators, individually or collectively. For Asian NIEs, with the replacement of indigenous market coordination by the organisational logic of individual MNCs in connection with the new technology-based competition, ‘it is time to bring the MNCs as “marketmaker” back into international political economy’ (Eden, 1993: 54) to redefine, or move beyond the dichotomised market–state debate in the context of reconceptualisation of international competitiveness. To develop this argument further, we will focus upon the Korean major chaebol, mostly exemplified by Samsung Electronics Company (SEC), to try to capture the empirical reality of Korea’s electronics multinationals which represents the significance of individual MNCs in highly competitive advanced markets, while the ‘privatisation’ of anti-dumping measures led by the leading companies in the midst of European integration

4 Newly Industrialising Economies and International Competitiveness

has reflected the institutional reaction to confront the comparative competitiveness of the export-driven Third World multinationals.

Meso (medium)-market, market power and international competitiveness with the significance of knowledge-intensive technology This section deals mainly with definitions of the key concepts in order to clarify the main assumptions. Firstly, whereas ‘the market’ has been regarded as ‘one of the most important economic institutions’ (Swedberg, 1994), the concepts of market, or market-related connotations, are not easy to define, since conceptualising the notion of markets is a multifaceted, ambiguous or less transparent task. For example, in the formulation of markets as ‘an abstraction’ ranging from perfect competition to monopoly (Underhill, 2000), attempts to define varieties of markets have been in great measure made at elaborately categorised levels across a body of writings on political economy in the academic disciplines such as economics, sociology and political science. When it comes to the market phenomenon in socio-economic terms, the market can be defined not only as a ‘price-mechanism’, but as a ‘social phenomenon’ in its own right that is constructed as a ‘social institution’ in terms of exchange between sellers and buyers (Cawson et al., 1990), or a ‘social structure’ as inspired by Max Weber’s work (Swedberg, 1994; Cawson et al., 1990). As Eden (1993) also maintained, the market is a structure, not an actor such as the state. In some sense, while it is apparent that the classical economists saw the market as an important institution within capitalism, the market was understood as being synonymous with either the ‘marketplace’ or a ‘geographical area’ (Swedberg, 1994: 257). In classical political economy, the price mechanism has been understood as a ‘decided price’ signifying the amount of labour that is necessary to produce a commodity, and not as related to the automatic mechanism of demand and supply, as political economists have focused on ‘production’ rather than exchange. Secondly, in explaining the term ‘market power’, we need to emphasise that the concept of market power cannot be simply seen as the extent, or amount of market share likely to be existent in a particular marketplace in the context of commercial or business activities whether at the level of the domestic, the international marketplace or in-between. In Chapters 3 and 4, it is pointed out that except for the interpretation of the market phenomenon, some analyses have tended to take

Introduction 5

account of ‘market power’ academically in terms of ‘economic and political concepts’. Whether the market can be regarded as a mechanism, or a marketplace, or a geographic area, the reason we propose to present new perspectives on the interpretation of market power is that the ‘market phenomenon’ should not be simply confined to economic activities representing profit-seeking business or benefit-maximising management of particular corporations, but rather ‘politico-economic’ phenomena that have historically existed in social structures incorporating political and economic activities centring around marketplaces. Thus, despite the fact that market power is originally ‘economic power’, it can be argued that at the same time market power has tended to pave the way for political power, because the business firms intrinsically translate economic activities in marketplaces into political leverage. As Zysman (1983: 17–18) argued, ‘markets, in fact, were political creations, and there are no markets apart from politics’. By implication, there is no doubt that corporate power is politically as well as economically at odds with state power in terms of shaping market institutions and the workings of markets. This understanding of market power is a preliminary explanation of how Korea’s chaebol-governance gives rise to ‘market power’ (economic actor) as well as ‘political power’ (political actor) (Chapters 3 and 4). To the extent that, coupled with the importance of international competitiveness, Korean electronics MNCs invariably led to an entanglement of political and economic power in relation to state power, the conceptualisation of ‘market power’ will also contribute to an analysis of how and why state–corporate power relationships have been considerably transformed until quite recently. Thirdly, with regard to what we would term the ‘meso-market’, the changes in the nature of industry relate to a new interpretation of the nature of products, or technology, such as higher-end knowledgeproducts (Quah, 1999) or knowledge-intensive technology. The significance of intra-industry trade or ‘systemic integration’2 (Ernst, 1999) associated with ‘multinational-led’ inter-firm and intra-firm linkages across production as well as trade, needs to be extensively examined and compared to inter-industry trade traditionally viewed as ordinary by the classical political economy. Thus it could be argued that the nature of industry or industrialisation has transformed the ‘nature of the market’, be it at a meso- or macro-level. More importantly, the nature of industry has significantly influenced national economic development as a whole, due to the market power of individual leading companies, in particular MNCs, significantly affecting the market positions of foreign network competitors in world markets.

6 Newly Industrialising Economies and International Competitiveness

According to Hirst and Thompson (1999), recent decades have witnessed the increasing importance of ‘intra-industry’ trade that has entirely characterised intra-Triad trade – the US, the EU and Japan – in contrast with the traditional ‘inter-industry’ trade between the North and South essentially originating from specialisation based on comparative advantage (Gruber, 1998: 171). As Hirst and Thompson (1999: 105) put it: The Heckscher-Ohlin/Stolper-Samuelson (hereafter H-O/S-S) model is less satisfactory in the context of intra-trade, where it is intra-industry trade that dominates. In this case, New Trade Theory (NTT) models are displacing the H-O/S-S factor endowment approaches. NTT assumes an oligopolistic market structure, economies of scale (both internal and external), barriers to entry, first mover advantage, technological lock-ins, and the like. These features are what give rise to trade between countries in products with similar factor endowments. Against the accepted perception of inter-industry trade between the North and the South, for Asian NIEs in pursuit of the rapid catch-up strategies, when it comes to the electronics industry, there is evidence that intra-industry trade between the North and the South has increasingly, and sometimes unilaterally taken place in the advanced markets. For example, with regard to semiconductors, in the EU market, the market share of Korean electronics firms such as Samsung, LG and Hyundai accounted for 6 per cent in 1986, 15 per cent in 1988 and 25 per cent in 1990 (Gruber, 1998: 178). Moreover, this trend has been accelerated by the paradigmatic notion of ‘new’ technology representing knowledge-intensive products, thus leading to trade regulations, directed mostly to exports from the ‘electronics’ multinationals in Asian NIEs, e.g. Korea and Japan, against dumping in European markets. As Gruber (1998: 174) argues: Of all the trading nations, the EU uses antidumping investigations the most. The sector that is most heavily affected by EU antidumping actions is the electronics industry. This sector accounted for 86 per cent of the total value of imported goods in 1991 affected by antidumping measures. Moreover, antidumping actions are almost exclusively targeted to imports from Japan and South Korea, which represented 83 per cent and 6 per cent respectively of the total value of imported goods in 1991 affected by antidumping measures [emphasis added].

Introduction 7

As far as the wealth of nations is concerned, it is important to point out that particular industrial markets, amongst a variety of markets, have been related to the source of the new wealth of nations. Here we should distinguish between industrial markets and consumer markets. According to Swedberg (1994), whereas consumer markets are the places where there are ‘typically few sellers (organisations, or companies) and many buyers (individuals) who are unorganised’, industrial markets are assumed to be a type of market that consists of a small number of interfirm or intra-firm buyers, in other words, companies, or manufacturers dealing with, sometimes typically, ‘intermediate products’ such as semiconductors. Thus, we intend to examine a meso-market as being closely related to ‘production markets’ at the industry-level with an emphasis on the norms of competitive advantage that characterise ‘industrial markets’ at the meso-level, as opposed to ‘exchange markets’ at the macro-level. There is an implication that several firms in their own right can constitute ‘a market’ by viewing each other as principal participants, or ‘marketmakers’. From a sociological view of markets, we can also assume that ‘markets are social structures in which producers reproduce their own set of actions’ (White, 1981: 518). Similarly, Swedberg (1994: 268) says: Production markets, as opposed to exchange markets, are characteristic of industrial economies. A production market [White (1981) says] typically consists of about a dozen firms that come to view each other as constituting a market and are perceived as such by the buyers    The central market mechanism in the construction of a market is its ‘market schedule’ [operationalised by White]    This schedule    is considerably more realistic than the economists’ demand-supply analysis. Businessmen know what it costs to produce something and try to maximise their income by determining a certain volume for their product [emphasis added]. Arguably, this perspective needs to be distinguished from that of the classical and neo-classical market structure. Classical and neo-classical theorising views business behaviour as ‘passive, mechanistic and utterly predictable’ (Auerbach, 1988: 15). Until recently, in industrial economics, according to the well-known paradigm of structure– conduct–performance, ‘the market structure of the industry determines the conduct of the firm, which in turn determines the firm’s performance’ (Jacobson and Andreosso-O’Callaghan, 1996: 9): (market) structure → (business) behaviour

8 Newly Industrialising Economies and International Competitiveness

Taken together, our key points are two-fold with respect to the mesomarket. First, as illustrated by semiconductors, owing to a risky, short product cycle and zero-sum competitive sensitivity, innovative improvement of knowledge-intensive products initiated by the leading companies in industrial markets at the meso-level directly gives rise to significant spill-over effects in the market as a whole on the macro or international dimension, and also more generally contributes to the development of a national economy at the macro-level. On occasion, there is a possibility that this allows few individual MNCs to participate in a monopolisitic market structure or to achieve ‘closure’ (Cawson et al., 1990) in terms of market power. Secondly, concerning knowledge-products as distinct from ‘general purpose technologies’, we can consider knowledge-intensive products as ‘knowledge-like goods’ that encompass many of ‘the same physical and economic properties as knowledge itself’ such as computer software, new media and information technology, including semiconductors, thus providing typical examples of the developments of a ‘weightless economy’, to borrow a term from Quah (1999). This does not always mean, however, that ‘the resulting goods continue to be knowledgeintensive’. Moreover, what is more important is that ‘demand-side factors’ – consumer attitudes towards sophisticated goods – rather than production factors may greatly influence patterns of technological development related to economic development (Quah, 1999). Subsequently, for a meso-market at the production level, the market structure may be determined by particular knowledge-intensive products resulting overall from the firm’s innovative capability. That is to conjecture that severe competition among the leading firms targeting industrial markets may determine the market structure for a sustained period of time, or periodically. In this regard, contrary to classical economic theorists’ perspectives, on the reformulation of the correlation between firm behaviour and market structure, with the compelling importance of the knowledge factor in international competitiveness, we can posit that the marketmaking behaviour displayed by business can meaningfully determine the structure of industrial markets in some cases. As will be argued in Chapters 2 and 3, however it is defined, central to the issue of international competitiveness is the question of how international competitiveness is redefined or reconceptualised. On the one hand, what kinds of factors or actors have transformed the nature of ‘competitiveness’ in conventional markets at the macro and meso dimensions, when we consider the importance of internal factors, such as the character of interventionist government so often focused on and

Introduction 9

customarily analysed? On the other hand, to what extent can external factors significantly affected by the resulting phenomena of internationalisation or globalisation have an effect on the relevance of international competitiveness? Correspondingly, in terms of spill-over effects on the national economy, new technology alongside knowledge-intensive industry has evoked new perceptions or interpretations of the firm3 which is traditionally perceived and analysed only at the micro-level in the context of ‘level of analysis’ by classical economists (compared to ‘the industry’ at the meso-level, and ‘the economy’ at the macro-level; see Cawson et al., 1990: 15; Mattsson, 1999: 242). In contrast, when it comes to international competitiveness concerning knowledge-intensive products, it is undeniable that individual big business, or MNCs, have tended to represent and restrain to a substantial extent the industry at the international level, sometimes to the extent that the national economy, in macro-aspects, is overwhelmingly affected by the behaviour or actions of individual big business in terms of ‘economic (market) power’. As Stopford and Strange (1991) suggest, the notion of competitive advantage claimed by Porter (1990) has been argued to neglect the changes in the world system outside the nation-state by simply concentrating on internal factors. When faced with the advent of a new international trade regime, international competitiveness needs to be redefined, given that the conventional interpretation of ‘national systems of innovation’ at the national level (Lundvall, 1992; Nelson, 1993, 1996) can no longer be employed to explain the variety of challenges stemming from exogenous factors in the advanced marketplaces in a process of globalisation (Ernst, 1999). Thus, while such phenomena stemming from globalisation demand a ‘new’ concept of international competitiveness, we need to pay much more attention to the new logic of big business in the creation of market power in world markets by going beyond some classical and neo-classical observations of the firms as being subject to the invisible hand of market mechanisms in major modern industries (Chandler, 1977, 1980). As for Asian NIEs, to explore new implications of international competitiveness, according to the assertions of Mathews and Cho (2000) and Luo (2000), it can be assumed that ‘knowledge-derivative dynamics’ likely to be applied to the catch-up companies in latecomer countries are no less important than, and sometimes considered to be more efficient than, ‘knowledge-creative performances’ in their own right that innovative start-ups in industrialised countries substantively have enjoyed following the development of new technology in the

10 Newly Industrialising Economies and International Competitiveness

initial phases. Significantly, innovative firms require ‘innovative technology’ and ‘innovative organisation’, understood as encompassing ‘organisational logic’, illustrated by ‘organisational learning within firms’ (Mathews and Cho, 2000) or ‘combinative capability’ (Luo, 2000). As Luo (2000) observes, even though dynamic and distinctive resources are indispensable to MNCs in exploring market positions, what matters most is the organisational ‘learning capabilities’ that are crucial to a firm’s survival and technological leverage within their own institutional setting directed to world markets (Mathews and Cho, 2000: 72). In explaining a vital characteristic of competitiveness, Luo (2000: 358) identifies ‘combinative capability’ as the following: The assumption that sustainable competitive advantages can come from an unchanging resource bundle is inherently at odds with operating in a dynamic environment. Such advantages are only possible when firms continuously reinvest in building resources    Combinative capability, a firm’s ability to integrate and synthesize internal resources and external learning and apply to the competitive environment, is vital to a firm’s survival and growth in a foreign market [emphasis added].

Methodological approaches This section seeks to provide methodological approaches to strengthen the main arguments by utilising the logic of big business as the ‘market-maker’ beyond the concept of the market vs. state dichotomy in the realm of international political economy. To this end, we need to review the body of literature on conventional debates with regard to corporations, or industrial (big) business, coupled with various interpretations of two types of ideal rationality, namely the ‘market’ mechanism and ‘state’ functionality. Based on variants of epistemological thinking, the primary concern is how far corporations or big business, whether at the domestic or international level, have been theoretically dealt with, and academically placed in terms of classical and neo-classical economic theories, or other countervailing arguments, and neo-Schumpeterian hypotheses. In particular, neoSchumpeterain thinking on organisational innovation deals extensively with the competitive connotation of ‘firms’ as well as ‘technology’, and recent socio-economic or political implications of corporations. Thus, we intend to adopt neo-Schumpeterian analyses of ‘big business and technology’ to provide a preliminary insight into individual MNCs as

Introduction 11

the principal market-coordinator, that gradually has begun to refashion two kinds of ideal-type constructs, that is, ‘market rationality’ or ‘plan rationality’ (Dahrendorf 1968: 219) as the dominant norms provoking economic development in industrial society, given the changing nature of industry, and the transforming character of international competitiveness. To make the main approach more distinctive, some politicoeconomic interpretations of business organisation or multinationals as the source of international competitiveness need to be analytically examined.

The market imperfection approach: oligopolistic market structure and market size As Dunning (1998: 32) argues, one characteristic of hierarchical capitalism4 is that ‘firms primarily react to endemic and structural market failure by adopting “exit”, rather than “voice” type strategies’. Similarly, some scholars have suggested that the behaviour of firms associated with foreign direct investment (FDI) may lie in market imperfection, e.g. oligopolistic market structure and market size. According to Kindleberger (1969), firms’ decisions to move abroad reflect firms’ advantage associated with oligopolistic engagement in competitive strategy which relates to unique products, marketing expertise, control of technology and management skills, or access to capital. They may invest abroad aggressively to secure a permanent advantage over competitors. As Kindleberger (1969: 13) maintained, direct investment derives from ‘some imperfection in markets for goods or factors’. Built on perfect competition, the pure orthodox theory of the firm cannot address the phenomenon of foreign direct investment and the role of the MNCs. As Hood and Young (1979: 47) put it: In such a world there would be no such things as direct foreign investment since no advantage could accrue to the prospective multinational firm. Foreign direct investment is therefore a by-product of imperfect markets. Knickerbocker (1973) assumed that in oligopolistic markets, in order to avoid destructive competition, companies exhibit a tendency to follow the choices of domestic competitors into new foreign markets to maintain overall national position. According to the ‘follow-the-leader’ hypothesis defined by Knickerbocker (1973), national oligopolies may display ‘imitative’ behaviour in strategic decisions to invest abroad to ensure that outward investment initiated by a rival cannot decisively

12 Newly Industrialising Economies and International Competitiveness

affect their domestic oligopoly. As Perrin (1999: 194) argues, foreign markets can be viewed as ‘an extension of the domestic market’, indicating that the domestic rivalry is simply replicated in overseas markets beyond ‘the saturated domestic market’ (1999: 204). In this respect, Hoesel (1999: 17) argues that this ‘follow-the-leader’ model applies to Korean electronics MNCs. Interestingly, according to Thomsen and Woolcock (1993), a firm may not always prefer to choose a market larger than its home market. Even though the domestic market is the largest one, ‘a firm will not shift its activities when the market is enlarged’ – in the light of the emergence of the Single Market. Market size can be seen as ‘only one of the factors behind the location decision’, rather than the most significant factor in why firms choose to locate plants abroad. Drawing upon the case study of Japanese investment in Europe, as far as German and UK markets are concerned, Thomsen and Woolcock (1993: 64) state that: Germany is the largest export market but Britain receives the most investment. This merely serves to highlight the fact that the market size, whether measured by GNP or exports, is only one of the factors behind the location decision. Germany is an expensive place to produce and its firms are often highly competitive; both of these factors may have served to discourage Japanese investors [emphasis added].5 First, while the market imperfection paradigm applies to some characteristics of first-tier NIEs’ investment in Europe, this hypothesis underestimates considerably the importance of indigenous organisational factors that determine the behaviour of individual MNCs at the industry- (meso) or firm- (micro) level. Though the European market may be actually more difficult to access for MNCs in Asian NIEs, Korean multinationals have adopted a different trajectory of FDI from other Asian emerging multinationals such as Taiwan, Singapore and Hong Kong (Y. C. Kim, 1997). Faced with tougher EU market situations in comparison with American and Asian markets (Perrin, 1999), as empirical results have suggested, the Korean chaebol have invested aggressively, but other NIEs’ companies have not all located manufacturing in the EU. Following from analyses of the pattern of Korean and Taiwanese investment in the EU (Hoesel, 1999), market-structure determinism cannot identify the question of why certain oligopolistic companies in the same industry, especially the electronics industry, have not demonstrated the same behaviour of FDI in the same market, though they are in their oligopolistic position in the domestic market. Over the last two

Introduction 13

decades, as in the EU market, while Korean companies have displayed a meaningful share of total FDI (19 per cent), Taiwanese investment has invariably remained minimal (3.5 per cent). Second is the rise of new forms of oligopoly, i.e. the ‘new knowledgebased networked oligopolies’ (Delapierre and Mytelka, 1998) which pave the way for the market power of MNCs. In other words, this has something to do with the industrial organisation approach to the study of MNCs. Delapierre and Mytelka (1998: 73) have addressed the emergence of a knowledge-based mode of competition and its globalisation. According to them, ‘these changes have eroded the basis for the formation of traditional oligopolies’. Delapierre and Mytelka (1998: 74) say that: During the 1970s and 1980s a number of changes made the use of these traditional strategies less effective. The semiconductor industry is particularly illustrative here, but the impact of these changes has been equally felt in industries as diverse as automobiles, telecommunications, biotechnology, textiles and clothing and new materials [emphasis added]. Taken together, our approach in this research endeavours to recognise the notions of ‘knowledge asymmetries’ and the existence of ‘market power’ that mainstream economists have traditionally neglected (Pitelis, 1998: 60, 68).

The ‘non-zero-sum competitiveness’ hypothesis Krugman (1994a) argues that competitiveness is a meaningless word when applied to national economies. Krugman’s vision of ‘competitiveness’ has established that international trade is not a zero-sum game. Krugman has seriously criticised arguments focusing upon national competitiveness for indulging in ‘competitive obsession’ by taking up the stance that ‘if the European economy does well, it need not be at US expense’ (1994a: 34). As Krugman (1994a: 30) put it: The growing obsession in most advanced nations with international competitiveness should be seen, not as a well-founded concern, but as a view held in the face of overwhelming contrary review. Paradoxically, while Krugman (1994a) observes that in principle, the competitiveness problem is typically treated as an important issue

14 Newly Industrialising Economies and International Competitiveness

between countries, he insists that living standards depend on how well the national economy works and thrives in domestic domains rather than on international performance in world markets, because in the advanced major countries, trade tends to constitute a relatively small part of GNP6 (Prestowitz, 1994: 186). Alongside this, as part of a critique of the explanation of ‘East Asian miracles’ in the four Tigers, Krugman (1994b: 70) provocatively argues that Asian growth seems to derive not so much from ‘gains in efficiency’, but from ‘extraordinary growth in inputs like labour and capital’. Clearly, Krugman (1994b) has been reluctant to interpret the East Asian economic performance as ‘productivity-driven’, while some scholars such as Freeman (1995) have reassessed the productivity of a competitive position resulting from catching-up strategies and technological innovation based on firm-specific high-end technologies at the micro-level associated with the promotion of enabling technologies in the Tigers (Krueger et al., 2000: 112). As we will see in Chapter 2, in contrast to Krugman’s logic of ‘competitiveness’, Reich (1990) characterised the wealth of our nation – the US – as being, in principle, attributable to America’s corporate ownership in undermining the attributes of the foreign MNCs’ role intrinsically targeted to the wealth of their nations, because [some] foreign-owned corporations primarily have concentrated on the maximisation of their own profits, even though they might employ American people in their subsidiaries worldwide (Reich, 1990: 59–60). In a similar vein, Palan and Abbott (1999: 34) have suggested that the prosperity of MNCs is considerably reliant on the nation-state. Clearly, the globalisation of MNCs tends to reduce the significance of the nationality of ownership as a ‘feature influencing the contribution of such firms to national economic welfare’. A foreign MNCowned subsidiary could be contributing more to the ‘upgrading or workforce skills, R&D and productivity’ than national firms (Dunning, 1993: 13). Krugman (1987: 143) suggested that ‘free trade is not passé – free trade is nevertheless the right policy’, even though he assumed that ‘comparative advantage is an incomplete model of trade’. In this regard, we argue that Krugman’s non-competitive approach is not always right when it comes to the productivity and international competitiveness of firms at meso- (industry) or micro- (firm) level. In the context of knowledge-intensive industry, we see that Krugman paid little attention to the competitive advantage originating in individual MNCs that yields market power and which is seen as indispensable

Introduction 15

to national economic survival (Lall, 2001), and often implicated in new knowledge-based oligopolistic MNCs in Asian newly industrialising economies. Similarly, Prestowitz (1994: 186–7) attempts to prove that Krugman’s ‘non-zero-sum game’ hypothesis can be wrong in some cases: Trade between the US and Japan is not like competition between Coca-Cola and Pepsi because whereas Pepsi’s gain is almost always Coke’s loss, the US and its trading partners can both be winners through the dynamics of comparative advantage. Although true to some extent, this rationale ignores that different kinds of trade take place. Surely Krugman is correct in the case of trade between the US and Costa Rica, where America imports bananas it does not grow and exports airplanes and machinery that Costa Rica does not make. Both countries come out winners by devoting their resources to what each does best. But what about the kind of trade typified by the recent Saudi Arabian order for $6 billion of new airplanes? Why were the Europeans so upset and Clinton so happy when the Saudis announced that US producers would win all the orders?    this order means that the US will gain jobs and income that Europe might have had but lost. In this regard, Thurow (1994: 192) argues that ‘obsessions are not always wrong or dangerous’. As Scharping (1994: 192) observes, the level of prosperity of national economies is connected to the productivity and the international competitiveness of their companies. Whereas Krugman (1994a) rejects President Clinton’s metaphor of the US economy being like ‘a big corporation competing in the global marketplaces’, in a sense, Cohen (1994) acknowledges that the national economy largely depends on the international competitiveness of national huge corporations by arguing that ‘Krugman’s own arithmetic is careless’ (1994: 195). As Cohen (1994: 195) puts it: The six main keiretsu – massive structures of grouped companies – which for many purposes come very close to being the Japanese economy, produce about half the Japanese total output of transportation equipment, banking, insurance, oil, glass, cement and shipping. Over onehalf of all intermediate products are produced and bought within the cozy network of the six main groups, not to mention the lesser vertical keiretsu [emphasis added].

16 Newly Industrialising Economies and International Competitiveness

Porter’s notion of ‘competitive advantage of nations’ In his influential book, The Competitive Advantage of Nations, Porter (1990) criticises the classical trade theory of absolute advantage, which suggests that states should concentrate on a ‘natural advantage’ or ‘acquired advantage’, and the principle that requires states to expend much energy on developing those products in which they can enjoy absolute advantages (El Kahal, 1994: 76). Porter also rejected the presupposition that richness of factor endowment is perceived as the only source of advantage, while arguing for a need to focus not on the economy as a whole, but on ‘specific industries and industrial segments’ (1990: 9). We can assume that Porter’s prime focus has been placed upon the creation and sustenance of competitive advantage generally, at firm, industry and national levels, without putting an exclusive emphasis on the particular level of analysis, even though his analysis ostensibly tends to explore an account of national competitiveness as a whole. As Porter (1990: 1) put it: [I]t is the wrong question if the aim is to best expose the underpinnings of economic prosperity for either firms or nations. We must focus instead on another, much narrower one. This is: why does a nation become the home base for successful international competitors in an industry? Or, to put it somewhat differently, why are firms based in a particular nation able to create and sustain competitive advantage against the world’s best competitors in a particular field? And why is one nation often the home for so many of an industry’s world leaders? [emphasis added]. Despite his continual stress on the importance of differences in national character, it can be understood that he is solely concerned with the significance of a ‘national system of innovation’ in terms of national industrial development. Certainly, he expresses unwillingness to pay any attention to the international dimension with respect to competitiveness, even though he argues strongly for a new trend towards methodological implications of international competitiveness. Also, Porter (1990: 735) says: My theory highlights and reinforces the importance of differences in nations and of differences in national character. Many contemporary discussions of international competition stress global homogenization and a diminished role for nations. But, in truth, national differences are at the heart of competitive success [emphasis added].

Introduction 17

By contrast, some scholars demand that we view international aspects or changes in the world system as the factors that have a significant impact on national systems of innovation that straightforwardly relate to the framework of national competitiveness. As El Kahal (1994) and Stopford and Strange (1991) maintain, Porter has been criticised for neglecting the changes in the world system – the advent of a world trade regime – far beyond the nation-state. Similarly, Ernst (1999) analysed new phenomena of the firm’s entry into global production networks in terms of region – spatial agglomeration that is crucial for a firm’s international competitiveness.

Neo-Schumpeterian perspectives on big business dynamics: ‘market-maker’ model As is well known, in Capitalism, Socialism and Democracy Schumpeter provides an interpretation of competition as a ‘process of creative destruction’ capable of addressing dynamic efficiency within the capitalist economic system (Schumpeter, 1952: 81–6). This section explores what is the most precise statement of neo-Schumpeterian perspectives on innovation as well as large-size enterprises in the context of Schumpeter’s own intellectual agenda, from which we propose to develop the critical tenet of big business as ‘market-maker’. To explain our methodology more properly, neo-Schumpeterian views are supplemented by relevant hypotheses underpinning industrial organisations, along with our understanding of some terminologies – corporate or organisational strategy – from ‘organisational economics’ (Augier et al., 2000; Jacobson and Andreosso-O’Callaghan, 1996; Porter, 2000), which might be considered useful in investigating innovative dynamics of the organisational complex inherent in big business, and moreover, in the newstyle MNCs with global corporations. According to Schumpeter, innovation is seen as incorporating ‘organisational innovation’, i.e. ‘New Firms’ and ‘New Man’ (Schumpeter, 1954: 68–82), and ‘technological innovation’. The neo-Schumpeterian perspective encompasses ‘all innovations in commercial combinations’ and ‘many innovations in business organisations’ (Schumpeter, 1954: 62) which is linked to the ‘relatively unfettered big business’ (Schumpeter, 1952: 81) in part, coupled with the Chandlerian perspective in terms of the role of large firms characterised as knowledge creators (Chandler et al., 1998). In this sense, this approach is in marked contrast to analyses examining the business management factor conventionally stressed by some corporate theorists, especially in the ‘business strategy’ literature. Taken together, these interchangeably interrelated

18 Newly Industrialising Economies and International Competitiveness

approaches will enable us to identify and develop the notion of the MNCs as ‘market-makers’. The neo-classical analysis of equilibrium does not presuppose the internal forces, or impact of innovative activities understood as the most distinctive feature of the behaviour of firms that may be the primary driving force of economic change (Rosenberg, 1994). By contrast, we need to remind ourselves that neo-Schumpeterian analyses presuppose the importance of ‘big business’ and ‘innovation’ that allow a particular country to survive in the capitalist system depending on comparative competitiveness by focusing on organisational innovativeness in connection with large firm dynamics. This so-called ‘Schumpetarian hypothesis’ is mainly concerned with ‘corporate size’ and ‘market structure’ aspects which propose that the effects of market structure will lead to the improvement of innovation by way of lessening innovation risk (Grupp, 1998: 56). Depending upon his corporatist explanation of bargains between the EU and major firms, Cawson’s (1992) concept of micro-corporatism (at the firm-level) suggests that major large firms are of no less significance in the EU level decision-making process, as illustrated by the Europeanisation of an industrial sector, the consumer electronics industry. It seems understood that the firms remain invariably perceived as being subject to market forces. As in orthodox economic thinking, firms are still interpreted as political actors in terms of being ‘lobbyists’ (Cawson, 1997: 185). While Cawson argues the notion of firms as political actors, it is not suggested that we can identify the market power of big business as the cause of political power. In a slightly different context, as occasioned by the semiconductor industry, Hobday’s (1994) preference for large-scale firms in approaches to competing also reflects the implication of the neo-Schumpeterian standpoint of corporate size and the importance of innovation. In addition to the introductory propositions mentioned above, for further rigorous analyses, some critical considerations can be suggested as follows. Firstly, the neo-Schumpeterian ‘market-maker model’ is not the device intended to replace the dichotomous market–state concept, and further, nor is it to be seen as the paradigmatic model of alternatives, or adversaries. Rather, the former can supplement the latter’s theoretical deficiency or weakness, even though the formulation of big business as market-maker is assumed to come from the ‘incomplete’ function of the market or the state that entails market imperfections, market failure, or government failure.

Introduction 19

Secondly, with the compelling importance of knowledge-intensive technology or products, we argue that, in a narrower sense, the study of competitiveness in industrial markets or production markets at the meso-level tends to become more critical to an interpretation of the source of the wealth of nations. Thirdly, the concept of ‘market power’ will serve to provide an account of the reasons for the emergence of corporate power as the countervailing force against the market mechanism and, especially, state power. The redefinition of market power centring on the particular nature of industry may constitute a conceptual leap that contributes to a better understanding of how big business has grown as a political power in NIEs in recent years.

2 International Trade Regime, Big Business as ŽMarket-makers^ and the Wealth of Nations

From market-maker Under the globalisation era, scholars have suggested that it is essential to ‘bring MNCs back’ into the analysis of international political economy (IPE). Following this, in parallel with the process of bringing ‘the new style of MNCs of the 1990s’ into IPE (Eden, 1993: 26), we seek to adopt neo-Schumpeterian analyses of ‘big business and technology’ to provide a methodological insight into individual MNCs as market-makers rather than market-takers beyond the concept of the market vs. state dichotomy in the realm of IPE. Thus we need to explore neo-Schumpeterian perspectives which focus on the importance of large firms as well as knowledge-intensive technology, given that the transforming nature of new technology has entailed this new aspect of international competitiveness. To this end, two propositions are proposed. First, it should not be assumed that big business tends to be ‘safely subordinate’ to the market and to the state (Peterson, 1989: 390). Rather, since the 1980s industrial enterprises have emerged as countervailing forces against the state as well as the market. With specific regard to the relationship between the business firm and the market, Peterson (1989: 381, 390) argues that there has been a shift of power towards the corporation: [T]hey have power that transcends the market    the modern corporation remains the foremost example in our day of resort to organization as a means to escape ‘tyranny of the market’    In the 1970s    power was directed primarily toward prices. In the 1980s, 20

International Trade, Big Business and the Wealth of Nations 21

however, the game has shifted. It is not prices that are the primary object of power in today’s economy; it is the corporation itself.

Second, in the realms of international trade as well as international business, competitive advantage seems to be determined by technology – the knowledge created by large firms through R&D. Thus, a knowledge-intensive industry such as semiconductors, has also enabled big business to generate important ‘spill-overs’ to the wealth of nations academically perceived as emanating from the market-as-mechanism or the state-as-institution (Krugman, 1986b). In fact, the East Asian countries’ innovativeness was undeniably not of the conventional kind in the context of high-technology originally created by innovative firms in the most advanced countries such as the US, Europe and Japan. It is more important to recognise, however, that a ‘national system of innovation’ (Lundvall, 1992; Nelson, 1993, 1996) or a ‘national system of economic learning’ (Mathews and Cho, 2000) indigenously contrived and developed by some new industrialised economies’ MNCs frequently has given rise to a comparable wealth generation in the sense that a latecomer firm carries out R&D and develops successful high-technology originating from the most advanced technology in the US, Europe and Japan. In addition, in terms of competitive advantage, Porter (1990) has been criticised for his neglect of the changes in the world system outside the nation-state. Here, we also provide an account of exogenous factors within an international trade regime – European trade regulations (Chapter 6) – in explaining the international competitiveness of new industrialised economies’ MNCs, with a focus on the Korean electronics MNCs in the world market. In order to demonstrate the role of large firms (MNCs) as ‘marketmakers’ more clearly, we need to examine the arguments. First, it is hypothesised that ‘as a market-maker, the firm creates and operates markets’ (Spulber, 1999: 8). Here one must distinguish between ‘marketmaking’ and ‘market-taking’ firms. ‘Market-maker’ firms are characterised by their ‘acting as decision-makers, choosing competitive strategies and creating innovative transactions’ in contrast to the conventional market-taking connotation of ‘being operators of technology and passive price takers’ (Spulber, 1999: 10, 16). Second, according to Chandler (1977, 1980, 1990b) in the context of managerial capitalism, it should be recognised that some markets are

22 Newly Industrialising Economies and International Competitiveness

guided by the ‘visible hand’ of firms rather than the ‘invisible hand’ of the market. As Chandler (1977: 1) put it: [M]odern business enterprises took the place of market mechanism in coordinating the activities of the economy and allocating its resources. In many sectors of the economy, the visible hand of management replaced what Adam Smith referred to as the invisible hand of market forces. Third, the market-maker model tends to pay more attention to a few ‘large’ firms, or MNCs, as well as the market power performed by individual big business, based on a particular industry, notably the semiconductor industry, rather than the activities of numerous small firms. According to McCraw (1997: 525–6), ‘in spite of [Adam] Smith’s notorious hostility to the corporation, neither he nor List witnessed the rise of Big Business’. Furthermore, it was beyond the Smithian understanding that technological – or knowledge – differences might give birth to international investment as well as to trade. In this sense, ‘neo-technology’ theories have reinforced the notion of international trade flows. Competitive advantage is considered to be created by individual firms through major breakthroughs in innovativeness, which have allowed the innovative firms to become strong competitors in world markets across national boundaries (Lall, 1995). To make the main argument more precise, the first section deals with a literature review of conventional politico-economic explorations of big business in the context of two kinds of ideal-type constructs, that is, ‘market rationality’ and ‘plan rationality’ (Dahrendorf, 1968) as the dominant norms underlying economic development. This section provides the notion of big business as knowledge-creating entities. We can sense that the globalisation of knowledge-intensive technology has paved the way for a new thinking about big business (MNCs) viewed as instigators of industrial development. The third section emphasises the necessity of characterising the predominant form of East Asian business organisation, in particular the Korean chaebol, as the ‘network enterprise’ which emerges as the actual ‘market-creating units’ in terms of international trade. The fourth section examines the evolution of the ‘new-style’ MNCs as market coordinators based on a technologydriven network of production distinguishable from the so-called global production networks (GPNs). The final section concludes that more recently MNCs embodying knowledge-intensive technology have begun to emerge as market coordinators in international markets.

International Trade, Big Business and the Wealth of Nations 23

Beyond the market versus state dichotomy: the firm as emerging key actor in the wealth of nations Is the dichotomy between state-as-actor and market-as-mechanism still feasible? This section makes an attempt to go beyond the state–market dichotomy by developing the argument that it may be fallacious to characterise the market and state always as alternatives. Significantly, as Dutt et al. (1994: 3) point out, ‘both the state and the markets can help and hinder economic development’. The mainstream neo-classical approach has tended to view the state and markets as rival institutions, leading to a non-reconciliatory attitude towards ‘the virtues of these institutions’. In response to this, according to Dutt (1994: 17), ‘the virtues of both the state and markets’ need to be complementarily recognised to identify the cause of the wealth of nations. Nonetheless, we would like to argue here that it is essential to identify the firms, e.g. Korean electronics MNCs, as the key actors within the context of the state–market dichotomy in pursuing the wealth of nations in accordance with the emergence of a knowledge-intensive industry. The new appreciation of big business has resulted in approaching the firm from the perspective of its critical role in contributing to overall economic development. For analytical purposes, this section goes on to explore in some depth major trends, or perspectives, as to why firms have emerged as the principal actors, and furthermore, how they have responded to new phenomena such as globalisation, or the creation and dissemination of new technology over the past decades. First, despite the fact that there might have been partial theories of the international competitiveness of firms, academic circles have only recently given a major place to the economic significance, and market power, of big business, in particular MNCs, in an ever more rapidly changing globalised environment. As Hagström and Chandler (1999: 1) put it: There is also a rejuvenated interest in the large and complex – often global – firm, and in its internal efficiency; again downplaying the role of the external environment and deterministic adaptation [emphasis added]. Hagström and Chandler examined global firms, the ‘unique’ firm and the innovative firms in the advanced countries, and beyond that, NIEs’ conglomerates. More significantly, such developments have attempted

24 Newly Industrialising Economies and International Competitiveness

to ‘break free from traditional academic demarcations, and to stimulate new thinking’ (Hagström and Chandler, 1999: 1) in relation to the critical role of big firms in international competitiveness as well as the resultant impact of the knowledge-intensive technology developed by the former. It is evident, however, that since the time of Adam Smith we have witnessed the emergence of big business as well as recognised the importance of industry structure in economic growth, which Smith did not perceive. Historically, in the US, it is apparent that big business has tended to involve the formation of predominant socio-economic forces that no countervailing counterparts could resist, given that the American individualistic ideology did not permit government ownership of business enterprises. In real terms, the emergence of big business preceded that of big government. Academically, however, scholarly efforts have not sufficiently investigated the theoretical identification of big firms, in conjunction with the dualistic attitude relevant to ‘bigness’. As McCraw (1997: 540) also adds: Attitudes of the American government toward big business, meanwhile, remained and are to this day of the love-hate variety. Despite continual rhetoric about how many jobs are ‘created’ by the small business sector, and how few by the Fortune 500 companies    not many scholars seriously question the importance of large firms to overall American industrial power and success    The academic record in answering these questions has been dismal, redeemed by only a few beacons of insight such as those of Chandler and his school. For the most part, scholars have not yet figured out how to measure the role of big business with any precision. Their failure derives in large measure from a glaring lack of theoretical success in relating the role of the large business corporation to microeconomic theory, and from a more general failure in economic theory to connect microeconomic phenomena with macroeconomic performance. In reality, most recently, it is important to observe that some scholars have attempted to combine interdisciplinary research – for instance, international business, international economics, IPE and international trade – to explore and scrutinise the dynamics of big firms, particularly with an emphasis upon the globalisation of knowledge-intensive technology (Chandler et al., 1998). The second argument, related to the first, acknowledges the notion of an ‘individual’ MNC as ‘the key economic actor and commercial

International Trade, Big Business and the Wealth of Nations 25

actor’ (Sally, 1994), i.e. the competitive advantages of MNCs within the context of the changing international economic environments and globalisation. Significantly, according to Sally (1994), we can see that one of the striking deficiencies in the research is the neglect of the individual enterprise in national and international affairs in the realm of IPE or the global economy. One of the reasons for this deficiency stems from the fact that the various approaches towards MNCs have mainly tended to view the existence of MNCs as a phenomenon strongly subordinate to ‘state power’, or to an MNC-related ‘international regime’ without exclusively concentrating upon the MNC itself. This critical point is supported by Sally’s (1994: 163–4) tenets: [T]he current decade is one in which the global strategies of individual MNEs play an ever more crucial role in economic development, in shaping the world economy and in significantly influencing the direction, content and outcome of public policy choices    Political economy continues to be ‘state-centric’, overwhelmingly concentrating on the role of ‘government’ and both domestic nation-state and international economic affairs. The last 25 years of reemergent IPE has witnessed a shift from ‘old’ to ‘new’ agendas on the subject of the MNE    What unites otherwise opposing paradigms in IPE is still a fixation with ‘what governments do’, and, occasionally, ‘what international organizations do’, in the international economic arena, rarely focusing on the MNE per se, and frequently considering the latter chiefly insofar as it is linked to the phenomena of ‘state power’ and of the existence of    MNE-related ‘international regime’. The third assumption emanates from neo-Schumpeterian perspectives on new technology, or technological innovation. With regard to the globalisation of innovative technology depending upon innovative superiority, both firms and markets have become increasingly internationalised. As the market becomes globalised, we can assume that the potential sources of government failure and market imperfections are likely to intensify. Frequently, the emergence of ‘global workshops’ under the auspices of MNCs may entail intra-firm trade, thus reflecting that unlike neo-classical and neo-liberal perspectives, such new phenomena may lead to a distorted variant of the perfect market at the regional or international levels, that is, to market imperfections in one form or another. With respect to the cross-border flow between subsidiaries and branches of the same global corporations of components and final products, it has recently been estimated that during the period

26 Newly Industrialising Economies and International Competitiveness

between the early 1970s and the early 1990s, the share of ‘intra-firm’ flows has steadily risen from about one-fifth to approximately one-third of world trade (DeMartino, 2000: 12–13). As DeMartino also shows, MNCs have come to hold over 70 per cent of overall world trade in goods and services. For example, the gross sales revenue of General Motors is greater than the GDP of several catching-up countries, such as China, India, Brazil, Indonesia, Mexico, Argentina and South Korea. The last, but most important, factor is concerned with the strategy and enhancement of ‘sustainable competitive advantage’ performed by NIE firms, particularly Korean chaebol in the electronics sector (Mathews and Cho, 2000), following the surge of the Japanese keiretsu which are responsible for changing corporate practice in world trade. It would be wrong to say that globalisation automatically leads to an even diffusion of technology across regions or countries, but globalisation does tend to give rise to a considerable upgrading of industrial capability as a whole. On the one hand, the efficiency of the globalisation of knowledge-intensive industry depends on the peculiarities of national systems of innovations which include ‘a web of political, educational and financial institutions which cannot easily be copied or adapted’ (Boyer and Drache, 1996: 14–15; Nelson, 1996). On the other hand, focusing upon ‘knowledge creation’, rather than on knowledge per se, it is more important to investigate the implications of how Asian countries’ electronics industries have achieved their performance to the extent that their success stories are not confined to East Asian countries, and furthermore, ‘applicable to any country seeking to catch up in any area of advanced, knowledge-intensive technology’, e.g. semiconductors (Mathews and Cho, 2000: 329). As suggested by some scholars, in order to do this, as with the advanced countries, the newly emerging concepts, such as ‘organisational knowledge creation’ (Nonaka and Takeuchi, 1999), and ‘developmental resource leverage’ through ‘organisational learning’ (acquisition of enhanced technical capabilities) (Mathews and Cho, 2000), within firms need to be analysed and defined appropriately in terms of the competitive advantage of East Asian big business as a latecomer. Such a preliminary overview may properly contribute to determining the question of how, and to what extent, the ‘new style’ (Eden, 1993: 26) big business, even in the latecomers in East Asia, might have successfully emerged as a ‘market-maker’ in global electronics markets, thereby significantly reducing the share of the world markets initially held by the advanced countries. Given that the main argument in this chapter is, in broad terms, underlined by the Gerschenkronian hypothesis, a neo-Schumpeterian perspective is taken here in

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the context of ‘innovation’ labelled the ‘process of Creative Destruction’ (Schumpeter, 1952: 83), encompassing ‘all innovations in commercial combinations’ and ‘many innovations in business organisations’ (Schumpeter, 1954: 62) linked to the ‘relatively unfettered big business’ (Schumpeter, 1952: 81). This analysis is in part connected to the Chandlerian perspective in terms of the role of large firms characterised as knowledge creators (Chandler et al., 1998). Schumpeter suggested that innovation could be seen as incorporating ‘organisational innovation’, i.e. ‘New Firms’ and ‘New Man’ (Schumpeter, 1954: 68–82) in addition to ‘technological innovation’. We see this approach as in marked contrast to some analyses examining the business management factor conventionally stressed by some corporate theorists, especially in the ‘business strategy’ literature. Taken together, these interchangeably interrelated approaches will enable us to identify and develop the notion of MNCs as ‘market-makers’.

Knowledge-intensive technology: neo-Schumpeterian perspectives on big firms’ dynamics New technology and the individual firm As many neo-classical economists admit, they have paid little attention to the determinants of technological change. Arguably, the main reason for this may derive from the traditional paradigm of technology. In other words, historically, technology or technological change has been viewed as an ‘exogenous’ phenomenon, or an ‘exogenous shock’, rather than an ‘endogenous’ factor that has more recently been identified as related to ‘the creation of new technology and the stimulation of economic growth’ (DeMartino, 2000: 68; Hagström and Chandler, 1999: 2–3). Hagström and Chandler (1999: 2–3) address this issue as follows: A one-dimensional view of technology has been replaced by an appreciation of technology as more complex, embodying different elements that go beyond the traditional ones of high and low technology, and of products and process technology    The famed and elusive ‘technological residual’ in economists’ growth models has traditionally been treated as exogenous and has only in the last decade or so come to be incorporated as endogenous, as a function of firms’ investment in research and development. Recently, as Krugman (1979) has shown, technological innovation has come to receive much attention in international trade theory. It has

28 Newly Industrialising Economies and International Competitiveness

continued to be readily recognised that technology innovation and technology transfer tend to play a critical role in determining the pattern of world trade, thus, by implication, reflecting neo-Schumpeterian insights of new technology as necessarily related to the international competitiveness of individual firms. In particular, the technology activities are carried out by individual firms, which are mainly responsible for the acquisition of new knowledge, the adaptation of such technologies, technology transfer, and the creation of new technologies from earlier ones. Individual firms need to cope with the lack of even imperfect knowledge under conditions in which information is imperfect and knowledge is mostly tacit in character. To what extent and how individual firms cope with these circumstances can depend, on the one hand, on technological capabilities at the national level, and on the other hand, on the level of technology innovativeness attained by the individual firms at the enterprise level. As Lall (1998: 215) points out clearly: [E]ach enterprise has its own learning trajectory, depending upon how it perceives its environment, engages in the technological process, and creates the ‘routines’ to cope with the lack of perfect knowledge. The learning process is unpredictable, path-dependent and incremental, differing by firms, industry and circumstances [emphasis added]. In contrast, with regard to the technology itself, the neo-classical perspectives provoke some observations. Firstly, technology is innately familiar to numerous small and homogeneous firms, in the sense that the firms were not perceived as innovative entities. Secondly, how and to what extent technology can be disseminated and absorbed by the firm depends upon capital/labour factors accumulated by individual firms. Consequently, the neo-classical literature need not devote much energy to hypothesising about the notion of innovation per se, and the learning process of technology. As Lall (1998b: 1371) also maintains: [S]mall, homogenous firms operate in perfectly competitive markets, where all technological options are known, choices are made costlessly to optimize allocation on the basis of capital/labor costs, and technology is absorbed and used without further effort and cost    Firms do not need to learn to use existing technologies, and they operate essentially in isolation without interlinkages and spillovers.

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In addition, we need to indicate the relationship between technology and institutional factors, that is, the organisational impact of technical change upon economic development. According to the concept of ‘national systems of innovation’, the institutional factor is conceived as an exogenous factor that determines ‘technological and economic development’, whilst another approach of viewing ‘technology’ as the exogenous factor rather describes technology as a conditioner of economic and institutional development (Chesbrough, 1999: 447–448).

Firms as a knowledge-creating entity: literature review As Nonaka et al. (2000) emphasise, the various theories of the firm and its activities – such as neo-classical economics, transaction-cost theory, principal-agent theory and the resource-based view of a firm – do not provide sufficient understanding of the firm as a creator of knowledge. These authors develop a theory of the firm, in which they argue that ‘the raison d’être of a firm is to continuously create knowledge’ which relates to the most significant source of ‘a firm’s sustainable competitive advantage’. The extent to which knowledge can be transformed into a meaningful resource, such as technology, will also be simultaneously affected by such factors as the organisational structure, corporate culture, national systems of innovation, institutional factor and management leadership, developed and integrated by a particular firm (Nonaka et al., 2000: 16–17; Morikawa, 1990; Chandler, 1990a). Concerning the early tentative theorising of innovation, Hodgson (1988) argued that based on Williamson and other theorists’ perspectives of the firm, it is unusual to create and sustain technological innovation in the marketplace. The firm might be understood as a stable and safe place in terms of long-term R&D in that it may only offer ‘a kind of protective shelter’ (Hodgson, 1988: 212) rather than a knowledgecreating entity in itself. Here we should distinguish between information and knowledge, and make the distinction between the mere ‘repository of knowledge’ and ‘knowledge-creating activity’. According to Fransman (1995: 714), by information, we mean ‘data relating to states of the world and the state-contingent consequences that follow from events in the world that are either naturally or socially caused’. With regard to the relationship between information and knowledge, following Dretske (1982, cited in Fransman, 1995: 715), ‘information is a commodity that is capable of yielding knowledge; and knowledge is identified with informationproduced (or sustained) belief, that is, knowledge is processed information’. According to Dretske, it is understood that while knowledge is part

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of information, knowledge is qualitatively better than just information. In this sense, knowledge tends to be dependent upon, and confined to, a repository of collected data. Going one step further, Fransman (1995: 717) suggests that knowledge be interpreted in its own terms as an ‘open-ended process’, thus striving necessarily to break away from an exclusive reliance upon processed information. Significantly, the creation of knowledge includes more than the processing of information, while it is acknowledged that the processed information may function as a crucial ‘input’ into the knowledge-creation process. It is surprising to discover that Fransman’s concept of knowledge is characterised by the language of ‘dominant sets of belief’, which may attach importance to the vision of a firm. As he put it: The way forward, it is proposed, is to distinguish ‘information’ from ‘knowledge’    Knowledge, on the other hand, is defined as belief. While belief is influenced by information processed by the believer, belief is not necessarily wholly determined by processed information. In the formation of belief, accordingly, there is room for insight, creativity and misconception. (Fransman, 1995: 755) Interestingly, in a somewhat comparable, but more detailed manner, Pavitt (1998) attempts to explore close technology-related connotations by distinguishing products from the firm-specific technological knowledge on which such products are reliant. Specifically, as Pavitt stresses, even though the two dimensions evolve at the same time, it is evident that their effects may be quite different. Moreover, it is more important to point out the significance of the firm’s organisational processes of coordination and control that will lead to a consistent and successful ‘matching’ between the deployment of technological knowledge and output of the commercially successful products. Put simply, Pavitt wants to argue that even the firm’s meaningful output deriving from its outstanding technology will depend considerably on a firm’s organisational factors. According to Pavitt (1998: 448), in some cases, the dynamic flexibility of ‘routines’, such as a large firm’s organisation, is more important than ‘creative destruction’ initiated, and re-created by a firm. Pavitt (1998: 447) stresses: [O]ur practical and theoretical knowledge of these organizational processes are less well grounded than our knowledge of the processes of technological advance per se. This why companies with

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outstanding technological competencies – Xerox and IBM in the early days of personal computers, for example – failed to develop organizational forms to exploit them. Similarly, in accordance with Pavitt’s argument, it is important to look at the issue of ‘organisational knowledge creation’ addressed by Nonaka and Takeuchi (1999: 214). Their main motivation is to explain how Japanese companies established their prominent position in international competition, despite the fact that ‘they are not terribly efficient, entrepreneurial or liberated’, in contrast to most of their Western counterparts. Nonaka and Takeuchi make a distinction between ‘explicit’ (objective) knowledge and ‘tacit’ (subjective) knowledge. In contrast to the Western companies’ approach to knowledge, Japanese corporations have mainly focused upon tacit knowledge, whilst the Japanese also have introduced ‘organizational knowledge creation’, understood as a ‘never-ending process that upgrades itself continuously’, in contrast to personal knowledge creation (Nonaka and Takeuchi, 1999: 236). They also pose the question why Western companies ‘tend not to address the issue of organisational knowledge creation’ (Nonaka and Takeuchi, 1999: 215). Consequently, as with the Western firms, they have presented a new interpretation of the success story of Japanese companies recently based on two dimensions – epistemological and ontological. The focal point is how knowledge created by individuals can be transformed into advanced knowledge that is continuously and interactively destined to produce a quasi-automatic spiral on the corporate and inter-organisational dimensions over time. As Nonaka and Takeuchi (1999: 237–8) put it: The epistemological dimension is    where knowledge conversion takes place between tacit and explicit knowledge. Four modes of this conversion – socialization, externalization, combination and internalization – were discussed. These models are not independent of each other, but their interactions produce a spiral when time is introduced as the third dimension.    Another spiral takes place at the ontological dimension, when knowledge developed at, say, the project-team level is transformed into knowledge at the division level, and eventually to the corporate or inter-organizational levels. Related to this, it is recognised that the shared knowledge relates to a corporate culture. The presence of a large firm’s corporate culture gives

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rise to a ‘synergy’ between the cultures of their constituent subsidiaries, which will determine, on the one hand, how and to what extent coordination problems arise, and on the other, how subsequently it may be transformed into inter-organisational coordinating effects in terms of a stable ‘integrated culture’ (Cremer, 1993). Once this integration of culture is established, it is most likely that it will continue to exist, for a long period of time, perhaps permanently. According to Cremer (1993: 379): This integration of culture will be greater the more flexible the channels of communication, and the more mobile the employees. This integration will make changes difficult to conduct. Any change in a culture which affects parts of the firm will affect, more or less, the whole organization. Hence, progressive reform by piecemeal improvement will be extremely difficult, or impossible.

The globalisation of technology and the role of international firms The globalisation of technology has paved the way for a new way of thinking about big business, i.e. MNCs, understood as instigators of technological development. In general, globalisation contributes to the emergence of new international structures for technology (Cantwell, 1999). In the wake of globalisation, it has often been argued that the state is about to disappear, or wither away. Hence, globalisation might be regarded as a process that undermines the raison d’être of the nationstate. The contrary assumption that globalisation is a ‘passing, or transitory phase’, or has no complex or remarkable impact on the nation-state seems to us unreasonable (Palan and Abbott, 1999: 203). In a similar context, we need to explore technology-connoted implications related to national systems of innovation. We can see that both globalisation and regionalisation might be defined as processes which weaken the significance and coherence of national systems of innovation in terms of directing processes of learning and innovation. According to Lundvall (1992), it is noted that complex and multifaceted elements of the process of innovation tend to provoke transnationalisation and globalisation beyond the limited scope of a national system. Furthermore, some of the international firms have striven to break the bonds to their home country, attempted to extend their innovative activities abroad and to ‘source’ diverse national systems of innovation, in some cases, without necessarily sticking to their indigenous countries. Nonetheless, it is too early to argue that such phenomena eventually will contribute to the demise of national

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innovation systems. Lundvall (1992: 4) remarked that ‘these changes are important and they challenge the traditional role of national systems of innovation, but they do not make it less important to understand how national systems work’. In the meantime, the state and market in each country are also considerably affected by the pressure of changing conditions of internationalisation, and the emergence of international regimes, defined as ‘the set of rules and institutions that govern the interaction among international actors including, but not limited to, nation-states’ (Padoan, 1995: 29). It is also recognised that states and markets tend not to respond rapidly to changing international environments. In this context, international investment, or FDI, is, in the main, made by technology leaders, that is, innovative firms, with a view to incrementally increasing their hold on world markets and world production. At the same time, FDI may be the principal channel through which transfer of the advanced technology is most likely to take place. The same trend could be true of outward FDI from the East Asian NIEs (Mowery and Oxley, 1995: 89). Arguably, from the developing countries’ perspectives, it is assumed that FDI is more ‘productive’ than inward investments by domestic firms by virtue of the largely transferable innovation they bring. As Borensztein et al. (1998: 133) suggest: [D]omestic firms have better knowledge and access to domestic markets; if a foreign firm decides to enter the market, it must compensate for the advantages enjoyed by domestic firms. It is most likely that a foreign firm that decides to invest in another country enjoys lower costs and higher productivity efficiency than its domestic competitors. In the case of developing countries in particular, it is likely that the higher efficiency of FDI would result from a combination of advanced management skills and more modern technology. Ironically, however, under international economic distortion originating from protectionist trade regimes initiated by the advanced countries in world markets, in addition to the host country, FDI may fail to play a critical role in performing the transfer of the advanced technology. The host country market inevitably tends to be superseded by the home market (Borensztein, 1998; Turner and Kim, 2004). Under such conditions, NIEs’ international firms encounter a new challenge in terms of market power, and must employ new corporate strategies to cope with the newly emerging international trade regime. Therefore, the activity

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of MNCs should be incorporated as an additional exogenous variable affecting the globalisation of technology-related knowledge, whether proactively or passively motivated. Historically, several leading American and European firms, recognised as initiators of innovation, locally or internationally, have been responsible for the international dispersion of technological innovativeness in low-end products. Such examples correspond to: firms in the chemical and electrical equipment industries broadly defined, as these are the industries which are most reliant on sciencebased technologies. Historically, US firms were strongest in the electrical equipment industry, while European (and especially German) firms were stronger in chemicals. Among leading companies such as these, technological activity is not always much more widely geographically dispersed today than it was in the interwar or early post-war periods [emphasis added]. (Cantwell, 1999: 265–6) In marked contrast to conventional industries in terms of their international competitive edge, the high-technology sector has tended to result in an unexpectedly different shift in industrial superiority compared to that which the US and European firms had enjoyed for a long period of time up to the post-war period. There are even more debatable questions to be determined, such as whether military R&D and procurement will be ‘a help or a hindrance’, in the context of highend technology. Nelson (1996: 396) provides an example in a similar context: Of the major industrial nations, the US spends by far the largest share of industrial R&D on military projects. A strong case can be made that in the 1960s this helped the American electronics (and aircraft) industries to dominate commercial markets, but that since the late 1960s there has been little ‘spillover’. Britain has the second largest of the defence R&D budgets among our set of nations, but most of the companies receiving R&D contracts have shown little capability to crack into non-military markets. The same can be said for most of the French companies. In one sense, it is more accurate to suggest that the demise of the dominance of US and European companies stems not so much from their deficiency as from the supremacy of knowledge-derivative – though

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not always knowledge-creative – dynamics in East Asian NIEs, especially Korea and Taiwan (Mathews and Cho, 2000). Apart from Japan, East Asian NIEs operate in many categories at different levels with regard to technological involvement, occasionally knowledge-creative, or knowledge-derivative forms. As Lall (1998: 213) observes, some cases involve an effective application of new technology as catch-up leader; some are ‘innovators’ in their own right; whilst several tend to display backwardness and inefficiency both in the application of new technologies and in the use of the technologies that they have acquired. This has been related to national innovation systems whereby knowledge is accumulated and distributed across each country’s institutions (Lundvall, 1992; Nelson, 1993) by way of learning processes. The mere application, let alone creation, of knowledge may neither be always equitably reproducible, nor replicable worldwide even on a regional basis. This is because the market leaders have imposed ‘entry’ barriers to block the dispersion or diffusion of knowledge-based core technology. This has happened in many sectors of the electronics industry and information industries. The ‘entry possibilities’ targeted by potential competitors, especially large firms in late-comer countries, have arisen asymmetrically as a consequence of learning processes such as imitation and licensing, relevant to the reproduction of technology (Mansell and When, 1998). Mansell and When (1998: 11) also give examples in the case of the ICT industry. The global division of labour is largely asymmetrical    this means that the ‘export-led growth’ strategy in the ICT, that contributed to the success of Republic of Korea and some of the South East Asian economies, is unlikely to be reproducible in other countries, such as Thailand, Malaysia, Indonesia, or the Philippines [emphasis added]. In a narrow sense, it can be posited that Nelson assumes the importance of educational institutions in countries such as Korea and Taiwan. By implication, this argument highlights the essential element of Nelson’s understanding of national innovation systems as being mainly characterised by learning processes emanating from country-specific education and firm-specific training systems. Thus it ultimately allows ‘new entrants’ to catch up with the US and European start-up firms in terms of commanding the former’s commitments to several important core technologies (Nelson, 1996; Nelson and Wright, 1992).

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There are some important assumptions that should not be ignored. First, it has been suggested that modern technology accompanying ‘techno-nationalism’ tends to be ‘globalising’, concomitantly leading to the internationalisation of trade, business and technology. As Nelson and Wright (1992: 1921) recognised, ‘it is increasingly difficult to create new technology that will stay contained with national borders for very long’, due to the widespread availability of technological sophistication derived from any firm’s readiness to invest in new ‘generic’ technology. Moreover, the internationalisation of technological activity in large MNCs is not a recent trend. Initially, such international dispersion of technology was strengthened and accelerated by technological activity by some US MNCs. This dates back to the inter-war period, and until the early 1960s. Importantly, many European MNCs were already internationalised in terms of technology creation in the 1950s (Cantwell, 1999: 277–8). Secondly, more significantly, we assume that the ‘protected market’ is not linked only to the Japanese and Korean cases, as observed in Japanese and Korean big business dealing with the auto and electronics industry (Y. C. Kim, 2002). As suggested by Nelson (1996), the term ‘protected market’ can also be applied to US and European start-ups, such as aircraft and electronics companies that were supported by military R&D. Nelson (1996: 397) put it differently: The Japanese auto and electronics companies and the Korean chaebolbased enterprises are well-known examples of presently strong firms that grew up in a protected market, but it also should be recognised that the American computer and semiconductor industries grew up with their market shielded from foreign competition and with their R&D funded to a considerable extent by the Department of Defense. After a period of such shelter and support, these firms came to dominate the world’s commercial markets. Airbus may be another example. On the other hand, the country studies in this project give many examples of protected and subsidized industries which never had got to the stage where the firms can compete on their own. France’s electronics industry is a striking example, but so also are the import-substituting industries of Argentina and Brazil. Thirdly, it is acknowledged that the role of the nation-state is of continuing significance. It does not diminish with respect to the evolution of knowledge-creative circumstances within the national systems of innovation (Phillips, 2000: 42). Nonetheless, the NIEs’ success story

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may be attributable not so much to government incentives, MNCs as the principal source of technology, accompanied by the dynamic interaction between innovative ‘business organization’ (Lazonick, 1991: 8; Spulber, 1999: 267) and technological change, at the meso-level (industry), but rather to ‘multiple locations for innovation’ (Cantwell, 1999), or ‘multinationality’ as source of innovation at a regional, or global level. Taken together, according to Cantwell’s argument, the rationale of globalisation has allowed for NIEs’ international firms to be intensively incorporated as additional knowledge-creative ‘firms’ among multiple sources of innovation. According to Cantwell (1999: 284): There are two similarities in the theoretical rationale provided for the product cycle model (which applied best to the USA and to US-owned MNCs in the early postwar period) and that suggested for the current globalization of technological activity in MNCs. Both explanations rely on the role of the economics of locational agglomeration, and on the leadership exercised by the most technologically competent firms. The essential difference is that in the product cycle model just one preeminent centre for innovation was recognized, whereas in the globalization story there are multiple locations for innovation and even lower-order or less-developed centres can still be sources of innovation [emphasis added]. In addition, either at the micro- (firm), or meso-level, concerning the competitive advantage of firms, it is necessary to define ‘performance routines’ associated with ‘dynamics capabilities’ (Teece and Pisano, 1994). Like Pavitt (1998), Teece and Pisano (1994: 553) maintained that the routines operating within the firm, or among conglomerates, are construed as ‘long-term, quasi-irreversible’ processes which ultimately relate to both ‘industrial organisation’ and ‘product quality’ (Rodrik, 1994). Teece and Pisano (1994: 553) revive the importance of pathdependent history of the firm’s competence: Because of imperfect factor market    these capabilities generally cannot be bought; they must be built. This may take years – possibly decades. Given these facts, it can be proved that international competitiveness arising from the quality of manufactured exports has reflected industrial organisation patterns accounting for particular business organisations with reference to market-creating processes in the long-term sense. For

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example, Rodrik (1994: 190) concluded that the Korean big business or industrial organisation, in large part, has contributed to its international competitive edge relative to Taiwan: I find strong support for the hypothesis that industrial organization and product quality are related in the expected manner: the quality of Korean manufactured exports    is systemically higher than that of Taiwanese exports. The growth of Korean industrial organisations based on large firms in some regards resembles Japanese keiretsu. It is often claimed that Korean big business experienced fierce competition between firms within the same industry as was the case in the Japanese keiretsu, while Britain and Germany tended to prefer ‘negotiation’. However, this does not mean that Japanese companies have been less cooperative than their European counterparts. Rather, as Morikawa suggested, Japanese conglomerates have preserved wider cooperation, as contrasted with Chandler’s description of European firms, especially German cartels: Chandler also argues that the growth of British organizational capabilities was arrested by ‘less vigorous competition between firms’. British firms tended to avoid competition and to negotiate with each other for market share in the domestic market and with foreign companies in the world market. However, this tendency    was seen not only in Britain, but also in Germany    The zaibatsu and most of the keiretsu are certainly cooperative    In Japan enterprises cooperated in multi-industry and multi-business areas, whereas in Germany the cooperation remained within each industry. (Morikawa, 1990: 722) It is no exaggeration to say that there has been less intra-industry or inter-firm cooperation in Korea compared to the situation in Japan and Europe. Given this fact, Mathews and Cho (2000) attempt to acknowledge the continued significance of East Asian NIEs’ success, and furthermore, strive to reject the prevalent revisionist perception of the Asian miracle as ‘a seemingly transitory, or non-repeatable’ phenomenon (Krugman, 1994b). Mathews and Cho focused on the importance of the steadily growing potential of the semiconductor sector as a knowledgeintensive industry ever since the Asian financial crisis. Moreover, they argue that the recent ‘tiger technology’ is dependent not so much on

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traditional factor advantages, but on innovative extremity with regard to high-technology: [T]he East Asians have been extremely innovative in creating successful high-technology (knowledge-intensive) industries based on the most advanced technologies available in the US, Europe and Japan. No one welcomed them into this exclusive club. They inserted themselves, not by following conventional strategies which are concerned with exploiting firms’ existing advantages and resources    these countries were ready to make their break into knowledge-intensive industries [emphasis added]. (Mathews and Cho, 2000: 7) For Mathews and Cho (2000), however, the concept of innovativeness is somewhat removed from the conventional kind such as R&D, new technological products and processes. For them, the term ‘innovativeness’ is characterised by the institutional system encompassing the ‘organisational learning’ involved in the acquisition of enhanced technological knowledge. This reflects the process instigator of technology transfer from the innovative firms in the advanced countries to the East Asian firms, on the one hand, and from firm to firm at the national, regional, or global levels, on the other (Mathews and Cho, 2000: 7–8). As Porter (1990) put it, given the coincidental occurrence of ‘historical accidents’, which occasionally result in important innovations, changes in the exogenous factors outside a country – in the international trade regime – which deeply affect the activities of the East Asian innovative firms should be analysed, aside from the newly emerging notion of the firms as knowledge-creators at the corporate level. In this sense, the notion of the East Asian ‘networks enterprise’ can be understood as a heuristic concept in contrast to an interpretation of ‘international production networks’ (IPNs).

International trade regime and the Korean electronics pathway The first important implication of this section is that, even though government action is still effective in altering the shifts of global competition through intervention (Stopford and Strange, 1991: 8; Dunning, 1999), it is widely recognised that the emerging international trade regime has tended to have influential and restrictive effects over the

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role of government, whether in the Asian tigers, or in advanced industrial countries. In terms of the emergence of the East Asian international firms, as was the case of MNCs in the advanced countries, as far as the East Asian region is concerned, it should be remembered that confronted with international trade regulation, such as the EU antidumping policies, Japanese and Korean MNCs have become to a great extent multinationalised, in terms of market power, as will be argued in Chapter 6. In general, the electronics industry has been perceived as being based on knowledge-intensive technology (Held et al., 1999; Fujita and Ishii, 1999). Regarding the multinationalisation of the electronics firms, as Fujita and Ishii (1999: 345) recognise, being part of a knowledge-intensive industry allowed the electronics firms to become more easily multinationalised than any other assets-based industry, across country-specific borders at low expenditure. As Held et al. (1999: 263) state: Electronics was one of the first industries in which stages of the production process were diffused to developing countries. Not only is the production process spread internationally, but there are also high levels of intercontinental trade and firms compete in markets worldwide. Also, with regard to international competitiveness, it could be proposed that the term ‘innovative firms’ might be reinterpreted or reorganised in contrast to the typical interpretation of it being perceived as technological innovativeness itself. Attention needs to be given to the language extensively related to the dynamics of ‘business organisation’ itself, as partly characterised by a mixture of concepts, such as ‘routines’ (Pavitt, 1998; Teece and Pisano, 1994), ‘organisational knowledge creation’ (Nonaka and Takeuchi, 1999) and ‘organisational learning’ (Mathews and Cho, 2000). It is generally agreed that the significance of organisational competence is largely the source of firms’ competitive advantage, assuming that it is quite distinguishable from conventional strategy analysis such as product- and market-related strategy. It is premature to maintain that such an organisational factor might apply across all industries and across countries (Mathews and Cho, 2000: 82, 284). Based on the above, we would like to ask how international – or regional – exogenous factors, especially what has come to be termed the ‘network enterprise’, have emerged. The assumption is that the network would have an impact upon intra- (and inter-) firm networks, in one way

International Trade, Big Business and the Wealth of Nations 41

or another. To this end, we briefly examine the conventional literature, e.g. IPN, with reference to the performance of the East Asian NIEs’ electronics industries, with a focus on the Korean semiconductor industry. This will provide a better understanding of dynamics of ‘organisational competence’ frequently analysed at the firm-level by defining inter-firm interconnectedness, such as interlinked triadic trade, and international inter-firm interaction, in more probability, occurring at a regional, or global level.

East Asian NIEs’ firms and market-driven ‘network enterprise’ Concerning the innovative firms, especially, it would be wrong to conclude that innovative firms in advanced countries will preserve their superiority for ever. Sometimes, the patterns of world trade have resulted from not only the technological innovation mainly led by the advanced countries, but also the transfer of technology to developing countries (Mathews and Cho, 2000: 245–55). According to Krugman (1979: 265), as a result of factor competition from the catch-up countries, the decline of industries in the developed countries seems to be ‘recurring’. Under these circumstances, trade policy initially orchestrated by the actions of government has exerted considerable influence on market coordination in world markets. Moreover, there are some indications that the international competitiveness of the innovative firm has been closely related to the interaction between the dynamic firm and its external environment – the global economy. With this in mind, it is more significant to posit that the innovative firms must not be regarded as confined to innovation-related activities at a corporate level. Furthermore, one should distinguish between the innovative firm and its innovative technology. In other words, given the trade barriers, an innovative firm encompasses, aside from its technological innovativeness, the organisational competence that involves market-driven ability directly or indirectly related to the capacity of firms for the ‘coordination of production process’. In this context, we would like to define ‘innovative firm’ in terms of not only the ‘innovative capacity’ of firms, but, more importantly, their ‘organisational ability’ with reference to the efficiency of their production and distribution networks. This relates to the notion of a ‘network enterprise’, pioneered by Castells (2000), at the macro-level within the context of technological, regional and global considerations. As Held et al. (1999: 261) state: The globalization of business thus depends on the innovatory capacity of firms and their ability to organize efficiently cross-border

42 Newly Industrialising Economies and International Competitiveness

production and distribution networks with the aid of advances in both communication technology and management technique    trade barriers alone no longer explain the growth of transnational production; rather, what is more crucial is the capacity of firms for technological and product innovation. For further development of these arguments, it is necessary to provide some insights into the notion of a network enterprise. Castells (2000: 209) attempts to characterise the predominant form of East Asian business organisation as the ‘network enterprise’, gradually initiated by Europe and the US. He argues that the ‘convergence between organisational requirements and technological change’ has given birth to ‘established networking as the fundamental form of cooperation in the new global economy’ (Castells, 2000: 186). Castells stresses that the network enterprise is assumed to be a ‘network of firms’, that is, actual networks of business groups of different kinds, significantly related to the survival of the firms, rather than the firm itself or the individual entrepreneur. As Castells (2000: 186–7) claims: Barriers to entry in the most advanced industries, such as electronics and automobiles, have sky-rocketed, making it extremely difficult for new competitors to enter the market by themselves, and even hampering large corporations’ ability to open up new product lines or to innovate their own processes in accordance with the pace of technological change    Inside the network, new possibilities are relentlessly created. Outside the networks, survival is increasingly difficult. Under the conditions of fast technological change, network, not firms, has become the actual operating unit [emphasis added]. To make the term more distinct, Castells (2000) offers the differing accounts of two different kinds of organisations: bureaucracies and ‘enterprises’. The former are focused upon the reproduction of the system of means, while the latter are related to reshaping of the structure of means in parallel with the targeting of the organisational goals. He adds: In a dynamic, evolutionary perspective, there is a fundamental difference between two types of organization: orgnaizations for which the reproduction of their system of means becomes their main organizational goal; and organizations in which goals, and the change of goals, shape and endlessly reshape the structure of means. I call the

International Trade, Big Business and the Wealth of Nations 43

first type of organizations bureaucracies; the second type, enterprises. (Castells, 2000: 187) Likewise, Macmillan (1996: 118) recognises that the world economy has been steadily shifting, on the one hand, from ‘physical units of production’ to knowledge-based units, and on the other, in the dynamic and broader senses, from a corporate-level system based on country-specific economies to a ‘technology-driven network of production’ being geared towards global markets. It could be argued therefore that the electronics industry is turning from ‘partial’ to ‘systemic’ globalisation, in the sense that the reorganisation of related-firms’ operations tends to be more largely dealt with in geographical and functional terms than a mere emphasis on prices and product development (Held et al., 1999: 264). To conclude, network enterprises based on the observations made so far can be summarised as having the following characteristics. First, in the narrow sense, a network enterprise represents a ‘new mode of corporate organisation’ (Held et al., 1999: 264), or ‘organisational logic’, which relates to coordination of the production process (Phillips, 2000: 44). That is, it stands for the convergence and interaction between a ‘new institutional, or organisational logic’ and ‘a new technological paradigm’ closely involved with the ‘highly interactive process of innovation’ (Castells, 2000; Phillips, 2000). According to Castells, furthermore, ‘this organisational logic manifests itself under different forms’ in the context of the various cultural and institutional arrangements (2000: 164). Phillips (2000: 44) maintains: The network enterprise represents the increasing organisation of business activities into an enterprise not run by individual firms or even multinational corporations but by international networks constituted through a variety of actors and institutions continuously adapting to support the environments and markets in which the enterprise itself operates. Second, it almost entirely emphasises the ‘inter-penetration of market and organisation’, reflecting both the ‘hierarchy benefits’ and ‘market benefits’ needed for innovative firms (Phillips, 2000: 41), as exemplified in such Asian large firms as the Japanese keirestu, or Korean chaebol. However, we should not overlook the importance of cooperative networks of small and medium firms such as Silicon Valley in the US and networks in Hong Kong and Taiwan which still seem to be competitive in the globalised production system (Castells, 2000: 122).

44 Newly Industrialising Economies and International Competitiveness

Related to the second assertion, network enterprises – including not only firms, but networks of firms rather than countries – appear to have emerged as the actual ‘market-creating units’ in terms of international trade. Subsequently, it becomes evident that, in the broader sense, the ‘organisational logic’ occurring at the global level – rather than the domestic level – invariably stemming from networks of firms, is assumed to mediate, compromise and condition, to some degree, the abstract ‘market logic’ (Castells, 2000: 188; Held et al., 1999; Lazonick, 1991). Castells (2000: 188) puts it differently: [T]he ‘market logic’ is so deeply mediated by organizations, culture, and institutions that economic agents daring to follow an abstract market logic, as dictated by neoclassical economics orthodoxy, would be at a loss. Most firms do not follow such logic. Some governments do, out of ideology, and they end up losing control over their economies (for example, the Reagan administration in the US in the 1980s, or the Spanish socialist government in the early 1980s). In other words, market mechanisms change over history and work though a variety of organizational forms.

The Korean electronics MNCs: a variant in the globalised manifestation Beginning in the late 1980s, international trade has grown faster than production in the global economy (Dicken, 1993: 23; Castells, 2000: 101). In the electronics industry, the production process seems to have spread internationally, combined with higher levels of international trade and increasingly fierce competition between electronics MNCs in the world market. The growth of the electronics industry, in particular, semiconductors in East Asian NIEs, appears to have produced a growing tension and a major competitive threat to the advanced countries. Simultaneously, the mid-1980s witnessed the intensified and widespread emergence of trading arrangements around the world, typically characterised by the world’s largest single market in the process towards the integration of the EU, aside from NAFTA. In terms of the changing international regime, undeniably national governments and large firms have been confronted with a challenging phenomenon, that is, the establishment of a single European market (Dicken, 1993). In terms of market size, EU imports amount to about 20 per cent of the total exports of the rest of the world. According to Hanson, the EU accounts

International Trade, Big Business and the Wealth of Nations 45

for 27 per cent of total exports from the US, and 21 per cent of Japanese exports. As will be argued in Chapter 5, in the context of ‘sectoral internationalisation’, from a firm-centred perspective, it is often claimed that European trade policy is mainly determined by the preferences of the firms within a particular sector (Hanson, 1998). As a result, EU trade policy has significantly contributed to a variety of responses from Korean electronics MNCs, given some examples of trade regulations initially undertaken by European large firms. Dunning (1999) indicates that we need to consider the consequences of globalisation of national, regional government, and of supranational institutions or regimes, in that they have had a tremendous impact on the options of East Asian NIEs’ firms or networks of firms committed to a ‘network-dependent’ industry, e.g. the consumer electronics industry (Cawson, 1994). It cannot be denied that the success of the Korean electronics industry is due in the main to the Korean conglomerates, chaebol, given the contending stances for the criticism of the chaebol’s significant role in terms of the developing Korean economy (Kang, 1997; Fitzgerald and Y. C. Kim, 2004). Confronted with such international regimes as trade barriers enacted by the EU, accompanied by the privatisation of antidumping measures, Korean large electronics firms seemed to be less prepared to cope with the institutional arrangements imposed upon world market, investment and technology flows accelerated by ‘hightech neo-mercantilism’ (Mytelka and Ernst, 1998: 135–6). In response, at that point, underpinned by weakness in the Korean systems of innovation, it may be that one of possibilities approached by chaebol until then was related to dependence on ‘quick follower’ or ‘fast second’ strategies in attempting to obtain the position of the market leaders. The semiconductor industry has pursued a different path from the consumer electronics industry. Strategic trade policy, generally followed by targeted specific industries for export promotion and monopolistic incentives promoted by the Korean government, has come to be viewed as non-existent for the semiconductor industry. Yoon (1992: 256) asserts that: Instead of targeting    [u]nlike Japan, the governmental role in the development of the Korean semiconductor industry was not important    Even conglomerate bankruptcy has always been possible. Their success would depend on their own financing ability and competitive strategy.

46 Newly Industrialising Economies and International Competitiveness

However, it is not entirely convincing to argue that the performance of the Korean semiconductor industry reflects the accumulation of financial resources as a result of the growth of firms to cope with industrial goals prompted by international environments. We would like to argue that the rise of the network enterprise, e.g. a ‘technology-driven network of production’ (Macmillan, 1996: 118), should not be overlooked in the East Asian region. Thus we argue that it is necessary to distinguish network enterprises from so-called international production networks. It could be argued that the notion of IPN is seen as market-leader-oriented, or advanced countries-biased, as shown in the flying geese model that characterises Japan as the crucial actor in the development of the East Asian NIEs’ electronics. As a response, it is also important to quote Ernst and Guerrieri (1998: 205): [T]his popular assertion may be misleading, if it leads us to neglect the important role of international production networks established by electronics firms from the USA, Europe, Korea and Taiwan. In the electronics industry, Japanese firms are not the only ones that have established international production networks in Asia    Japanese firms have clearly ceased to be the only carriers of Asian regionalisation. By contrast, the notion of network enterprise tends to view the behaviour of NIEs’ electronics MNCs as market – or production – driven coordinators, based on an innovative organisational coordination behind the corporate organisational logic regenerated by NIEs’ firms in its own right in the global operation of economic activities (Phillips, 2000: 44). The rising economic independence of domestic and cross-border activities has allowed much attention to be given to the organisation of resources and capabilities and the introduction of flexible production systems is causing firms to require interaction between innovative firms and their external environments by ‘reorganising their asset portfolios’ among a network of related firms (Dunning, 1999: 302–3). For semiconductors, Borrus (1999) realised, in relation to the Japanese decline – whether it be transitory or permanent – the US’s regaining of the world position is attributable mainly to its network relationship with East Asian NIEs, including Southeast Asia. Borrus (1999: 215) offers concrete evidence in this respect. [T]he recent success of US-owned firms has rested in significant part on extensive interfirm relationships with Asian-based producers. Those cross-border ties permitted US-owned firms to exploit

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the growing technical sophistication and competitive strength of indigenous firms initially in Taiwan, Singapore, and Korea, and later throughout Southeast Asia and along the coastal provinces of mainland China    By contrast, the pattern of Japanese investment led to a dual production structure    sophisticated products were produced at home    while lower-end products were produced    to serve local Asian markets    [B]y the early 1990s, the division of labor between the US and Asia, and within Asia between affiliates and local producers, deepened significantly, and US firms effectively exploited increased technical specialization in Asia    The US networks exploit increasing technical specialization throughout the production process in which Asian contribution is maximized; the Japanese networks exploit a value-added specialization between products in which the Asian (i.e. not Japanese) contribution is minimized. When the electronics industry was confronted with fiercer head-on competition from the advanced countries, greatly intensified by the advent of international trade regimes, e.g. WTO, combined with the rise of the European single market, the Korean government was not expected to play a part at the macro-economic level. Therefore the government-as-marketplace-player (Zysman, 1983: 76) – in the form of strategic trade policy so often considered necessary – mostly ceased to be in the world market, aside from a mere macro-organisational role (Dunning, 1999: 300–1) at the national level that may affect irregularly the economic activities of big business. As for Korean industrial policy, such a change in the government’s role has frequently tended to lead to coercive corporate restructuring for economic or political reasons, in some cases distortedly manifested in Korean economic restructuring in the way that the IMF has enforced it since the Asian financial crisis (Kim and Kim, forthcoming). According to Chang (1999), even before the Asian crisis, the Korean market-player state had already led to the internal dismantling of Korean industrial policy in the mid-1990s. As a consequence, coupled with the rise of international trade barriers, the rise of new technological paradigms has transformed the conventional market mechanism, thus pointing the way to a new vocabulary of big business organisation as market coordinator.

‘Big business’ organisation as market coordinator Much of the debate surrounding government intervention directed towards specific economic policy, industrial policy, or strategic trade

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policy has centred around the respective roles of the market and the state. Whatever the dispute over economic policy in the national, or international dimension, the essence of the answer has been largely focused upon the market–state dichotomy, that is, ‘to what extent of margin’ on a linear spectrum between the market posited at the one extreme, and the state at the other. Depending upon the notion of the new technology paradigm and the recent advent of an international trade regime, especially anti-dumping measures, the market–state dichotomy should be dealt with from a different viewpoint derived from changing aspects of the international business environment. ‘Market coordination is to some extent replaced by new institutional forms’, in other words, business organisation (Grant, 1993: 9). As with the market-as-structure (Eden, 1993), the emergence of global production networks has given rise to the strategic organisation of multinational or transnational trade, which necessarily involves transactions within the firms or among groups of firms rather than through market mechanisms (Held et al., 1999). With regard to the international competitiveness of firms, whilst technological innovation becomes more critical in terms of MNCs’ competitive advantage, it has been widely observed that MNCs have attempted to become involved with organisation of production and distribution through geographically dispersed networks of firms controlled by MNCs. Ironically, the emergence of global markets directly accompanying business globalisation conversely leads to a novel ‘paradox’ (Turner and Kim, 2004), that is, the replacement or encroachment of market coordination by intra- or inter-firm networks. As Held et al. (1999: 261) put it: Herein lies a curious paradox, for just as economic globalization has contributed to the evolution of global markets, business organization has encouraged the substitution of market transactions by intra- (and inter-) firm networks. If this is the case it might be expected that the share of intra-firm trade in world trade would rise as transactions within MNCs rise    Although individual MNCs vary in their capacity to organize production and trade, MNCs collectively supply markets throughout the world and produce from sites across the globe. Recently, in the 1990s we have witnessed the evolution of the ‘new style’ MNCs (Eden, 1993; Phillips, 2000). As Phillips (2000) recognises, in international relations practice, and within academic circles, in terms of IPE, business considerations have often been ignored largely due to the nation-state oriented concern, either in practice or in theory. It

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is assumed that the new style of business organisation relates to the significance of a deeper understanding of international business studies and the business strategy over international trade (Phillips, 2000: 36), whereas strategic trade policy has still focused attention on the logic rooted in state-centric thinking. Furthermore, turning to Sally (1994), with regard to technology-intensive industries, especially the electronics industry, a little more attention has been paid to the importance of intra- and inter-MNC organisational differences, given the oligopolistic competition and network of alliances between large firms originating in the US, EU and East Asian region (Sally, 1994: 165). Bringing the organisational concerns into the analysis of the new-style MNCs allows us to see differences in the studies of big business as a market-maker. As mentioned above, on the basis of network enterprise the interpenetration of organisation and market (Phillips, 1999) has proved that the ‘organisational logic’ applied far beyond the domestic level to the global dimension has resulted in creating market-making activities in order to cope with the international trade regime in the global markets. Under these circumstances, the reality is that the infallibility of the market mechanism is destined to be superseded by the characteristics of organisational innovativeness, simultaneously based on technology innovation with international competitiveness. Likewise, regarding the substitution of markets by business organisation across borders, as Lazonick (1991: 147, 220) has suggested: [O]rganizational coordination has increasingly replaced market coordination in the value-creation process    Within national industries, enterprises with greater organizational capability have been able to gain and sustain competitive advantage not only through the development and utilization of resources within the enterprise, but also through privileged access to external resources both within and beyond the boundaries of the national economies in which they are based    the transaction cost approach [of Williamson] does not go beyond the analysis of the adaptive organization. The theory of the innovative organization, in contrast, is equipped to analyze the institutional conditions that favor both innovation and adaptation [emphasis added]. In this context, the market coordination of the Korean electronics MNCs depends on how they can overcome the market imperfection derived from macro-organisational logic posited at the global level rather than macro-economic language. On the basis that a semiconductor is not

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a finished good, but an intermediate component, most likely to be manufactured and processed in different ways by medium-sized and large firms interconnected with the related electronics industry, the phenomenon of intra- and inter-firm transactions outside the market mechanism might have become more universal and central. According to Dicken (1998), semiconductor manufacturers fall into three broad categories: vertically integrated captive manufacturers, merchant producers, and vertically integrated captive-merchant producers. The first reflects their in-house use, the second are firms that simply produce semiconductors ‘for sale, or export to other firms’, while the third kind is partly related to sales to others (Dicken, 1998: 370–1). As with intra-regional specialisation, it is more heuristic to suggest that the building-up of regional headquarters in a particular region by foreign semiconductor MNCs offers another perspective of the international firm as a market-maker. As Dicken (1998: 374) states: The other development has been the establishment of regional headquarters in the region by US semiconductor firms: for example, National Semiconductor in Singapore, Motorola, Spargue, Zilog in Hong Kong. These developments reflect the growing importance of the region as a market for semiconductors and not merely as a lowcost assembly location [italic original]. Overall, Korean industry in the 1990s witnessed a shift from a ‘catchup’ phase to a ‘maturing’, in part innovative, stage. In the meantime the Korean semiconductor industry has emerged as a major player most likely to engage in fierce international competition, transiently experienced until the downturn of the mid-1990s, and a few years later, intensively affected by the Korean financial crisis. Against such disadvantageous odds, Korean semiconductor firms have survived; according to Mathews and Cho (2000: 148), in other words, they ‘have come through it diminished but unbowed’.

Conclusion and policy implications This chapter aimed to provide perspectives on two important arguments which can help to overcome the deficiencies of the market–state dual explanation with reference to the wealth of nations. Firstly, on the basis of the new technological paradigm, we argued that, coupled with the phenomenon of globalisation of technology, in general, MNCs accompanying knowledge-intensive technology have begun to emerge

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as market coordinators, individually or collectively. Secondly, given that the advent of an international trade regime, i.e. particularly the creation of the single market, has forced the NIEs’ development state to retreat from the strategic trade policy often considered necessary, the East Asian NIEs’ big businesses have been expected to stand alone in world markets, accompanied by trade policies initiated by the competitors in the advanced countries. Under these circumstances, it is undeniable that the governed market orchestrated by the Korean government has not been viable at the macro-economic level, nationally or internationally. In this respect, market coordination by the Korean government has been remarkably invisible within the context of the overall economic restructuring that the IMF has been enforcing since the Asian financial crisis in 1997. For the electronics industry, involving semiconductors as a knowledge-intensive technology, we needed to examine the question of how market-making activities pursued by big business have been facilitated in the global electronics markets. We argued that it is important to posit that the conception of innovative firms is characterised by encompassing ‘innovative technology’ and ‘innovative organisation’. In this regard, the organisational logic, for example, ‘organisational learning within firms’ (Matthews and Cho, 2000) becomes no less critical than technological innovation, or the product itself, initially at the corporate level, and over time, extending to the firms’ market-creating activities in the world markets. We argued that the ‘marvel of market’ may be superseded by the organisational market coordination wrought by the ‘visible hand’ (Lazonick, 1991: 11). This is not to say that the market mechanism is ultimately likely to be totally substituted by business organisation. Even though the policy implications are beyond the scope of this chapter, it can be seen why the Korean government should distinguish between ‘the state as the marketplace player’ and ‘the state as macro-organisational actor’ as it affects overall economic restructuring generally and focuses upon Korean chaebol restructuring. The role of the Korean government must change radically. In this regard, if the Korean government insists on playing a conventional role, it may be that this will lead to the demise of the Korean chaebol and result in the failure of Korean economic performance achieved so far.

3 International Competitiveness and the Shifting Contours between State and Corporate Power

This chapter provides a discussion of the relationship between international competitiveness and the shifting contours between state and corporate power through a case study of Korean state–corporate power in terms of so-called chaebol governance. The chapter explores how the nature of industry has transformed state–corporate power relations. This will also investigate the question as to why Korean big business can be regarded as a political power rather than as a mere market agent. The chapter shows how Korean corporate power has emerged as the countervailing force against Korean state power. The first section provides a preliminary review of government–industry relations in the context of international competitiveness. The second section examines the shifting rationale of the relationship between the Korean government and the private sector. The third section comprises an account of why Korean state–corporate power relations have shifted significantly compared to the Japanese case. The chapter concludes by suggesting that under the pressure of globalisation, market power mainly originated by the Korean private sector gradually gives rise to economic power as well as political power in relation to public authority or state power.

Government–industry relations: the ‘international competitiveness’ context The issue of government–industry relations has long been an interesting topic for academic discussions and a subject of concern for public policymakers. Related to this, with respect to the Asian model of the industrialisation process, the literature has been dominated by the ‘market vs. state’ debate (Lo, 1999: 7). There are a large number of interpretations of East Asian economic development in terms of the ‘market vs. state’ 52

International Competitiveness, the State and Corporate Power 53

debate with diverse views, sometimes contradictory or complementary, ranging from the market-oriented to the statist. As far as industrial development is concerned, in terms of explaining industrial competitiveness, a dichotomised market–state model of the developmental path has tended to represent the highly subtle and interactive process of national industrial development simply by focusing on a single dominant factor such as ‘state’ or ‘market’ without specifying the complex mechanism of ‘government–industry’ relations, or government’s interaction with big firms. Our intention here is to reconstruct the historically evolving interaction of state, market and firm by paying much more attention to the significance for the phenomenon of governance of big business in the process of globalisation. In other words, globalisation has freed large firms from the constraints of national government even though over the past few years firms have been almost entirely dependent on national political institutions and regulations for domestic access and influence (Coen, 1999: 97). In this respect, it is argued that firms have come to emerge as political actors, whether in world markets responding to a new international trade regime, or more specifically, in the process towards European integration. The conventional market–state dichotomy undeniably has been related to some relevant analyses of government–business relations, for example, in the case of Asian NIEs. Nonetheless, in the context of market–statist arguments or government–industry debates, regardless of their theoretical relevance, it is necessary to explain why such a vast literature has accumulated around such a conventional discussion. Firstly, it may be meaningful to point out that some interpretations of these topics have ignored the impact of external factors following the phenomena derived from globalisation. Moreover, we would argue that there is a need to explain the newly emerging governance of international firms, that is, specifically big business going beyond the domestic confines of the national market or government. It is also important to point out that a focus on internal factors is responsible for the limitations of the significance of the market–state dichotomy. As Castley (1997: 30) contends: [T]he ‘market versus state’ debate is only relevant if the contributing factors are ‘internal’, which both schools of development emphasise. Unfortunately, the external factors which also contributed to the growth of the industries in the NICs have been ignored in the literature on East Asian development. The concentration on internal factors results in only a partial analysis, which inevitably distorts the overall picture.

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Secondly, related to this, with regard to ‘market power’ accrued by big business in world markets, it should be noted that government–business relations have tended to shift strongly in favour of the latter over time, even when taking into account variations between industrial sectors, such as electronics and the steel industry. In addition, government’s role is a controversial and still unresolved issue in arguments about international competitiveness, as reflected in the form of strategic trade policy or industrial policy. In the more immediate past, the importance of international competitiveness and the market-making function have been emphasised less by interventionist governments than the newly emerging governance of big business in conformity with the international market. Furthermore, it is necessary to present an accurate explanation of what has made possible a new perspective concerning the shifting contours between government and big business in the context of global politico-economic environments. From a government–industry relations perspective, the prevailing arguments have focused mostly upon internal variables such as government’s role – ‘administrative guidance’ – in domestic markets, and the characteristics of political leadership. For example, Siaroff and Lee (1997) argue that national differences in ‘state strength’, or ‘state–business’ power relations, account for the dynamics of industrialisation, including the reasons for uneven economic development. Understandably, the conventional arguments about the market–state dichotomy considerably influenced the preliminary theorising underlining the newly emerging governance of NIEs’ multinationals in relation to each government. In some respects, discussion on government–industry relations may be indirectly related to the market– state dualism, in that such arguments tend to characterise debates on economic development. As Woods (2000: 6) emphasises, ‘globalization affects more than markets and states’. Accordingly, the impact of globalisation is the source of incessant debate in academic circles in terms of effects on the global economy such as investment, capital flows, profits and welfare. Moreover, according to Best (1990), over the last decades, the emergence of ‘New Competition’ depending mainly on business organisation has been argued to contribute significantly to the new logic of big business in world markets, thus paying much more attention to ‘competitive advantage’ than comparative advantage. When it comes to world markets, the doctrine of globalisation invariably demands the ‘new’ international competitiveness, which intimately relates to technology

International Competitiveness, the State and Corporate Power 55

and innovation subsequently undertaken by big business, given the importance of the governmental role at the initial stage with regard to innovation (Kim and Kim, 2006). With respect to international competition, according to Ernst (1999), globalisation has been recognised to affect and shape considerably national innovation systems that were originally defined as a concept dealing with the national rather than the international level in terms of space. As Ernst (1999: 2, 7, 31) maintains: It is widely accepted that national innovation systems (NIS) are under strain due to the impact of globalization. Much less agreement exists however on how precisely globalization and innovation interact.    The missing link is an insufficient understanding of how globalization reshapes the geography of innovation systems. An important weakness of innovation system theory is a neglect of the international dimension: a theory of innovation systems needs to address explicitly the spatial impact of globalization. We agree that globalization increases the need for strong national innovation systems. Yet, this does not imply that one could neglect the role played by international linkage. Under these conditions, it can be argued that national innovation systems need to be analysed beyond the level of government. This is to say that the role of firms has become more important compared to the geographically limited role conventionally played by national governments. Faced with the ‘accelerated pace of change and increasing uncertainty’ resulting from globalisation (Ernst, 1999: 21), business organisations began to occupy a central place in the national innovation systems (Lim, 1995) by way of relocation of production and firms’ entry into global production networks. In terms of space or region, ‘spatial agglomeration’ (Ernst, 1999) is critical for a firm’s international competitiveness as it gives rise to knowledge externalities and its spill-over effects. As Ernst (1999: 9) adds: Marshall’s important observations have been forgotten for a long time: neo-classical economists have neglected until recently the agglomeration or clustering of related activities. Since Krugman, economic geography has been re-established as a respectable topic for mainstream economists    clustering effects are particularly important for knowledge externalities and spill-overs.    A regional cluster provides access to specific resources and capabilities that are

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difficult to reproduce otherwise; it enables a firm to engage in a peculiar type of coordination and organization; and it allows the firm to share activities with other cluster participants. In this context, international competitiveness arising from competitive advantage cannot be explained merely in terms of price-relevant competitiveness. Haque (1995: 3) argued that ‘competitive strength is less certain if a firm expands its market share by reducing prices and taking losses, notwithstanding the strategic reasons that might lie behind such moves’. In particular, in conjunction with the increasing significance of international trade barriers in the advanced markets since the early 1980s, the government has not appropriately resolved the problem of international competitiveness. Against such a background, while the emerging governance of corporate power needs to be examined from a new international competitive perspective, we would like to focus attention on the reformulation of initial premises on government–industry relations. Alongside what we have termed knowledge-intensive industry, the importance of technological factors has tended to increase the influence of big business in the government–business relationship. The existing discussion has perceived the growth of the economic and political role of big business as capable of challenging the state that had unexpectedly enjoyed autonomy from the private sector in Korean society. Until recently, however, there seems to have been little exploration of what really has given rise to the changing pattern between the developmental state and big business. It is vital to rethink the questions of how, and to what extent the Korean private sector, intentionally or coincidentally, has come to confront the influence exercised by the developmental state for a significant period of time, given the changing international trading environment arising from globalisation.

The Korean state as marketplace player and corporate governance in big business State and private sector: the importance of finance Finance, as Woo-Cumings (1999: 10) contends, is above all one of the most important engines that ‘binds state to industrialisation in the developmental state’. The financial factor in the historic relationship between the Korean developmental state and Korean large firms is a case in point. In the market-oriented view, the rapid growth of the

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Korean economy has been argued to be the result of an export-oriented economic system in a benevolent international free trade regime. It has been argued that the growth of the Korean economy has derived from the regulation of the world markets (Balassa, 1981; World Bank, 1987), showing that the significance of the governmental role is substantially recognised.1 In other words, what is more important is that the performance was achieved despite the Korean state’s intervention which has to be regarded as secondary to the market mechanism. Similarly, Woo (1991: 48) also suggested2 that ‘the success of Korea’s economy was thought to have occurred in spite of, rather than because of, government’s role’. By contrast, critical of the notion of a market-conforming path, scholars such as Johnson (1982), Amsden (1989) and Wade (1990a) consider government intervention as having been indispensable in achieving the East Asian miracle. In particular, Amsden (1994) goes so far as to suggest that the ‘unfettered regulation by the world markets’ could lead to underdevelopment instead of development. Despite the background of such achievements of the Korean economy, it is apparent that the growth of Korean chaebol has eventually tended to significantly restrain such state capacity emanating from the developmental state. As Field (1995: 48) put it: [I]n the three regimes succeeding the Park government there was a gradual shift from the state dominance over the chaebol to a relationship of symbiosis to, most recently, increasing friction and animosity. In addition to this erosion of Park’s hard-won autonomy, the size and complexity of the economy and its chaebol engines have limited the Korean state’s capacity to dictate the chaebol’s developmental path. These changes have called into serious question the ‘sword-won’ alliance first forged by Park and the underpinning of the developmental state [emphasis added]. Here the crucial question is how the autonomy of national, large firms can be explained even without their recourse to government subsidies from the Korean developmental state, given that finance is so often regarded as one of the most influential tools to promote its control and influence. For developing countries, we need to present a convincing explanation of how big business has emerged as a countervailing social force against government, even though it has been almost subordinate to the developmental logic primarily pursued by the strong state for a considerable time.

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Intrinsically, whilst the growth paths of the Korean chaebol are seen as dependent on pre-existing configurations of financial factors originally structured by Korean economic and political institutions, it appears to be that with regard to government–industry relations finance has come to be perceived as a lever no longer to be wielded permanently by a strong state. Moreover, when it comes to globalisation, Korean big business systems seem to have developed considerable organisational capacity and adaptability to the major changes prompted by globalisation, given that the nature of business systems has in some cases remained almost untouched, and in others has been able to adapt, whilst being decisively affected (Yeung, 2000: 400) in contrast to the vulnerability of the developmental state as a ‘weak state’ (Woods, 2000) in the wake of globalisation. Yeung (2000: 402) argues that Asian business systems prominently exhibit adaptive capability and organisational flexibility: Although business systems are much more structurally embedded in specific national social organization and political-economic institutions, actors in business firms are significantly more mobile and receptive to change    globalization has only limited effects on Asian business systems at the structural level, yet, significant transformational impact on Asian business firms at the level of key actors    business systems are conceived as ‘open systems’ and are subject to dynamic changes from within, i.e. at the level of actors themselves [emphasis added]. As mentioned in Chapter 2, given that the ‘withering away’ of the state is really inconceivable, governments, in particular, in industrialising countries have become relatively weaker in terms of government– business relations in the context of international competitiveness following liberalisation and deregulation originating significantly from the newly emerging world economic order. As Woods (2000: 11, 12) put it: Weak states suffer from a lack of choice in their international economic relations. They have little influence in the creation and enforcement of rules in the system and they have exercised little control over their integration into the world economy    Weak states have been further weakened by an inability to deal with the political and economic turmoil and rebellion resulting from globalisation.

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Often economic liberalisation and deregulation have been accompanied by a reduction in the role of the state – in both the economy and society, in the developing world (whilst in industrialised countries over the past two decades of globalisation, a solid core of government activity has remained untouched  ). In developing countries where governments were often weak to begin ‘rolling back the state’, in order to enhance global competitiveness, has left a vacuum of political authority. In these circumstances, as domestic financial markets have become more integrated into a global financial system, both politically and economically, the influence of the domestic financial market has weakened. In addition, the pressures to internationalise financial markets have arisen from international trade negotiations in great measure initiated by the advanced countries. It should not be forgotten, however, that governments in industrialised countries are also likely to weaken vis-à-vis large firms, as characterised by some examples manifested in the process of European integration. According to Greenwood (2000: 77), ‘business is more intensively organised’ and exercises a more significant influence on the EU in the course of European integration than business has at any other transnational level in the globe. In this regard, as Underhill (2000: 22) maintains, the role of non-state actors such as ‘international business, or organised business’ that traditional international relations scholars have until most recently been unconcerned with has gradually attracted much attention in the context of regional integration as well as the changing global market economy. By contrast, as far as regional integration is concerned, it is interesting to note that the activities of the business community seem to vary across region, as illustrated by one peculiarity of the East Asia region vs. Europe and North America. Unlike business interests in Europe and North America, it is ironic that the East Asia business community may not intend to play a major role in forging regional frameworks and economic development and furthermore coerced the governments to consider ways of accelerating and facilitating regional relations (Gallant and Stubbs, 2000). As Woo-Cumings (1999) emphasises, it is evident that finance has become central in analysing the developmental state in East Asia. Inspired by Johnson (1982: 10–11), as far as state–industry relations are concerned, government control of finance has constituted a major reason for considering economic policy in Japan, Korean and Taiwan as typically finance-related, while the remaining major issues such as labour relations and autonomy of bureaucracy have been given

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less significance in the academic analysis of national industrial policy. Directly related to this, the banking system also needs to be emphasised in order to clarify the intrinsic government–industry relations underpinning the statist arguments relating to Korean state autonomy since Park, Jung-Hee seized power in 1961. According to Lee (1997), with regard to the role of the state in relation to big business, even though the Korean government intended to exercise a crucial influence in orchestrating economic development, the Korean state, in reality, seemed to have enjoyed autonomy from Korean conglomerates, in other words, the capitalist class in neo-Marxist terms, as argued amongst others by Poulantzas (1972). That is to say that the Korean government was not willing to serve to secure the domination of the capitalist class regardless of the government’s support of Korean chaebol, even though such a relationship is said to be invariably extended to the Chun, Doo-Whan and the Roh, Tae-Woo’s democratising and liberalising regimes, let alone the period under the Park regime. Within the context of Poulantzas’s logic, Lee (1997: 103) adds: [T]he principal role of the state is to organize the dominant class or to represent the long-term political interest of a power bloc.    In South Korea, then, did such a capitalist structure exist, in which ‘the state is the factor of reproduction of the conditions of production of a system that itself determines the domination of one class over the others’? If it did, how can the abrupt advent of the political restriction of the chaebol be explained? Obviously, the South Korea state cannot be reduced to a structure that guarantees the dominant class interests    the restrictive policies did not coincidence with the chaebol’s interests. On the contrary, they were opposed to the interests of the capitalist class. As for state autonomy, whilst Lee’s argument is to some extent persuasive, it is important also to examine other analyses of what really caused the Korean state to establish its autonomy in relation to big business or the capitalist class in terms of socio-economic background or class structure (Kim and Kim, forthcoming). Some scholars have attempted to characterise state autonomy as being derived from a particular Korean government’s state capacity in light of state apparatus, that is, the presence of the Economic Planning Board (EPB), which is very similar to the role of the Japanese MITI, in terms of overseeing foreign capital and initiating the ‘administrative guidance’ in relation

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to industry as well as Korean large firms. The concentration of decisionmaking in the government branch, especially in relation to economyrelated issues as a whole, was one major factor that allowed the state to remain independent of societal powers by virtue of its institutional cohesion and responsiveness related to expertise, subsequently leading to enhanced state autonomy and strong state capacity. Even though evaluating the success of the EPB continues to be a matter of controversy, it is worth quoting the following from Ravenhill (1995: xxiv): The centralisation of decision-making in the hands of the executive branch was a major factor that helped to insulate the state from societal pressures. The new constitution established a Presidential form of government in which the legislature was very weak: the dominance of the executive helped to reduce the problem of patronage politics that had devilled the Rhee regime. Furthermore, economic policy-making was centralized in a new body, the Economic Planning Board (EPB), which was dominated by technocrats. This move thus helped both to increase the autonomy of policy-making and the expertise of the state. In a short period of time, the EPB developed extensive expertise not only about the local economy but also world markets. In this context, the financial framework in Korea has appeared attractive to other developing countries, given that Korea’s economic performance has been so remarkable. Korea’s financial reform, however, in the 1980s was related to high rates of savings and financial deepening, substantially different in character from any other liberal reforms (Amsden and Euh, 1993). Until recently the Korean banking system was largely state-owned. As a consequence, loans from state agencies and state-regulated banks have allowed for the expansion of Korean chaebol. This illustrates the point that loans have been offered at interest rates far lower than those commonly available in domestic or international financial markets. This has necessarily given way to subordination of Korean chaebol corresponding with state policy directives and national economic goals, coupled with industrial policy and strategic trade policy originating from the Korean government (Henderson, 1993; Wade and Veneroso, 1998; Kim and Kim, 2006).

The shifting relations of state power vs. Korean corporate power In terms of government–industry relations, the steady growth of the chaebol permitted the state to reduce subsidies and thus allowed the

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chaebol to become more independent from the state. The reality has also interrelated with success stories in other East Asian NIEs. Some scholars have suggested that industrialisation has been attributable almost entirely to the state, while others argue that such single factorcentred analysis is not relevant and that it averts the significance of the social foundation on which the state generally relies (Field 1995: 30). E. M. Kim (1988: 105) strongly maintained that other actors, such as chaebol, also played a critical role. Historically, it cannot be denied that the firms have eventually emerged as social forces, economically and politically. According to Penrose (1995: 13), ‘the firm is not a firm’ because ‘changes in the characteristics of the individual firms’ should be treated as ‘causing changes in the size of a single firm or as causing the creation of a series of new firms’. The firm should really be regarded as ‘a [growing] administrative, and rational organisation’ (1995: 31), not as a ‘price-and-output decision maker for given products’ (1995: 14). Similarly, based on what Cawson terms ‘corporate power’ in his analysis of big firms as political actors in the European consumer electronics industry, it is useful to investigate how the different character of power exerted by big business in each country tends to affect government’s relations with large corporations, or inter-firm relationships in three different dimensions: firstly, power exercised in relation to other firms through the process of competition; secondly, power exercised in relation to government and public authorities; and thirdly, power relations within firms (Cawson, 1997: 186–92). In a similar context, to understand big business as exercising political power, Zysman (1983) has attempted to see political power as related to the market itself. Political power is interrelated with the operation of the market mechanism and, consequently, market position itself automatically gives rise to political power. Governmental decisions seem to shape market institutions, resulting in a sort of political conflict. Historically, we might say that government and business firms have tended to be politically at odds with each other centring around the market. Zysman (1983: 17–18) put it that: Market positions are a source of political power and government choices shape the operations of the market. Thus, any analysis must begin from the understanding that there are no markets apart from politics, that markets were in fact political creations, and that political life is entangled with the workings of markets and market institutions. In addition, Penrose (1995: 197) also emphasised that ‘market and firms are interacting institutions, each being functionally necessary to the

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existence of the other’ for resource allocation. Overall, we can see that government and firms simultaneously interact in the market, economically and politically. Under these conditions, the particular arrangements of the financial system stipulated by government help to constrain both the marketplace choices of firms, both being in accordance with each other, or cooperative, while business is plausibly subordinate to government in the context of competitiveness in the marketplace (Penrose, 1995: 16). As Johnson (1995) observes, in most of the East Asian NIEs, until recently – prior to the Asian financial crisis – government’s exclusive control of finance might have been understood as one of the most distinctive features in leading and controlling the private sector, as far as the government–business relation is concerned. Johnson added that ‘these financial measures are often unorthodox by Anglo-American standards, particularly in their emphasis on the supply of capital to industry primarily through the banking system’ (1995: 53). Specifically, with regard to Korea, direct government ownership and control of the banking system has been one of the most conspicuous features of the industrial policies that characterised the 1960s and 1970s. However, 1979 saw a departure from the traditional pattern of banking ownership when there was an attempt to privatise the state banks and liberalise government control over the financial sector. With reference to state autonomy, it is important to acknowledge that one should distinguish between the East Asian capitalist states and Latin American countries. In terms of public–private relations, Asian states have tended to develop independent economic development options in contrast with their Latin American counterparts wherein the state’s goals are noticeably subordinate to private interests. Whilst the Asian states cannot unilaterally disregard the interests of big business, it is also clear that the strength of bureaucracy helped to maintain government autonomy in pursuing national policy objectives to a greater extent than in other industrialising countries (Kim and Kim, forthcoming). The former notion applies to the Korean economic bureaucracy. As Johnson (1995: 61) maintains:

But there is clearly a distinction between systems of public–private cooperation in which the state independently develops national goals (the East Asian capitalist cases) and systems of public–private cooperation in which the state’s goals are reducible to private interests (Mexico, and the so-called bureaucratic authoritarian regimes of the

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cone of South America). It may be true that even in the Asian cases the state cannot directly contradict the interests of big business, but it is also true that the politicians have maintained their independence to a greater degree than in other quasi-authoritarian capitalist nations. Under these circumstances, we should recognise that with respect to Korea, the developmental state can have no alternative but finance to control the contending forces of the private sector. The paradox is that offering the opportunity for business firms to run the commercial banking business is to imply that the Korean chaebol would inevitably monopolise the ownership of the entire banking system, which may be the last and the worst thing that the Korean state has ever imagined. As Lippold (cited in Chai, 1993: 69) put it: The government thinks that if the chaebol owned the commercial banks, the combination of industrial capital and financial capital would have a nasty result. The government’s dilemma is that no one but the chaebol has the money to deal with these banks. As argued in the previous chapters, with reference to Korean industrialisation, the explanation of the Korean economy has primarily centred on the state–market dichotomy. In order to further the argument in more detail, we need to explore briefly the implications of the relationship between the state and the market. First and foremost, states and markets cannot live without their counterparts. Intrinsically, states are interrelated with markets, and states, furthermore, even act as ‘quasimarket actors’ or ‘commodifying agents’. The relationship between them in practical terms is interconnected and ‘mutually supporting’ (Cerny, 2000: 34). According to Padoan (1995: 28), the state requires the market to itself survive: The state needs the market because to sustain itself the state requires a system for the production of wealth, and the market, in this respect, is the most efficient system available    the important issue to consider is to what degree, in which forms, and through which ways, their relationship exists and how this relationship evolves. In this context, whilst Padoan (1995) has recognised the importance of the presence of numerous economic and political actors, such as

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the government, the central bank, the bureaucracy, business, financial communities and trade unions, he still accepts the assumption that the performances of particular economic policy options rest upon changes in the dual mechanism of state and market. Secondly, related to this, it is interesting to briefly explore one assumption, which is to indicate ‘periodically changing’ power relationships between the state and the market – by hypothetically seeking to deal with the asymmetrical relationship between ‘market power and state power’ likely to arise in a particular country, notwithstanding the ambiguity of the measurement. For example, with regard to the market–state dichotomy, Yoo and Lee (1997) have divided the phases of the Korean economy into state–market terms: the initial stage of a market economy (1945–60), predominance of the state over the market in the 1960s, the emerging forces of market mechanism, monopolistic market and chaebols, and symmetrical interaction of market and state in the 1980s and 1990s. Taken together, it is too early to say if it is academically meaningful to attempt to identify the accordingly shifting power of the developmental state vis-à-vis market power over time. Rather, as mentioned in previous sections, within the context of, or in addition to, the symbiotic relationship between the market and the state, it is implicit that a complex mechanism of relations between state power and corporate power also needs to be analysed to explain the achievements of national economic development. E. M. Kim (1988) notes the shortcomings of the ‘strong state’ perspective in explaining Korea’s economic development, arguing that other actors such as the chaebol are also believed to play a critical role in industrial development. According to E. M. Kim and Soh, state power is not constant over time, and the state–business relationship at the same time varies ‘over time and across industry’ (E. M. Kim 1988: 106; Soh, 1997a: 254). Soh (1997a) in particular contends that the aims of government initiatives vis-à-vis the industrial realm have changed over the last thirty years. The conventional hypothesis that the developmental state in Korea has considerably affected the nation’s entire industries must be reformulated (E. M. Kim, 1988). The state–corporate power relationship has shifted from a subordinate to a symmetrical one (Soh, 1997a: 257), in a sense, ‘from state dominance to interdependence and symbiosis to competition’ (Soh, 1997a: 205). Even when the initial phase of economic development in the NIEs was orchestrated and initiated by the state, big business also emerged as a powerful, independent actor in relation to government as national goals of economic development have been identifiably achieved (E. M. Kim, 1988: 120–1). In his comparative

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study of the steel industry and semiconductor sector, Soh (1997a: 255) maintains: By the 1980s, three chaebol began to dominate the economy    semiconductor production was initiated by the chaebol rather than by the state. The role of the state in the semiconductor industry has been less significant than that of its involvement with the steel industry. Not only did the 1980s witness a change in the state–business relationship, but the role of the state itself was also quite different from that of the previous two decades. More importantly, as with many discussions of the governmental role, Lall and Teubal (1998: 1382) have suggested that the fact that ‘some interventions in the past have been inefficient does not mean that all interventions have been inefficient’. It is well known that well-designed intervention will contribute to development to some degree as long as there is assumed to be market failure. As Lall and Teubal (1998: 1382) note, what is still important is related to analysis of ‘what kind of interventions work, how they can be designed and implemented in the particular circumstances of each country’. With regard to Korean MNCs, the Korean state has focused on building up ‘national champions’ among the chaebol by imposing the most restrictive conditions on foreign MNCs, thus persuading the foreign multinationals to invest in Korea in the form of joint ventures with Korean chaebol. Moreover, the Korean strong state has even ‘forced the foreign corporations to divest’ once the Korean enterprises have become more internationally competitive in the light of new technology and business originally acquired or licensed by foreign MNCs (Clark and Chan, 1996: 94). As Ernst (1998: 252) argues, the Korean government has enabled the Korean national champions to overcome high entry barriers in world markets by providing ‘critical externalities such as information, training, maintenance and other support services, and finance’. Specifically with regard to Korea, government–industry relations also have to be analysed in the context of market size and external factors. The implication is that Korea has a small local market resting ‘excessively on export (even more than Japan)’ in terms of the wealth of nations, which is to say that Korean firms need to be well-equipped to cope with international competition (Woo-Cumings, 1999: 12). In addition, the Korean firms have been required to respond to external shocks in terms of fluctuations in trade and in world markets, for

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example, those arising from the advent of new international regimes. These circumstances have acted to recondition Korean industrial policy or strategic trade policy, thereby contributing to a reconsideration of relations between state power and corporate power. Thus, in response to changing circumstances in the world, whilst big business has been the beneficiary of industrial finance, new conditions necessarily may give Janus-faced big corporations a new opportunity to redefine the pattern of relations between the state and corporate power. Historically, given that the role of the Korean developmental state was due mainly to finance, it might be expected that state–corporate power relations would tend to become more vulnerable and more unstable, relatively allowing big business to increase to a greater extent its bargaining power directed to a larger market vis-à-vis government, along with the gradual retreat of state power in dealing with market creation. Thus, we would like to contend that control and influence deriving from strategic finance provided by government seems to be time-limited in terms of government–business relations, when faced with recent changing international conditions surpassing domestic market mechanisms and national government jurisdiction. As Woo-Cumings (1999: 21) put it: The developmental state is unthinkable apart from its relationship to the external world, in particular to the hegemonic power, which opened its market    it is only in this relational context that one comes to appreciate the structural weakness of the developmental state in the world system. In exploring Korea’s economic achievement, it is an exaggeration to say that its success story is mostly attributable to the Korean state, which would imply that strategic finance is the determinant of the growth of Korean big business (Fitzgerald and Kim, 2004). Interestingly, whereas the Heavy and Chemical Industry (HCI) policy pursued by the Korean government in the 1970s turned out to be a failure, it gave Korean chaebol a momentum to increase to a certain degree their leverage vis-à-vis the Korean government. As Ravenhill (1995: xxvi) said: One thing is certain    [t]he HCI drive significantly increased the power of the chaebol, which, with the exception of a few state-owned enterprises such as POSCO, were the government’s chosen instruments to implement the drive.

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This trend seems to have intensified following the social, economic and political upheaval accompanying Chun’s regime (1980–8). For example, what is termed a ‘Chaebol Republic’ has represented the reality of Korean corporate power (Kim, 1997a, 1997b). This is also to argue that the chaebol have undeniably shifted from the ‘private agency of public purpose’ towards ‘quasi-state organisations’ (Woo-Cumings, 1999: 17) exercising power, politically or economically, thus going beyond the indigenous domain of economic organisations, implying that business organisations remain no longer mere business firms in many ways subordinate to the state. Moreover, the pursuit of hegemony between state and corporate power has become pervasive and, in a sense, has culminated in some frictions displayed by the chaebol founders and the presidents of big business groups. For example, the founder of Hyundai, Chung Ju-Young, formed his own political party (Unification National Party) and unexpectedly captured 25 per cent of the National Assembly seats in the March 1992 election. Surprisingly, Chung’s further challenge to contest the presidential election even with no prospect of success against powerful political leaders such as Kim Young-Sam is an indication of the deteriorating relationship between big business and the state. In addition, the announcement of Daewoo’s Kim Woo-Chung and the seemingly forced consequent retraction of his decision to run for president in the 1992 election was also seen as a sign of the growing rift and competition in conventional state–business relations in Korea. Moreover, on 13 January 1995, in front of press reporters, Lee Kun-Hee, the president of the Samsung Group, during his visit to China criticised the political class for being incompetent by grading Korean politics as fourth-class, lagging far behind the administration as third-class, and the business group as second-class (Chang, 1999: 38). Even though Lee had to apologise publicly and withdraw this remark, the event signifies, more than any other episodes or scandals, the changing relations between corporate power and the state. Indeed, Kim (1997b: 176) describes it as follows: The chaebol were becoming more visible and influential in economic policy-making and were increasingly voicing their collective demands to the state. Reports of collusive deals between politicians and the large chaebol further fueled the public belief that the chaebol had become a powerful group that was capable of manipulating the state.

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Going beyond strategic financing: against the Japanese ‘MITI paradox’ With respect to Korea, big business was forced to grow through diversification, characterised by being ‘opportunistic’ and technologically unrelated (Amsden and Hikiko, 1994: 114), mostly combined with strategic financing benefits exceptionally granted by the Korean state. The government owned commercial banks, while the Korean state maintained tight controls on foreign currency, broadly acquiring foreign capital together with its strict control on inward FDI at the international level. With regard to strategic finance, major government financial institutions such as the Korea Industrial Bank and the Citizens’ National Bank have existed as intermediaries for the supply of these financial resources. A revision of the Korean Industrial Bank Act in 1961 as well as a Presidential Emergency Decree effective from 3 August 1972, aimed to transform unregulated finance as a whole into a regulated financing system. As a result, non-banking investments, such as investment finance companies, mutual savings and loan associations, and merchant banking corporations were entirely under the government’s control, whilst they were allowed flexibility to a lesser extent in terms of interest rates compared to commercial banks (Kishi, 1998: 104–5). Since the 1980s, liberalisation of the financial market has focused on the privatisation of commercial banks and liberalisation of interest rates, strategically followed by the reorientation of financing objectives from large firms centred towards more emphasis on small- and medium-sized firms. This was due, on the one hand, to internationalisation of entire economic spheres, and on the other hand – mainly by virtue of liability – to a change in the status of Korea in parallel with its participation in the OECD in 1996. In the end, domestic financial markets have been forcibly or unwillingly opened and become more adaptable to foreign investors as well as FDI, inward or outward, following the settlement of the Uruguay Round of Trade Negotiations. Coupled with selective financial instruments such as credit and tax policies, trade policies and inward FDI screening policies, the Korean government’s intervention seems to have been viewed as sector- and firm-specific rather than macro-economic in character (Hoogvelt, 1997: 204). The government provided preferential support to big corporations in preference to small- and medium-sized enterprises, as part of the promotion of industrialisation in terms of economies of scale and efficiency, from the time the government began to discourage and contain Korean chaebol expansion in the early 1980s,

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until the Anti-Trust and Fair Trade Law became effective in 1981 for the purpose of regulation of monopoly and oligopoly firms. Unlike the bank-centred Japanese keiretsu, the Korean chaebol have been until recently excluded from the banking business. In this regard, the Korean government exercised a more influential leverage over its industry than did its Japanese counterparts by unilaterally controlling the financial system, such as loan funds, and foreign exchange. With regard to finance, this has made Korean chaebol heavily reliant upon the Korean government since the Korean banks were nationalised in 1961, following the military coup. It was only in the early 1980s that the Korean government came to consider the privatisation of banks and the creation of related measures directed towards specialised areas, such as small- and medium-sized business financing. Conventionally, as in the Japanese financing system, investment policy directives and credit expansion have been understood as a result of cordial discussion between the government and industry, especially in the case of the keiretsu groups (Y. C. Kim, 2002: 27–31), while the Korean financial system, characteristic of ‘bank-loan capitalism’ (Plummer, 1999: 233), has been greatly vulnerable to a ‘highly-centralised top-down conduit’ originating with government, accompanied by ‘policy loans’ targeting specific sectors of a particular industry as well as ‘general loans’ directed towards preferential financing, both of which were primarily carried out by the Bank of Korea (Plummer, 1999: 234–5). There is no doubt that the Korean banking system has been acting as a stimulus for industrial policy (Kim and Kim, forthcoming). In that context, the appointment of banking management was controlled by the government, consequently giving rise to subordination as well as distortion of banking industries caused by government-led policy loans (Cheong et al., 1998). The era of central bank-controlled ‘repressed finance’ (Gokarn, 1995), originally initiated by Korea’s drive to HCI as a way of encouraging Korean chaebol, was over by the beginning of the 1980s, thus broadly responding to the opening of capital markets in the early 1990s (Plummer, 1999: 237). The impact of the Asian financial crisis in Korea was a marked challenge to the conventional decision-making mechanism operating between the government and industry. Asian governments undertook radical financial deregulation, prompted by the IMF, the World Bank, the OECD and by Western countries’ banks and firms. As for the Asian financial system, characterised by ‘the high debt model’, as defined by Wade and Veneroso (1998: 5), it is certain that ‘such a financial structure requires cooperation between banks and firms, and considerable government support’. They also maintain that Asian corporate debt/equity

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ratios have become considerably higher than their Western or Latin counterparts owing to higher household savings currently conspicuous in Asia. This argument is debatable in the case of Taiwan. Taiwan, despite its high household savings, has a corporate debt/equity ratio as low as its Western counterparts (Chang, 1999: 744). With regard to Korea, the implication made by Wade and Veneroso (1998) is that the corporate debt/equity ratios arise not so much from the firms’ moralhazardous behaviour or unreasonable motives, but are an innate part of the financial system. According to Chang et al.’s argument (1998), it proves, however, that the high level of debt/equity is still very risky, as reflected by the recent currency crisis in Korea. The higher proportion of Korean chaebol debt/equity can be seen as, one, depending on the state–firm–bank correlation fundamentally committed to the developmental state, and the other, deriving from firm-biased loan markets. As Wade and Veneroso (1998: 6–7) put it: Why are corporate debt/equity ratios so much higher than in Western systems? First, because savings are much higher. Gross domestic savings to GDP ratios in Asia are one third of GDP or more, compared to 15–20 per cent in Western systems. The savings are done in large part by households. Households hold their savings mostly in bank deposits, bank deposits being much less risky than equities    When neither households nor government are significant net borrowers, the system is biased towards borrowing by firms    Second, firms that aim to make an assault on major world industries – as especially in Japan, Korea, Taiwan – must get their hands on very large amounts of resources, which they can do only by borrowing. Neither equity markets nor corporate retained earnings are feasible alternatives for mobilising resources on the scale required to compete in these export markets and continually upgrade    High household savings, plus high corporate debt/equity ratios, plus bank–firm–state collaboration, plus national industrial strategy, plus investment incentives conditional on international competitiveness, equals the ‘developmental state’ [emphasis added]. From the early 1990s, the Korean government sought to loosen its regulation over the financial sector and, under the Y. S. Kim government, which came to power in 1993, the presumed five-year financial liberalisation plan was announced (Kim and Kim, 2006), and accordingly put in place by substantial policy measures. Significantly, as with the earlier liberalisation attempts, these aimed to include some

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things that Korea’s previous plan for financial liberalisation had hitherto failed to include, such as ‘interest rates deregulation, abolition of “policy loans”, and granting of more managerial autonomy to the banks’ (Chang et al., 1998: 736). In fact, state power in the former Korean model was related to its power to orchestrate financial options partly through the coordination of a ‘pilot agency’ such as the EPB, and partly through government control over strategic finance. From the mid-1990s, and by the time of the Asian financial crisis, such policy instruments had been all but abolished. The EPB was absorbed into the Ministry of Finance and Economics, but strategically the latter was deprived of the formerly strict control of the EPB over economic policy objectives (Mathews, 1998: 757). However, while state control over financial flows is unlikely to re-emerge, it should be realised that excess deregulation may give rise to re-regulation effects, and the introduction of new financial supervisory institutions. As Mathews (1998: 757) emphasises, ‘the vacuum created at the centre by the excess deregulation of the mid-1990s has been filled by the new financial supervisory structures’. Depending upon common recognition of state power, Korean industrial policy seemed to have become substantially ineffective by the mid-1990s. According to Chang et al. (1998: 736): Contrary to the popular perception, industry policy was largely absent in Korea in the build-up to the current crisis. Slowly from the late 1980s, but very rapidly from 1993 with the inauguration of the YS Kim administration, the Korean government dismantled policy, except for R&D supports in some high-technology industries. It is difficult to blame the Korean crisis on industrial policy if it was not around any more in any meaningful way [emphasis added]. Furthermore, following the Asian financial crisis, we can see that a focus of the arguments of some scholars, as exemplified by Krugman (1998, cited in Chang et al., 1998: 742) placed responsibility upon Korean corporate inefficiency or low corporate profitability. Despite the moral hazard for Korean chaebol, when it comes to Korean corporate efficiency, it is proven that in real terms, international standards are not superior to Korean corporate profitability. Chang et al. (1998) argue that ‘Korea’s corporate profitability before interest payments has not been low’ compared with the US or Taiwan. They argue further that: The first obvious problem with Krugman’s account is that the ostensibly low corporate profitability in Korea is mainly due to

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high interest payments, rather than to inefficiency    Korea’s postinterest-payments profitability (the ratio of ‘ordinary income’ to sales) was low owing to high corporate gearing – 2.8% as opposed to 7.9% in the USA (1995), 5.1% in Taiwan (1995), 4.3% in Japan (1955–73) and 2.9% in Japan (1995)    Over the 1973–96 period [with regard to corporate profitability], this figure for Korea averaged at 7.4%, which was similar to that for the USA (7.7%) and Taiwan (7.3%) recorded in 1995. Moreover, low post-interest profitability did not harm investment momentum in Korea, since the government used a range of methods to ensure that the income appropriated by the financial sector was recycled to the manufacturing corporate sector. (Chang et al., 1998: 742) Taken together, this is not to deny, in the long run, that the Korean corporate governance system should be reformed in the light of international standards and the impact of the IMF programme since the Asian financial crisis. Also, it should be recognised that the Korean financial crisis has affected enormously the Korean economic framework. More importantly, we need to point out that until recently the Korean government had no alternative but finance to exercise leverage over corporate power, even though the D. J. Kim government, which seized power in 1998 shortly after the Asian financial crisis, has attempted to play a crucial role during the period of economic restructuring in parallel with the bail-out programme subsequently put forward by the IMF immediately after the Asian financial crisis (Kim and Kim, forthcoming). Compared with the Japanese MITI’s leverage over the industry, despite the fact that outwardly Korean corporate circles have been placed in the process of corporate restructuring aggressively designed by state as well as international finance institutions, we would hypothesise that Korean corporate power has been more autonomous vis-à-vis Korean state power in light of the Japanese ‘MITI paradox’. Historically, the prevailing view of MITI was that it exerted influence via a ‘not-so-invisible guiding hand’ likely to be seen as part of the shaping of the long-term structural change in the Japanese economy (Y. C. Kim, 2002). Specifically, MITI was mainly concerned with the prospective trend of technical change and the development of various technologies, combined with the Japanese choice of rejecting the traditional development strategy that depended upon the notion of comparative advantage. MITI focused upon the promotion of the most advanced technologies identifying the world market potential in the long term

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(Freeman, 1988: 331). Here, one critical point is that strategic finance, as we have seen it in Korea’s government role, is one of the key functions of its role, whereas the Japanese MITI has had a significant degree of control on distinctive features of the entire Japanese industry even without relying considerably upon finance. With reference to national technology policy, as with key government institutions, such as the Ministry of Education, or the Science and Technology Agency, what Fransman (1995) has termed the ‘MITI paradox’ indeed relates to how MITI can be the most powerful ministry in the technology area, given that its power and influence may originate from non-financial sources rather than from control of the budget. It is in this context that the Japanese ministry’s control of industry, in specific cases or generally, came to be largely dependent on Japanese ‘administrative guidance’ rather than finance itself. Unlike its Korean counterpart, Fransman (1995: 116) argues that MITI continues to play an important role even though MITI’s financial leverage over Japanese firms has considerably diminished. As he put it: While the Ministry of Education controlled 46% of the Japanese government’s science technology budget in 1991, and the Science and Technology Agency 26%, MITI’s proportion was only 13%. How then can MITI be the most powerful ministry in the technology area as many argue? The author’s answer to this intriguing question is that MITI is indeed the most powerful ministry in this area but that its power and influence come, not from its budget, but from two related sources: the companies which fall under its jurisdiction, and the highly effective global information network that it controls. On the domestic dimension, MITI has been able to ensure its indispensable role in the most dynamic sector of the Japanese economy, while simultaneously this role is applied in the international arena where it is the coordinator of numerous information networks in other major economies of the world. Apart from its technology-related role, with technology’s growing importance for trade, MITI has also come to play a crucial role in dealing with Japan’s international economic relations with its major trading partners. Relative to other key government institutions, MITI’s role has been extensively connected with two closely related issues – technology and trade (Fransman, 1995: 117–18) – notwithstanding financial resources manipulated by MITI at national

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and international levels. As for Japanese corporate groups, keiretsu, with regard to finance, Japanese debt-driven companies were highly vulnerable to capital availability and interest rates manipulated by the Japanese government at the domestic level. Meanwhile, by the 1980s accumulated earnings and equity financing, as Pempel (1999) argues, allowed Japanese companies to enjoy far more autonomy from state control. However, Korean corporate power eventually tended to become more autonomous vis-à-vis state power in accordance with a gradual diminution of finance-oriented leverage dominantly exercised by the Korean government. In contrast, as exemplified by MITI’s role, the role of government is likely to be interpreted as ‘auxiliary’ and ‘complementary’ in terms of government control of the private sector (Kikkawa, 1983: 262). It could be argued that relations between state power and Japan’s corporate power relations have consistently remained intact, in that the entire industry of Japan, especially the knowledge-intensive industry, seems to be subject to MITI’s guidance regardless of the amount of Japanese MITI-sponsored finance available for particular industries. Paradoxically, concerning Japanese corporate autonomy, it is not the size of finance that counts but government’s conventional leverage in guiding strategic industries and sectors. Relatively, with respect to Korean government–industry relations, for a definite period, it was indeed the size of finance that mattered, but Korean state strength in relation to corporate power gradually shifted to a modest level and then took on the role of a catalyst in real terms, once the Korean government started to lose financial leverage that it had exercised over the industry through state control of the banking system. In a sense, with reference to the Japanese case, state–corporate power relations have not changed steadily, given the emergence of knowledge-intensive industry, or high technology, whereas in Korea the relationship has shifted significantly in favour of corporate power, especially with the growing importance of knowledge-intensive industry and high technology. Moreover, this tendency seems to have intensified since the Asian financial crisis, despite the fact that corporate restructuring was an enormous help to the Korean government in enforcing re-regulation through widespread intervention over the entire industry, or the Korean chaebol. It is important to recognise, however, that the Korean government can behave only as a naïve political actor not as the typical marketplace player (Zysman, 1983) with regard to the more powerful role in what Wade (1990a) called the ‘governed market’, as far as state–corporate power relations are concerned.

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As for international competitiveness, until quite recently, in understanding the growing significance of the market power of corporate groups, it should be acknowledged that the nature or definition of ‘industry or industrialisation’ has changed, and thus mainly contributes to the transformation of the governance system of big business, partly due to globalisation itself as well as the globalisation of business knowledge (Higgot and Phillips, 2000). In this respect, some assumptions need to be addressed. Firstly, the ‘spill-over’ effects of a specific industry originating in the initiatives of a corporate group, notably the semiconductor industry, have tended to exercise a much more intensive influence over the rest of the national economy, thus leading to the growing importance of the corporate group as ‘market-maker’ in international markets, confronted with trade barriers created by the formation of international trade regimes, or regional integration, given that government targeting can no longer be effective in the long run. This has helped to reiterate the effectiveness of the so-called ‘new’ trade theory, demonstrating that strategic government policy can have a permanent decisive effect on trade patterns and can produce a better national welfare economy than the free trade rhetoric (Borrus et al., 1986). Borrus et al. (1986: 91–2) maintained: There are significant spillover effects between performance in one or more high-technology industries and performance in the rest of the economy. The semiconductor case illustrates both the nature and the importance of the effects we have in mind and indicates that in the presence of such effects    if spillover effects are important    [s]uccessful strategic targeting of sectors with significant effects will have a much more dramatic influence on national economic well-being. Secondly, combined with the changing conditions of world markets, fuelled by the language of international competitiveness, the initiatives and innovativeness of MNCs have a significant influence over the nature of competitiveness as well as market power, and are more pronounced especially in semiconductors where there are significant spill-over effects. For Korea, this is to say that the government’s role has been eroded by its failing to properly respond to the new paradigmatic market situations. Along with this, the emergence of new technology has triggered a significant transformation in ‘old’ modes of industrialisation, possibly led by the state in some industrialising countries, consequently tending to focus on the agenda of ‘knowledge-intensive development’

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in the main, and pertaining to big corporations in terms of international competitiveness (Chataway and Wield, 2000). Under these conditions, over time a change in the nature of development in which ‘state and big businesses work together’ eventually gives rise to a considerable transformation in relations between state and corporate power (E. M. Kim, 1997a). Regarding the redefinition of industrialisation, Chataway and Wield (2000: 803–4) argue that: [N]ew social and economic organizational forms that put knowledge at the forefront of industrialisation, make it key for the development agenda    Industrialisation is still necessary for development to take place but there can be no doubt that the nature of industrialisation has changed    knowledge has emerged as an issue in industrialisation and development.    We will argue that the implications go beyond most approaches to knowledge management that focus on knowledge as a ‘thing’ and ‘commodity’.    Hence the need to look carefully at knowledge practices – at how knowledge intensive development manifests itself ‘on the ground’. In light of the state–market dichotomy, until very recently the latter has been perceived as ascending, combined with the retreat of the state in the face of market dominance. As already mentioned, according to what Underhill (2000: 820) has termed ‘a state–market condominium’, the market cannot work without the state, while it is also recognised that ‘the market was structured and enforced by the state’. Against this agenda, as Underhill emphasises, state policy and regulation have been greatly affected by firm decision-making even though corporate power may vary across competencies of firms. Big business as a market agent has developed and enhanced its private sector market process to the point where the private sector has become an ‘integral part of the pattern of market governance’ (Underhill, 2000: 822). Thus, the state and market coexist in symbiosis with private interests. Underhill confirms that the state–market dual conceptualisation ‘appears counter-intuitive in our era of global integration increasingly dominated by private market processes’ (2000: 822). Even though some firms are far advanced in globalisation, while others are conversely experiencing ‘de-globalisation’ as the ‘growing complexity makes efficient coordination more and more difficult’ (Ernst, 1999: 17), the strategy of lead firms has primarily related to deriving their market power from major grown markets depending on the competitive position of other network (e.g. global production networks) participants.

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Conclusion Concerning industrial development, mainly represented by the logic of the developmental state, the growing significance of international competitiveness tends to have an influence upon a shift in government– industry relations in terms of the market power of indigenous big corporations responding to changing global market situations. Accordingly, we would suggest that political and market (economic) power interrelated with the developmental state can be compromised by corporate power demonstrating the spill-over effects of particular industries, such as semiconductors, which were gradually accelerated by the initiatives of big business despite being financially supported by government at the initial stage. Specifically, within the context of ‘knowledge-intensive development’, the emergence of new technology has caused a significant transformation in ‘old’ modes of industrialisation, thereby leading to retreat of state power in the light of the governed market, particularly in the global market accompanied by a world trade regime. With regard to Korea, as state power was due to mainly strategic finance, state–corporate power relations tended to become unstable and more vulnerable. Meanwhile, this has enabled big business to create to a great extent market power directed at the international markets, given the gradual fading of state power in dealing with ‘market making’ in the context of a globalising market. Compared with the Japanese government, Korean state control seems to be time-limited, heavily finance-reliant, and transitory, invariably reflecting the structural weakness of the developmental state in the world system (Kim and Kim, 2006). The state and markets coexist in symbiosis with the private sector. The state–market dual explanation can be regarded as counterintuitive in exploring a private market process increasingly dominated by global integration, in that lead firms have primarily derived their market power from major and highly competitive markets. In a globalised market, with respect to MNCs, market positions give rise to economic and political power, and we should acknowledge that political power is related to the workings of market mechanisms and market institutions. In this context, it might be that Korean chaebol have shifted significantly from a private actor conventionally vulnerable to state power towards a collection of quasi-state organisations able to challenge the state to a greater degree. In this regard, this chapter has helped to show how and to what extent the nature of industry has transformed state–corporate power relations, in political and economic terms, combined with the recent paradigmatic agenda of knowledge-intensive

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development. This argument will also contribute to providing an answer to why we have to characterise big firms as exercising political power in addition to economic power rather than as mere market agents. Our analysis will be extended by an examination of Korean electronics multinationals competing against major counterparts in world markets, particularly the EU market.

4 The Political Economy of Technology in Global Markets and Transforming Governance of Korean Chaebol

Introduction With the increasing significance of the new mode of ‘knowledgeintensive development’ which is related to the dynamic competitiveness of the electronics industry in world markets, this chapter provides an empirical study of individual Korean MNCs acting as market-makers, alongside the growth of Korean MNCs. To develop the argument, the chapter considers three seemingly related observations. Firstly, it appears that a particular industry in one country tends to have spill-over effects on the entire national economy or other industry sectors. It is generally recognised that a major feature of the electronics industry is its global character which means ‘an industry in which a firm’s competitiveness in one country is significantly affected by its position in other countries or vice versa’ (Jun 1987: 5; Porter, 1990). The electronics industry has been characterised as a trigger that is closely linked to the prosperity of Korea’s overall economy. According to Henderson (1994: 258–9): Because of the higher technology content of their products and production processes, they [electronics industries] have the capability to deliver higher productivity and value added, and hence rapid economic growth coupled with faster increases in general prosperity    the potential for electronics industries to make a massive contribution to development is clear. It could equally be assumed that the electronics industry has helped to develop the nation’s economy. The semiconductor industry is a case in point in terms of ‘important spill-over effects’ (Borrus et al., 1986: 92). 80

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Secondly, as mentioned in Chapter 2, the global strategies of individual as well as multinational firms collectively, have to be incorporated as an enabling variable in the explanation of the country’s economic development and as exercising a considerable influence over the direction of the world economy and shaping of the public policy agenda (Sally, 1994: 163). Firstly, we have witnessed regulations and negotiations between MNCs, government and other policy network actors, which go beyond the reach of individual enterprises (Sally, 1994: 177; Fitzgerald and Kim, 2004: 442). Secondly, global corporations of this kind have propelled individual countries to depend more upon their ‘MNC-centred policy network’ than ever before. Drawing on this, it is argued that the outcome of market coordination derived from the Korean conglomerates alone, be they chaebol or individual, should not be underestimated. Thirdly, as far as ‘chaebol-governance’ is concerned, it seems likely that conventional categorisations of the economy – such as macro (‘the economy’), meso (‘the industry’) and micro (‘the firm’) (Cawson et al., 1990) – may not apply to Korean big business. Instead, unlike the European national champions, we would argue that even individual Korean chaebol within the electronics industry can be analysed at the meso-level, rather than at the micro-level in terms of proportion and weight within the overall Korean economy, partly by virtue of their enhanced market power deriving not only from technological capability, but also from rapidly changing market conditions, be they domestic or international. In this regard, the role of firms in the making of markets needs to be acknowledged. Here we assume that what we would term the ‘meso-market’ is the result of market imperfections. As Jacobson and Andreosso-O’Callaghan (1996: 41) argue: Coase, among others, is wrong to assume that markets exist    [Auerbach argues] that    as a response to market imperfections, firms are created. This [Coase’s] assumption results in a ‘failure to see the role of firms in the making of markets’. A market    is a behavioural relation. Without the participants (e.g. firms), there would not be a market [emphasis added]. We contend that market failure is neither automatically, nor sufficiently remedied by state intervention in dealing with the governed market. Furthermore, it is hypothesised that a large firm may function not only as part of a market, but also tends to take control of a meso-market directed to a particular industry, exceeding a firm’s market-relevant

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activities (at the micro-level) in the light of international competitiveness, reflecting the fact that trade regulations such as anti-dumping measures enacted by the advanced countries are likely to stem from, or sometimes amount to, a sort of ‘market failure’.

Evolving governance of Korean chaebol as global market players With regard to electronics firms as global players, it is evident that entering into global markets or getting involved with international production networks continues to be risky in the context of the corporate governance system. In terms of space or region, there is no denying that international linkages pioneered by individual MNCs – in some cases, innovative firms – often seem to have enormous effects on the future developmental trajectory of the nation’s industry, or the wealth of the nation itself. As Ernst (1999) observes, it is uncertain whether firms proactively intend to engage in international production without any reservation, even though actors in business firms seem to be more flexible and adaptive to change (Yeung, 2000). Ernst (1999: 9) gives two reasons as to why a firm normally is reluctant to engage in international production: (i) geographic dispersion may weaken existing governance structure with the result that control over strategic resources and capabilities will erode. And (ii) distance may magnify the impact of unexpected disruptions in its value chain, and thus will lead to substantial coordination costs. The competence of individual global firms with international linkages can significantly affect their competitive position in the global markets compared to other network participants. With regard to competitiveness, the Korean electronics industry has emerged as an international competitor in the context of global electronics, accompanied by the growth of the chaebol. In general, the latecomer model shows a different trajectory from the ‘first-comer’ paradigm. Ostensibly, while the lead firms in industrialised countries established technological advantages by means of inventions or innovations, big business in latecomers has pursued catch-up strategies in the form of imitation, borrowing and learning. In this regard, in a limited number of industries such as electronics and, in particular, semiconductors, it is undeniable that only a very few chaebol have been capable of maintaining competitive

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advantage with industrialised global players, given that they may be still weak in other industries (Rowley and Bae, 1997/1998b: 131–2). In explaining the driving forces from which the current achievements of the Korean electronics industry stem, lots of arguments and counterperspectives have emerged. Among some examples from which we can analyse and evaluate the development of the Korean electronics industry are: strong state vs. market views (Amsden, 1989; Johnson, 1982; Balassa, 1981; Lall, 1997; World Bank, 1987; Wade, 1990a); internal vs. external factors; macro vs. micro perspectives (Hobday, 1997a; Fitzgerald and Kim, 2004); and the ‘Korea Inc.’ model (Woo, 1991). Regarding either ‘government intervention’ or the ‘market view’ as mainly focusing on the internal factor, Castley (1997) argues that the principal driving forces for the remarkable growth of the Korean electronics industry came from external factors. Thus, his key point is that the main cause of the expansion of the Korean electronics industry stemmed neither from government nor the corporate sector, but from external resources which include foreign firms, loans and external marketing networks. Castley (1997: 46) concludes that without Japanese investments and incentives based on the Japanese electronics industry, ‘Korean electronics would not have become a successful export-led industry’. Castley sees the growth of Korean electronics as deriving from a ‘regional’ rather than a national phenomenon. Also, he contends that the same pattern, a sort of spill-over, may apply to the development of Southeast Asian (e.g. Thailand, Malaysia and the Philippines) electronics, in that Japan and the NIEs have provided external assistance so far (1997: 46–7). Consequently, his argument is seen as undermining academically dominant ‘state vs. market’ views with an emphasis on regional factors. Moreover, it is implied that external factors take precedence over national or internal factors with regard to the development of electronics, thus leading to overemphasis on the unilateral role largely exerted by first-comers regardless of latecomers’ indigenous capabilities. In a sense, Castley seems to be still concerned with the so-called ‘flying geese model’, which indicates that the latecomers are said to follow, or replicate, the development trajectory of the countries ahead of them (Bernard and Ravenhill, 1995). In other words, he argues that the performance of the four Asian tigers is largely due to FDI from Japan (or elsewhere) (Hobday, 1994: 98; Turner and Kim, 2004: 4). With regard to the flying geese hypothesis, it is important to note that Japan was largely certain to be a critical source of goods and technology for the Asian NIEs at the initial stage, while the trade data have proved that they benefited greatly from the US and especially

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the EU in terms of access to export markets throughout the 1980s (Hobday, 1994: 100). While the flying geese idea overemphasises the importance of Japanese FDI, it would be misleading to underestimate the critical role of other first-comers, in addition to NIEs. This is confirmed by Ernst and Guerrieri (1998) in an analysis of the electronics industry in East Asia. Thus, as they maintain, what are thought to be international production networks (IPNs) come not only from Japanese and US firms, but also from newly emerging regional production networks established by electronics firms from Korea, Taiwan, Europe and, more recently, China. Therefore, we should not overestimate the important role of Japanese electronics firms in the process towards the formation of IPNs. In the electronics industry, Japanese firms are not the only ones that have created IPNs in the context of Asian regionalisation, despite the fact that IPNs initiated by Japanese firms are indeed significant (Ernst and Guerrieri, 1998: 203). In early 1990, according to Ernst and Guerrieri (1998: 207), Asian production networks created by Japanese firms led to ‘a serious trade imbalance between Japan and East Asia’ which affected the regional networks in favour of Japan, with a resultant trade surplus in electronics with East Asia amounting to approximately $21 billion. By contrast, the US had different trade patterns and approaches to Japan’s. The US imported $42.6 billion worth of electronics products from East Asia, which is almost six times the value of imports from Japan. The US trade deficit in electronics with East Asia accounted for $25 billion. Taken as a whole, we can see that Castley’s observation has to be re-examined with respect to the critical role of the Japanese electronics firms in the growth of Asian electronics industries.1

Bringing industry and firms into the analysis Within the context of the development of the Korean electronics industry, we need to move on to ‘macro vs. micro’ levels, mainly centring on corporate-level analysis, e.g. what we might call ‘chaebol governance’.2 Given that the micro features of the growth of Korean electronics should not be neglected, this section undertakes an analysis of ‘chaebol governance’ by reassessing predominantly firmrelated perspectives. More recently, firm-oriented perspectives have become popular in an analysis of industrialisation and economic growth (Porter, 1990; Cawson et al., 1990; Cawson, 1997; Dai, 1996; Hobday, 1997a).

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According to Porter (1990), national competitiveness ultimately depends on individual firms’ capabilities. He contends that ‘government cannot create competitive industries’ (1990: 620). As Porter emphasises, ‘firms must do so, though government can shape or influence the context and institutional structure surrounding firms as well as inputs they draw upon’, though government’s indirect role is still powerful at the initial stage of industrialisation. Cawson et al., (1990: 12–13) describe firms as essentially political and economic actors, ‘not only in the sense of seeking to influence public policy, but also in the sense of exercising their market power and resisting or accommodating to market power of other firms’. In this context, the Korean industries also have implications for the treatment of ‘corporate power’ as a political activity as well as an economic one, since market-making activity is greatly reliant on chaebol governance. As some writers maintain, firm-level analysis may be important in exploring the growth and development of a particular industry. Significantly, Hobday (1995b, 1997a, 1997b) provides an illuminating and clear example of this aspect in his explanation of the East Asian electronics industries. Hobday (1995b) investigates the growth of the Korean electronics industry by dealing historically with the trajectory of the Korean case with an emphasis on technology transfer. As shown in Chapter 3 above, government’s role tends to change over time and across industry. Drawing upon his analysis of the Brazilian computer industry, Evans (1986) observes that the state plays an important role at the initial stage of new industries, but its role tends to decline and is limited once the targeted industry is established. Thus, it follows that the changing characteristics of government’s role may inevitably lead to changes in corporate governance. At this point it might be useful to explore the notion of reciprocal subsidy before moving on to the issue of what is meant by chaebol governance.

The electronics industry and reciprocal subsidy: a reassessment It is often believed that chaebol governance has emerged from the government–firm relationship based upon ‘the politics of reciprocal subsidy’ (S. R. Kim, 1998). In general, reciprocal subsidy has enabled Korean chaebol to run particular industries directly rather than through an overall industrial policy, or policy objectives originally designed by government at the macro-economic level. From the chaebol perspective, it can be often characterised as leverage relevant to Korean state control of conglomerates as well as an incentive for big business to run a particular business without any risk. As far as reciprocal subsidy is concerned,

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it is useful to quote from Chang (1994: 123) in an analysis of Korean industrial policy: What is noticeable    in Korea is that even the economically and politically powerful conglomerates, the chaebols, were not immune to state discipline as individual agents, although as a group they were certainly privileged in their access to various state-created rents. To Korean policymakers it matters little who runs a business so long as it is run efficiently. If a particular chaebol runs a business well, fine; otherwise the ownership has to be transferred to another chaebol or even to the public sector    [T]herefore, the chaebols have had a powerful incentive to remain efficient, especially when the loss of state support can mean a sharp downturn in business in a few years’ time, given the state control of credit and the high leverage of Korean firms. Many of the chaebols that lost state favour (for political reasons and/or efficiency reasons) have either gone into oblivion or disbanded and their remnants distributed to other chaebols [emphasis added]. On the basis of arguments drawn from Chang (1994), it is wrong to overstate the importance of the subsidy proposed by the Korean government in defining the term ‘chaebol governance’ across industry. It seems unlikely that the ‘ideal type’ of reciprocal subsidy originally allocated during the initial stage of a particular targeted industry applies to the overall industry. In fact, it played a minimal role in the success story of the Korean semiconductor industry. Reciprocal subsidy is a driving force behind the growth of the overall Korean electronics industry, including other specific industries. However, it cannot be a case in point with regard to Korean semiconductors for two reasons. First, such a level of government support was no more than that in many other countries (Choi, 1994: 193). During the take-off stage of the industrialisation process, the Korean government’s policy was centred on HCI (Heavy and Chemical Industry) promotion. According to Soh (1997a: 228), originally, the electronics industry accounted for 12.9 per cent of overall HCI funding, amounting to $1192 million. However, by 1979 the amount was just $421 million, accounting for about 4.9 per cent. The share for the electronics industry indicates just 7 per cent for 1976, and 6 per cent for 1977, respectively, of total HCI support. Moreover, following financial liberalisation, by 1985 the chaebol issued commercial paper totalling $285 million through various foreign financial markets, accompanied by Samsung’s initiatives, with a

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view to investing in the semiconductor business. Samsung came to the forefront in raising funds abroad without state repayment guarantees, amounting to $190 million in 1984 alone (Hong, 1997: 103). Second, in qualitative and political terms, as evidenced by S. R. Kim’s conviction that the role of the Korean state has been ‘only supplementary’ (S. R. Kim, 1998: 296) to the early establishment of DRAM by Korean firms, the politics of reciprocal subsidy can no longer manifest itself, in the sense that the chaebol can act independently of government intervention in the case of semiconductors. This perspective is illustrated by other arguments. Outwardly, though the government and public institutions provided semiconductors with R&D subsidies, the government’s primary focus was upon its willingness to have a share in the success of memory chip development rather than its primary motive to offer the chaebol adequate subsidies (L. Kim, 1997a: 89–99). As far as semiconductors are concerned, surprisingly, the chaebol paid back the subsidy which was just found to be ‘seed money’ rather than public financial subsidy (L. Kim, 1997a: 99; Choi, 1994: 161; Fitzgerald and Kim, 2004: 446). Subsidies do not always create political power for the Korean government irrespective of the total amount of subsidies provided by it. In sum, it should be no surprise that government’s role deriving from subsidy varies across time and industry.

Chaebol governance in global competition Until the Asian financial crisis in late 1997, the Korean economy had grown faster than any other economy worldwide. Importantly, as Kenny (1998: 1) suggests, the electronics industry acts as a leading sector representing the root cause for ‘the overall success of the Korean economy’ in marked contrast to earlier industries such as garments and footwear. The electronics industry achieved a remarkable status in the Korean economy with a 27 per cent share of total exports. In a historical context, it might be that chaebol governance can be construed as deriving from the development of the Korean electronics industry. Here there is a need to review the notion of chaebol governance suggested by other scholars, in particular S. R. Kim (1998), to provide the basis for an analysis of Korean big business with reference to the Korean electronics industry. According to S. R. Kim (1996, 1998), chaebol governance can be understood as ‘the result of the complex interaction in the 1980s between regulations underpinning dynamic interplay of three critical variables such as the world market, the Korea’s corporate state, and the chaebol’ with a focus on the state–firm relationship based on reciprocal subsidies from which chaebol governance

88 Newly Industrialising Economies and International Competitiveness

originated. S. R. Kim (1996, 1998) views the governance concept as moving beyond the limits of market and hierarchical governance by combining three factors – state actions, market dynamics and firm strategies – to explain the growth of Korean semiconductors through ‘an optimal mix of co-operation and competition’ within a specific sector. The salient feature of R. Kim’s analysis suggests that the principal reason for chaebol governance mainly depends on the subsidy from the Korean government to the Korean chaebol, thereby focusing on the reciprocal subsidy in its own right, rather than particular state–societal arrangements from which subsidy tends to be formulated in any circumstances. As a consequence, S. R. Kim’s claim that the growth of Korean semiconductors has occurred as the result of the dynamic interplay of three variables – state, market, chaebol – based on ‘the optimal mix of co-operation and competition’ is not appealing, in that the relevant combination of these three factors may be rather exceptional, or coincidental. In this regard, we would like to view the term ‘chaebol governance’ as concerning the dynamics of Korean corporate governance, which is characterised not only by the result of interplay between state and society at the national level, but also originates from the changing environments of world markets, such as barriers to entry into industrialised markets at the international level, especially in the US and the EU markets, the importance of which relates to the economic growth of latecomers in the light of market size. With respect to Korea, the redefinition of ‘chaebol governance’ will help to emphasise that the Korean chaebol as NIEs’ multinationals have engaged in more proactive and globally integrative strategies to adapt to the new reality of global competition: firstly, on the basis of corporate organisational ability and technological capability; secondly, depending on politico-economic arrangements derived from the historical context in terms of government–industry relations. Here we would like to consider some assumptions. At national level, chaebol governance can be viewed as comprising two kinds of power: one is market power3 (as an economic actor) and the other political power (as a political actor). In other words, to quote from Cawson et al. (1990: 32), the former relates to both ‘power exercised in relation to other firms through the process of competition’ and ‘power relations within firms’; the latter is mainly focused on ‘power exercised in relation to governments and public authorities’, along with power exerted by firms as interest groups. We assume that both kinds of power may be reinforcing. In practical terms, market power as such, especially in world markets, tends to strengthen a firm’s bargaining power in

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dealing with political power in relation to government, and vice versa. For example, Samsung’s political power has increased markedly due to its success story in semiconductors in highly competitive markets, from which Samsung is assumed to achieve a more powerful position in relation to the Korean government. Also, we need to look into chaebol governance at the international level by placing Korean chaebol within the context of world markets underpinning new protectionist regulations in the form of anti-dumping duties among the industrial economies such as the US and the EU. In order for latecomer firms to overcome barriers to entry into the advanced markets, they tend to rely heavily on the firm’s corporate governance rather than any other substantial resource, such as subsidy frequently offered by their governments that seems no longer feasible owing to regulatory measures enacted by world trade regimes. As a matter of fact, the evidence drawn from many countries4 suggests that ‘government simply cannot be as in tune with market forces as industry participants’ (Porter, 1990: 619). With respect to chaebol governance, we need to make some observations. First, chaebol governance results from the interaction between the chaebol’s market power and corporate power as political activity, given that both tend simultaneously to reinforce each other in a synergistic way, or may diverge in different circumstances. In terms of market power, it seems more likely that chaebol governance has developed into different features according to ‘market size’, i.e. national, regional (e.g. Southeast Asia), or international markets (e.g. the US and the EU). Secondly, chaebol governance can be regarded as stemming from an organisation in its own right, rather than from individual members of a group. That is not to say that the demise of particular conglomerate(s), or the power shift among the chaebol, following forceful corporate restructuring since the Asian financial crisis, is likely to make chaebol governance more vulnerable in relation to the Korean government. Basically, chaebol governance is defined by a collectivity of chaebol, in the sense that the chaebol as a whole is more than the sum of its individual members. However, in some cases, it is assumed that an individual chaebol can speak on behalf of the chaebol as a whole, and the Big Five could be responsible for the whole system. Top chaebol such as Samsung or Hyundai tend to voice their suggestions as to their corporate activities on behalf of all the others. From a ‘holistic’ perspective, according to which ‘the whole is greater than the sum of its parts’, we need to treat the chaebol as an industrial system rather than a mere sum of firms (Jacobson and Andreosso-O’Callaghan, 1996: 3) through the overall representation

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of the FKI (Federation of Korean Industries). In 1997, the FKI revealed that the top five chaebol – Samsung, Hyundai, Daewoo, LG and SK – accounted for 32 per cent of total corporate sales, 29 per cent of assets, and 30 per cent of debt in Korea. In particular, Samsung alone accounted for 28 per cent of overall Korean exports in 1997 (Far Eastern Economic Review, 19 November 1998). With regard to the entire Korean economy, it could be said that Samsung is comparable to General Motors in the US economy. Although on the surface, Hyundai appears to be bigger in business size than Samsung, in substantial terms it is highly likely that Samsung has become more profitable than Hyundai, even during the hard times following the Asian financial crisis. A few years after the crisis, according to an analysis by Business Korea: Hyundai’s losses will double to about $330 million because of huge losses from Hyundai Electronics Industries, whose deficit may reach 400 billion won (Korean currency). Hyundai Heavy Industries is expected to generate a profit of 200 billion won, however, that will be offset by a 200 billion won loss by Hyundai Motor. Of course, that does not include the losses incurred by Kia Motors, with which Hyundai merged on December 1st last year [1998]. On the other hand, Samsung Group will see its net profit soar for 1998 to around $410 million in manufacturing business. If their financial business is included, the gap would broaden further    Samsung Group is said to face a critical situation under the Kim [Dae-jung] administration, nevertheless, its profitability is even more strengthening amid the nation’s economic difficulties. (Business Korea, January 1999) In addition, as will be indicated in Chapter 6, concerning the semiconductor industry, given that Hyundai acquired LG Semicon, a former subsidiary of LG, and despite its slightly smaller market portion (20.1 per cent) against Hyundai Electronics (20.8 per cent), Samsung Electronics is still expected to be ahead in terms of development in technology and productivity, mainly because of its organisational competence accumulated over the long term (Financial Times, 15 October 1999). Also, Samsung has greater technological advancement in LCD panel and design and development facility than the other two. Thirdly, the role of the state with respect to a particular industry can vary according to the structural constraints surrounding it, both at the national and international levels in the light of neo-institutional analysis (Hong, 1997: 35). In fact, the Korean government could not be in a better position to

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meet the changing characteristics inevitably stemming from world trade regulations such as anti-dumping measures filed against the Korean electronics industry and mainly orchestrated by leading firms from the US and the EU. The Korean government eventually had no choice but to transfer its role as ‘marketplace player’ towards Korean big business. As Haggard (1990) also argues, the role of the state can be characterised not as a constant variable, but as a ‘variant’ over time. According to Y. T. Kim (1998: 151), the 1990s witnessed a turning point in state–business relations, indicating a transition from the demise of the development state to gradual collaboration between the state and industry. At the domestic level, it is assumed that until recently, the stubbornness of Korean corporate power has come from the state–chaebol symbiotic and interdependent relationship between state and industry, ‘not because of the constant state–business relations as such, but because of the structural conditions in which state, state agencies, and the business have been located’ (Hong, 1997: 36). Likewise, Fukagawa (1997: 86–7) points out clearly: When administrations change, the government in almost all cases reassesses the chaebol (condemning the domination of the ‘special treatment’ in the past), and the economy starts to subside. However, when the economy slips into recession, unemployment, bankruptcies of small business (not the chaebol), other social problem are aggravated, and the government has to search for means to stimulate the economy; ironically, the easiest way to refloat economy, is to assist the chaebols, for they are the very players in the economic system. Further, the chaebol themselves had borrowed massive funds, so the sluggish growth in sales due to the decelerated economy directly threatens their operations so that they strongly lobby the government to switch into the expansion policy    In the end, the government was not able to abandon the growth pattern propelled by the chaebol [emphasis added]. The same may be true under the Y. S. Kim administration. Under the D. J. Kim regime since the Asian financial crisis, with respect to chaebol restructuring, any departure from the above-mentioned pattern is assumed to be transient. It would be misleading to suggest, however, that the state–chaebol symbiosis might evolve into the so-called ‘Korea Inc.’ model, as Woo (1991: 175) has termed it in an analysis of relations between the private and public sectors. Lastly, with the challenge of international competitiveness, accompanied by the advent of a new global trade regime, the WTO (World

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Trade Organisation), the corporate governance of individual Korean electronics MNCs needs to be analysed in the context of knowledgebased competitiveness on an international dimension. With the advent of knowledge-driven industrialisation, the challenging logic of competitive advantage has propelled Korean chaebol to respond rapidly to new paradigmatic innovations. In other words, whereas Korean conglomerates are not first-movers in particular industrial sectors, it is recognised that Korean chaebol have emerged as world-class competitors with regard to the electronics industry, e.g. semiconductors, depending on organisational competence which encompasses not only ‘the innovatory capacity’ of firms, but also firms’ ‘organisational ability’ concerning the efficiency of production and distribution networks in terms of ‘network enterprise’. With the redefinition of the innovative firm, it can be understood as incorporating ‘innovative organisation’ no less than ‘innovative technology’. As far as the electronics industry is concerned, it is plausible that the Korean leading chaebol, especially Samsung, fit well into this category. Interestingly, as Mathews and Cho (2000) suggest, even though some latecomer firms such as Samsung in Korea, Winbond in Taiwan and STG in Singapore are conventionally not the innovators or the generators of new knowledge in terms of the performance of R&D-led innovation, the notion of these firms as being at the technological frontier is mainly attributable to ‘knowledge diffusion’ rather than ‘knowledge generation’. Thus, this view can lead to much more emphasis on institutions of diffusion as the ‘source of competitive advantage’ rather than on innovation (Mathews and Cho, 2000: 72). With reference to international competitiveness, the significance of an individual firm’s organisation is posited by Robertson and Langlois (1994). That is, the firms in the follower country are able to compete with those in the leader country owing to the uniqueness of the innovative organisation adopted by the leading latecomer firms: Each organisation is unique and its ability to acquire the knowledge necessary to adopt a significant innovation successfully differs from that of existing or potential competitors    firms in the follower country are able to compete on equal, or nearly equal, terms with the representatives of both the old and new technologies in the pioneer’s home markets    Under this scenario    the adopters of the innovation in the follower nation are able to learn so much more quickly that they can appropriate the greater part of the market by the time the older firms in the pioneer nation fully succumb, and the adopters

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of the innovation in the pioneer will have been relegated to a minor role or eliminated together. (Robertson and Langlois, 1994: 369, 371) With reference to organisational competence, the tacit dimension of knowledge seems to have a significant impact on innovative organisation, in that tacit knowledge is ‘inherently non-transferable’ (Athanassiou and Nigh, 2000: 474). Depending upon the resource-based view of the firm, a certain organisational capability of MNCs characterises the cognitive dimension and values of top management accumulated over time as an independent source of competitive advantage (Athanassiou and Night, 2000). As far as the institutions of knowledge as well as knowledge management are concerned, as Chataway and Wield (2000) maintain, the ‘capacity to acquire, absorb and use knowledge is more successful when integrated into broader industrial development and institutional framework’ (Chataway and Wield, 2000: 819). In addition to innovative technology, with regard to knowledge, corporate organisational ability in dealing with crises has been related to the diffusion of knowledge. The significance of the management of crises is occasionally construed as typical of the organisational innovativeness of Korean chaebol, and this should not be overlooked in interpreting Korean corporate competitiveness and corporate culture. The deliberate construction of crises has relevance for achievement at the individual and organisational levels in terms of organisational goals and knowledge conversion. As L. Kim (1999: 133) argues: The Korean experience shows that constructing crises by setting ambitious goals is one of the most effective ways to intensify efforts at the individual and organizational levels. The goal-focused high intensity of effort to resolve crises prompts members to actively search for information for new ways to respond to them and to expedite knowledge conversion and accumulation at the individual level. This also intensifies interaction among them, giving rise to knowledge conversion and accumulation at the organizational level. Overall, with respect to the ‘innovative organisation’ that accrues with interdependence of internal and external networks of knowledge (Zanfiel, 2000), it seems likely that Samsung has been more institutionally mobile and adeptly proactive in the wake of globalisation in comparison with the other five big chaebol. As a leading chaebol, Samsung had a leadership philosophy at the initial stage of the electronics industry.

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It was accepted by government technocrats in this special industrial sector.

The Korean private sector’s R&D and S&T in the electronics industry Leading Korean chaebol have strived to set up R&D institutes. Samsung, LG, Hyundai and Daewoo are particular cases in point. One of the reasons the chaebol have established their own R&D centres appears to be because the government-sponsored institutes and laboratories were not seen as reliable sources of initial information about technologies. In addition, evidence collected by scholars of GSRIs suggests that firms, whether in developed countries such as the US and the UK, or in industrialising countries such as Korea and Taiwan, have placed a higher priority on other institutes rather than their own governments as primary sources to supply technology and initial information about new technologies (Schoening et al., 1998). Korean top chaebol have considerable in-depth resources, thus making them less dependent on the government, especially compared to Taiwan. As a matter of fact, between 1989 and 1993, Korean private sector R&D expenditure as a percentage of GNP rose remarkably at a real 12 per cent rate per annum (Schoening et al., 1998: 824). As far as the Korean private sector R&D is concerned, Choung (1998) argues that a substantial proportion of R&D spending is exclusively concentrated in the top five chaebol. With regard to Korean R&D expenditures as a whole, in 1993, the top five chaebol’s concentration share accounted for 30.1 per cent, and the top ten firms’ share was 39.1 per cent. In comparison, Japan accounted for 16.5 per cent in its top five big firms, and 25.5 per cent in its top ten firms5 (Choung, 1998). However, since the Asian financial crisis, the medium level of MNCs’ R&D investment has been increased from below 10 per cent to 17 per cent in 2003 (KITA, 2004). Also, most of the quasi-governmental banks have been widely opened for financial support for small and medium electronics R&D projects. As for electronics industrial technologies, the Korean government provides collaborative research support through related ministries: the Ministry of Science and Technology (MoST), the Ministry of Trade and Industry (MTI), and the Ministry of Information and Communication (MIC). Recently, MoST has spent approximately $10 million to assist a variety of national R&D institutes. Among others, 10 per cent of the science research budget goes to electronics; of which DRAM development expenditure accounts for 75 per cent (Pecht, 1999: 15). The DRAM project reflects direct government support of industry, accompanied by

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government–industry partnership with equity cost sharing (50 per cent) in new technology development. In 1991 industrial committees meeting Korean government identified electronics as a prime industrial development division within the Department of Industry. Between 1993 and 2006, the Korean government is carrying out the Highly Advanced National (hereafter, HAN) project to selectively conduct nationwide R&D projects with a focus on key industrial technologies, through joint investments by government and the chaebol. The HAN project is basically supported by inter-ministerial coordination and collaboration. A planning committee for the HAN project was set up at the national level in May 1991, composed of seven members from industries, government-supported institutes and universities. The strategy of the HAN project was that the limited resources be concentrated on critical technologies. With respect to electronics technology, the HAN project has assisted in the development of HDTV, along with the development of highly integrated semiconductors such as 64M and 256M DRAM. Importantly, the HAN project was formulated to put much more emphasis on ‘technology rather than science’ (Lim, 1995: 159–63). In 1976, the government established the Korea Institute of Electronics Technology (KIET) to promote the semiconductor and computer industries. KIET developed a linear IC in 1977, new IC in 1978, the 4-bit microprocessor in 1980, and the 32K ROM in 1982. More importantly, the Electronics and Telecommunications Research Institute (ETRI) was set up in 1985 and took over KIET’s activities, thus playing a major role in the fields of semiconductors, telecommunications, computer industries, satellite communication and IT. Arguably, chaebol R&D institutes played a crucial role in catching up with the advanced technologies. In this respect, the Korean chaebol have functioned in two ways: first, in the improvement of technology development; and second, in the accumulation of human resources which include in-house technical colleges and in-house training activities (Table 4.1).6 Samsung’s main R&D centre, the Advanced Institute of Technology (SAIT) was established in 1987, with an emphasis on seven areas: digital signal processing (DSP); laser applications; displays; mechanical/ electronics interfaces; computer software; data transmission; and environmental protection/alternative energy sources. Samsung’s investment in R&D amounts to 5 per cent of its total sales, with over 11 000 employees in the R&D centres (Pecht, 1999). Samsung has contributed to the enhancement of technological capabilities through interacting with three subsidiaries’ R&D centres: the Samsung R&D Centre specialising

96 Newly Industrialising Economies and International Competitiveness Table 4.1 Major electronics R&D centres: Samsung, LG and Daewoo Companies

R&D institute

Research areas

Samsung Electronics

Tokyo R&D Institute (Japan) Samsung Electronic Research Centre (Russia) Samsung Information System America (US) Samsung Electronics Research Institute (UK) SISO (India)

– DVD, CD-Rom Drive – SDX-RB MAP, RF ASIC, DSP – Multimedia, HDD core-technology – Mobile phone (GSM, GPRS UMTS) – Communication network software

LG Electronics

Tokyo R&D Laboratory (Japan) San José Technology Centre (US) Vorums Technology Centre (Germany) Chicago Laboratory (US) Design-Tech Ltd. (Ireland) Semiconductor R&D Moscow Technology Centre Frontech (Sendai Frontec Inc.) (Japan) San Diego R&D (US)

– AV & Media – Hi-media for computer, display areas – Digital AV – HDTV (with Zenith), VCR, FTM – Design development – Essential IC parts for multimedia – Telecommunication, basic technology – TFT-LCD – CDMA

Daewoo Electronics

Tokyo R&D (Japan) France-in-tech R&D (France) Semiconductor R&D (US)

– Design – Focus on the EU model – Semiconductors for multi-media

Sources: Samsung Electronics Research Institute (2001), LG Electronics (2004) and EIAK (2004).

in consumer electronics such as audio-visual and multimedia in 1980; Samsung Electronics in Kihung R&D Centre, with a focus on memoryrelated semiconductors such as DRAM, SRAM, LCD and compound semiconductors; and Samsung Electronic Micro R&D Centre, specialising in non-memory such as ASIC, micro and CAE. Samsung, LG and Daewoo have set up overseas R&D centres on a global scale. Like the Japanese one, most of the R&D bases in the developed countries focus on designed software functions, such as model design, consumer-friendly marketing and university-collaborated programmes (Y. C. Kim, 2000).

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The R&D headquarters of LG is located in Seoul, which can be also considered the main base for the LG Electronics R&D. While in 1994, LG Semicon spent 12 per cent of its revenues on R&D, by 1995 the figure had decreased to 8 per cent (Pecht, 1999). Concerning HDTV, LG established the Goldstar Central Research Laboratory in 1981, dealing with multimedia, display and ASIC design. Founded in 1983, Hyundai Electronics Industries (HEI) rapidly became one of the leading electronics companies in the world in a very short time. HEI operated two semiconductor R&D laboratories divided between memory and non-memory, such as the Memory R&D laboratory and the System IC R&D laboratory, respectively. One special R&D case in Korean electronics is the LG and Hitachi laboratory in the Netherlands. This is an R&D target laboratory with industry-level collaboration projects such as Honda– Rover (Y. C. Kim, 2002). Daewoo set up an R&D centre in 1982, mainly focusing on audio-visual and consumer electronics.

The development of the Korean electronics industry in a global competitive context Development stages and ‘state–private sector’ relationships This section offers an explanation of how the Korean electronics industry as a whole has evolved over successive phases alongside sequences of change in the relationships between the state and private sector. Thus, this section is divided into four stages. The first phase (mid-1960s to early 1970) was characterised by the consumer electronics industry in the initial stage with a concentration on its transition from assembly to production of sophisticated goods, with the help of initial inward FDI (Turner and Kim, 2004). As for semiconductors, the foreign firms started production of semiconductors with partial or whole ownership. The second stage (between the early 1970s and 1983) was characterised by the stable development of consumer electronics based not only on Korean domestic demand but also increasing inward FDI, and a pre-mature stage of semiconductors. The third stage (between 1983 and mid-1990) was mainly focused on the take-off phase of semiconductors, and the Korean chaebol’s response to the protectionist world market in the consumer electronics sector. Lastly, the fourth phase (from mid1990 to the present) involves the development of the Korean consumer electronics industry in the digital age, the growth of the Korean semiconductor industry and TFT-LCD which have exhibited world-class competitiveness in world markets.

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Consumer electronics-led industry with initial FDI (mid-1960s to early 1970) The Korean electronics industry mainly comprised assembly plants during this period. From the late 1950s to the mid-1960s, most production consisted of the simple assembly of imported parts and components. The main products included simple electronics products such as radio receivers, batteries and telephone exchanges. In the late 1960s, Korean firms started the production of radio and black and white televisions for the domestic market. Since the early 1970s, the Korean electronics industry was gradually transformed from assembly to the production of sophisticated products (L. Kim, 1997b: 62). During this early period, the state played a prominent role in the rapid growth of the industry. The government’s import-substitution policy and its restrictive constraint on inward FDI enabled local enterprises to easily enter the protected market in the early 1960s. The inward FDI was largely confined to the production of parts and components. The Ministry of Trade and Industry (MTI) designated the industry as a targeted industry for export. In December 1966, MTI confirmed its determination to view the electronics industry as a key export industry in the form of a five-year promotion plan for the export of electronics products. In order to do this, the government set an annual export goal for individual firms. For example, in 1969, when exports amounted to a mere $42 million, the state set the goal at $400 million for 1976. Significantly, exports exceeded this target, accounting for more than $1 billion, slightly over two and half times the established goal. In short, while government played a critical role in overall strategic industries, its role in electronics was extraordinary. Thus the features of the electronics industry changed from an import-substituting industry to a highly export-driven industry (L. Kim, 1997b: 133–4). The major investors included the US and Japan. The US firms had a preference for wholly-owned subsidiaries, while the Japanese FDI came from subsidiaries and joint ventures on a comparable scale. Compared with indigenous local firms, the foreign firms were bigger in terms of numbers of employees and amount of equity, with a focus on production of parts and components (He, 1996). For semiconductors, its focus at this stage was on simple assembly. The Korean government had no specific policy for the industry. The Korean semiconductor industry started with FDI from US firms such as Komy, Fairchild and Motorola in the mid-1960s. The first FDI came from Komy, in December 1965, with a total of $76 000 which accounted for 25 per cent of the total investment, while the remaining 75 per cent was provided by domestic

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investors. The implication with respect to Komy’s share is that the Korean government did not allow foreign companies to take command of their investments in a particular industry (Hong, 1997: 82). However, in August, 1966, the Foreign Capital Inducement Law was enacted, following the various incentives for FDI including tax exemption for five years, duty-free imports of capital goods and raw materials, and 50 per cent income tax reduction. In addition to these benefits, the Foreign Capital Inducement Law did not include any detailed regulation on the FDI. As a result, several companies such as Fairchild, and Singnetics in 1996, Motorola in 1967, Komy in 1968, AMI in 1970 and Toko in 1970 and 1971, invested actively in Korea with 100 per cent share of their ownership. As a matter of fact, the role of FDI in Korea was not an important factor through the 1960s and 1970s, but, as far as the electronics industry is concerned, it was an ‘exception’ (He, 1996).

Export-driven development of consumer electronics and the pre-take-off stage of semiconductors (early 1970s to 1983) At this stage, the electronics industry was designated a strategic export industry, accompanied by the promulgation of the Electronics Industry Promotion Law and the Eight-Year Electronics Industry Development Plan (1969–76). In particular, this trend was reinforced in the wake of HCI targeted by the Korean government between 1973 and 1979 due to the electronics industry’s export potential. Export-oriented industrialisation was in accordance with much more emphasis on the HCI promotion policy, especially based upon the Korean chaebol. Despite its remarkable ‘statistical’ performance, HCI promotion policy as a whole was found to be a failure (Choi, 1995: 75). It is ironic, however, that the HCI drive noticeably enabled the private sector to increase the Korean chaebol’s leverage vis-à-vis the Korean state (Ravenhill, 1995). There are many debates on the failure of HCI policy. However, as far as Korean government industrial policy has been concerned, Korean government bureaucrats realised and implemented a non-intervention policy towards the successfully managed industrial sector. The electronics industry has especially enjoyed this scheme since the D. H. Chun government (Kim and Kim, forthcoming). As for consumer electronics, the production of colour TVs (CTVs) in Korea started in 1974 with a joint venture between Daehan electronics and Matsushita Co. Ltd., followed by Samsung Electronics and LG. At that time, significantly, these companies started with production of CTVs for overseas markets because no colour broadcasting services

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had been launched in Korea. It was not until 1978 that CTVs broadcasting started, with the result that export restrictions were imposed upon Korean CTVs. As a consequence, manufacturers were engaged in producing the CTVs for domestic and overseas markets simultaneously (Sato, 1997: 409). During this phase, it is important to point out that the existence in Korea of a large domestic market was a crucial factor in the growth of Korean electronics production, thus giving rise to a substantial source of demand and allowing for firms’ disciplined opportunity for export growth. Between 1979 and 1984, the Korean domestic market doubled from $3 billion to $6 billion (Mody, 1990: 297–8). In 1982, Korea became the fourth largest CTV producer in the world, and in 1983 overtook Japan to become the largest exporter (in terms of numbers of sets) of TVs to the US. At present, Samsung, LG and Daewoo account for over 90 per cent of total TV production (Kenny, 1998: 16). As for semiconductors, from 1972 foreign semiconductor firms began to locate their production plants in other Asian countries because of much cheaper labour costs. In addition, local firms experienced serious difficulties which included vulnerable international subcontract business resulting from the first oil shock of the 1970s. As a result, a subsidiary of Goldstar finally merged into Goldstar Electronics Co. In addition, in the meantime, Anam and Korea Electronics Co. had difficulty continuing their business due to drastic cutbacks in orders as most foreign firms switched their orders to the southeast region (Choi, 1994: 57–8). In that context, from the mid-1970s, large firms were reluctant to enter into semiconductor production because they realised that this sector was highly risky, and its future prospects were not clear. However, during the second half of the 1970s, Korean firms benefited greatly from semiconductors. Once again they took the view that this sector was promising. In the wake of this, even Korean textile and garments firms attempted to join the semiconductor area,7 partly because their business was less competitive, partly because of the government’s encouraging announcements to prompt them to join the electronics and semiconductors. Between 1973 and 1979, the fundamental structure of the Korean semiconductor industry remained largely intact. In the early 1970s, there were about twenty assembly firms, mainly composed of wholly-owned foreign subsidiaries and joint ventures with foreign firms, while only Samsung and LG emerged as new participants in that sector. In addition, the government set up a public R&D institute – KIET (Korean Institute of Electronics Technology) – in 1976 to assist the semiconductor and computer industries. Later, in 1985, ETRI (the Electronics and Telecommunications Research Institute) was established, taking over

Technology in Global Markets and Korean Chaebol 101

KIET’s overall task. As for the government’s role, MTI was attempting to set up a coordinating industry association in order to effectively meet various responses from the private sector.8 On the basis of the state initiative, electronics product firms formed the EIAK (Electronics Industry Association of Korea) in 1976, by absorbing the two existing electronics industry associations, the Korean Electronics Industry Cooperatives and the Electronics Industry Export Cooperatives. Samsung’s entry into the semiconductor industry was a take-off point in the development of Korean semiconductors, coupled with its relatively strong financial resources and accumulation of technological capacity from its consumer electronics sector. It assumed the leading role in the industry from then onward (Hong, 1997: 92–3; L. Kim, 1997b). Basically, during the HCI period, the government’s focus was upon the objectives of HCI policy, in particular, the defence industry, rather than the semiconductor industry itself.9 No major changes were brought about except for the Korean chaebol’s participation – Samsung, LG, and later in 1983, Hyundai Electronics Industry – in the semiconductor sector. Until the early 1990s, most of the industrial guidelines, such as financial spending, R&D investment, and overseas’ marketing for semiconductors had been developed and explored by Samsung electronics and its sub-division.

Consumer electronics and adaptation to overseas markets: semiconductors as an emerging international market force (1983 to mid-1990) This stage shows the Korean chaebol’s willingness to spend a substantial amount of money on investment and technology acquisition. Between 1983 and 1989, the three chaebol – Samsung, LG and Hyundai – spent more than $4 billion on production equipment. Since 1987, the three chaebol’s capital spending per annum increased from $800 million to $1.8 billion in 1993, thus accounting for 20 per cent of the world’s total semiconductor facility investment in that year (Ernst, 1998: 254–5). Since the 1980s, government policy had changed from direct intervention to indirect involvement. Especially since 1982, the consumer electronics sector has faced slower growth caused by the global economic recession and protectionist policies in advanced countries, illustrated by anti-dumping duties filed by the UK and the US. The UK in 1977 imposed import restrictions on Korean black and white TVs. In the US market, in 1983, for the first time, anti-dumping measures were filed against CTVs at the initiation of the domestic producer Zenith. Fortunately, the loss of consumer goods exports to developed markets was offset by the growing domestic market, combined with the start in Korea of CTV broadcasting

102 Newly Industrialising Economies and International Competitiveness

in 1980. In response to trade regulations, Korean companies shifted their strategic focal point from simple assembly and high volume production to qualitative growth, thus beginning to move beyond low-end goods into ‘higher-growth’ products, that is, more capital- and skillintensive products such as advanced semiconductors, microwave ovens (MWOs) and VCRs. It was also an attempt to close the technological gap with Japan (Mody, 1990; He, 1996). During this time, however, in 1987, the EC Commission initiated anti-dumping procedures against Korean consumer products such as CTVs, video-tapes, VCRs, MWOs and compact discs (CD).10 By 1987, the Korean consumer electronics industry ranked third in the world just behind Japan and the US. Some examples indicate that the Korean chaebol have developed new products through the technological strategy of reverse engineering. Samsung may be a case in point. During the 1970s it invested several years into developing its first MWO in this way. Partly due to its acquisition of a US producer of MWOs, and mainly by virtue of Samsung’s own corporate strategy, Samsung became a ‘prime’ example in terms of generic catch-up strategy (Bloom, 1992; Magaziner & Patinkin, 1989). While latecomers began development of the consumer electronics as OEM (original equipment manufacture) in the 1950s and 1960s, since the 1980s Korean chaebol, including NIEs have moved to ODM (owndesign and manufacture), and gradually evolved into OBM (own-brand manufacture) (Hobday, 1995), which began to threaten more directly the competitiveness of firms in the industrialised countries, resulting in demands to trade regulations. In the historical context of semiconductor development, the year 1983 marked what came to be called a turning point in the development of the industry,11 when Korean firms entered the production of very large-scale integrated (VLSI) chips. This meant a marked departure from simple assembly production to sophisticated wafer-processing production. Investment in R&D and facilities rose rapidly from 1983. Samsung set up a private R&D institute in Silicon Valley in order to hire several well-trained Korean-American scientists in semiconductor design from the major US companies such as Intel and IBM. Hyundai challenged the semiconductor industry in 1983 with no experience in electronics.12 In the same year, Hyundai Electronics Industries established MEI (Modern Electronics Industry), later renamed HEA (Hyundai Electronics America) in the US to carry out R&D. At the beginning, MEI was inevitably forced to concentrate more on the SRAM, rather than the DRAM because of the reluctance of foreign firms to license their technology to MEI (Choi, 1994: 76).

Technology in Global Markets and Korean Chaebol 103

Daewoo expanded its electronics business by acquiring the consumer electronics division of Taehan Electric Wires in 1983, followed by its plans to invest $80 million for the production of customised ICs for telecommunication equipment (Hong, 1997; Fitzgerald and Kim, 2004). In comparison, LG entered into memory chip production later than any other chaebol owing to its CEO’s risk-averse investment strategy, the so-called ‘wait-and-see’ attitude (Fitzgerald and Kim, 2004). Preferring its own development to technology licensing agreements with foreign firms, LG’s relationship with Hitachi on OEM dependence enabled LG to learn the VLSI production technology so that LG was able to catch up with other domestic firms (S. R. Kim, 1996, 1998). Within the development stage, most chaebol had been followed by their CEO’s management philosophy. This has been confirmed by Daewoo and LG cases. By the mid-1990s, Samsung had moved from being a follower in 1980 to a leading contender in the memory chip business, though still lagging behind foreign global competitors in non-memory chip devices, constituting about three-quarters of the world’s chip market13 (Yoon and Shin, 1997: 25). In 1996, Samsung ranked first among the world top ten in the memory area with 14.6 per cent, and Hyundai and LG Semicon were ranked fifth and seventh with 5.9 per cent and 5.2 per cent, respectively, though far behind Japan with a total of 41.5 per cent, followed by Korea with 25.8 per cent, and the US with 24.9 per cent, as shown in Table 4.2.14 The Korean semiconductor firms shifted their attention to the non-memory area with a specific target of ranking among the world top ten by the year 2000. With the Korean won’s (Korean Table 4.2 DRAM share in world market by company, 1998 Rank (1997)

Company

Country

1 2 3 4 5 6 7 8 9 10

Samsung Hyundai Micron NEC LG Toshiba Siemens Mitsubishi Hitachi Fujutsu

Korea Korea U.S Japan Korea Japan Germany Japan Japan Japan

(1) (5) (4) (2) (6) (7) (9) (3) (10)

Source: IDC (March, 1999).

Revenue ($ million)

Market share (1997) (%)

2 810 1 740 1 290 1 280 1 180 1 110 1 095 970 905 830

201188 12480 9283 91117 8475 7972 78 6962 6586 5960

104 Newly Industrialising Economies and International Competitiveness

currency) fall against the Japanese yen, rapid growth in the semiconductor market brought about tremendous windfall profits for Korean chaebol, thereby prompting them to invest heavily in non-memory chips (L. Kim, 1997b). The most important feature of government–industry relations since 1983 was that the private sector’s leverage in dealing with the Korean government was strengthened compared to the preceding years. Moreover, the Korean chaebol have emerged as initiators of investment and production activities, as evidenced by the chaebol’s entry into semiconductors. First, the international trade environment has had a significant impact on the state–private sector relations in the latter’s favour. The pressures towards open markets and fair trade by the US and advanced countries have made it difficult for government to manipulate the Korean chaebol. In late 1989, the US urged the Korean government to withdraw any government subsidy towards a specific industry with a warning through a ‘Super 301’.15 The advent of the Uruguay Round and the resulting World Trade Organisation limited any state’s capacity to implement and promote particular industrial sectors (Hong, 1997: 105–6). Secondly, the chaebol became the most influential power bloc stemming from their performance established over the past decades. It could be said that they are not so easily orchestrated by the state. The relations between the state and the private sector changed from the vertically subordinate relationship in the 1960s to a competitive or symbiotic relationship in the 1980s (Soh, 1997a: 234). Thirdly, the electronics industry mainly contributed to the growth of the chaebol’s market power, especially based on the historical development of the semiconductors. The chaebol’s entry into the semiconductor sector was not a result of government initiatives and incentives, but a consequence of their judgement over how, or to what extent, the semiconductor industry would have an impact on the prospects of overall business for the future. As Porter (1990) maintains, competitiveness of individual firms can be identified with the performance of a nation, in that firms, not government, compete in the international market and create the industrial competitiveness of a nation (Lee, 1996: 5–6). Specifically, in the 1980s, big firms’ exposure to internationalisation in terms of overseas investment and trade barriers tended to restrict to the minimum the sphere in which government could perform and intervene (Soh, 1997a: 235). In this context, it should be noted that over the past decades the Korean semiconductor industry has enhanced its market power, based on the chaebol’s entry into a technology- and capital-intensive sector, adding

Technology in Global Markets and Korean Chaebol 105

a new dimension to its bargaining power in dealing with the Korean government.

Digital consumer products in the initial stage: leading international competitors in semiconductors and TFT-LCD (mid-1990 to the present) At present, it could be argued that the Korean electronics industry is in a transitional period of turning from the ‘investment-driven’ stage to the ‘innovation-driven’ stage (Pecht, 1999: 4). Based upon their enormous size and centralised corporate structure, the chaebol have had a considerable ability to enter new product segments or even new industries that include semiconductors, digital products, TFT-LCD and mobile phones. Until recently, the chaebol have challenged global competitors to overtake the latter’s leading position in the world markets in terms of innovative competitiveness at the international level. With regard to consumer electronics, according to one senior manager of Samsung Electronics, consumer electronics goods seem to be less promising for the future in the light of net income. He observes that: Apart from the Korean semiconductors, net profit coming from consumer electronics products has been negative on average. As for Samsung, audio-visual goods are said to hold 25 per cent or less of overall electronics business for the time being. As for consumer electronics, it might be that market share in world markets is not actually related to the profitability of the industry, given that in the digital age, Digital TV or DVD will tend to affect competitive features among the global players in innovative technology terms.16 Against such prospects, most recently, Philips has expressed its intention to concentrate on the consumer electronics industry, which contradicts the pessimistic assumption above. Specifically, coupled with its record profits in 1997, Philips’ attempt to appoint Roel Pierper, former vice-president of the US computer company Compaq, as chief strategist, indicates that Philips has been determined to devote much energy to ‘high-volume’ consumer electronics, accompanied by its aggressive willingness to become a leading company in the digital revolution (Financial Times, 13 February 1998). As Gordon Cram (1997) put it: Philips is to develop more products as potential winners, price existing lines aggressively and increase spending on marketing as

106 Newly Industrialising Economies and International Competitiveness

part of a plan to reassert itself in consumer electronics worldwide    Doug Dunn, head of a newly reorganised consumer division accounting for as much as a third of group sales, said: ‘We have charted out the path for Philips for the future. We have quite strenuously reconfirmed our commitment to the broader consumer market’    as Philips president in October last year [1996], Mr Dunn rejected any idea that the group should abandon an established product range because the valued added is low. ‘It will not make me embarrassed if they are called commodity products. We make money on them’ [emphasis added]. Since the Asian financial crisis, Korea’s mainstream electronics industry has faced a harsh recession, combined with sharply reducing demand from the domestic market and overseas markets and reduced export prices. During the first half of 1998, Korea’s electronics exports stood at $21.7 billion, while domestic shipments reached $3.8 billion, and production amounted to $26.1 billion. Consequently, supply was far beyond demand. In 1998, Korea exported electronics products worth $5.96 billion to the US, and $3.8 billion to the EU. Following that, the big three chaebol were compelled to restrict their average ratio of operation to 60 per cent (Business Korea, October 1998). In the meantime, Korea has strived to meet the international digital trend and lead the way in technology innovation. In response to Korea’s overall market opening of home appliances to Japanese products, the two largest TV makers, Samsung and LG, have shown their interest in their market share for high-end TVs such as large-screen flat TVs and projection-type TVs. In addition, Samsung Electronics exported its first HDTV to the US in November 1998. Before this, Samsung had exported a 40-inch LCD projection TV (called Tantus) at the end of October, and began selling a 52-inch TV manufactured in the US. Also, Samsung began mass production of HDTV in October 1998. Furthermore, it is important to point out that from the beginning this product was to be offered under Samsung’s own brand name, while LG intended to supply Digital TV under the Zenith brand name, seemingly in the form of OBM17 (Korea Times, 12 November 1998). As far as HDTV is concerned, Samsung stood as a leading manufacturer in the world while LG still struggled with its counterpart in the US market. With regard to DVD, Samsung has become one of the consumer electronics manufacturers to provide DVDP (Digital Video Disc Player) as one of five patent-licensing groups, in addition to Sony, Panasonic, Toshiba and Pioneer, thus reflecting its commitment to digital

Technology in Global Markets and Korean Chaebol 107

technology leadership, while LGE offers DVDP under Toshiba OEM. However, three leading groups – Sony with 30 per cent alone, Panasonic and Toshiba – account for 80 per cent of the world markets.18 In the LGE case, Zenith, a subsidiary of LGE in the US, produced a variant of DVD called Digital Video Express (Divx) in the US market. In the end, it turned out to be a failure as Divx had little support and was discontinued (Business Week, 5 July 1999). When it comes to DRAM, the Korean semiconductor manufacturers have continued to dominate world markets to a substantial extent, at least over the past few years. It is notable that Korean semiconductors in 2000 accounted for 15 per cent of total Korean exports (Samsung Economic Research Institute, 2001). In this regard, any fluctuation in market prices may affect the Korean economy as a whole, including trade revenues. Unlike traditional trade policy in Korea, most of the balance-of-trade has been easily affected by the industrial sector since the 1997 financial crisis. This trend has been strengthened by the chaebol’s involvement in the government’s industrial policy-making formulation. Also, the increasing number of government technocrats from the private business sector in the cabinet has led to the collaboration between the government’s industrial policy and the chaebol’s business policy. Despite the deep recession in the DRAM market over the last few years, coupled with forceful corporate restructuring, the big three Korean semiconductor firms successfully increased their share of the world markets to 41 per cent in 1998 (Table 4.2). Ranked first, Samsung alone accounted 20.1 per cent, followed by Hyundai at 12.4 per cent, and LG Semicon at 8.4 per cent. As of 1998, the world market for DRAM reduced from $19.8 billion in 1997 to $14 billion. HEI (Hyundai Electronics Industries) were ranked in second place just behind Samsung, increasing their market share from 8 per cent to 12 per cent in 1997.19 As discussed in the previous section, Korean firms had been the engine of growth in the semiconductor industry. The most important source of growth depends on the strategies of chaebol and Korean corporate culture. Thus, whenever one business group begins to make an investment in a new industry sector, other business groups necessarily tend to follow the same trajectory. On the whole, it brought about what is thought to be a ‘synergy effect’, combined with the resolve to be number one stemming from Korean indigenous culture and tradition. For example, when semiconductor prices collapsed, Korean companies, in particular Samsung, made huge investments in 1989 which resulted in the big success of the early 1990s.20

108 Newly Industrialising Economies and International Competitiveness

Based on the potential competitive advantage that they can create in globalising semiconductors, we believe that Korean electronics firms have replaced the seemingly conventional disadvantage derived from consumer electronics FDI flowing to the somewhat ‘regionalising’ EU with the possible ‘competitive advantage’ that they have attained in the globalising semiconductors markets. As of 1997, this argument can be supported by the analysis that the export weight of semiconductors alone accounted for 11.8 per cent of Korean exports as a whole, as compared to Japan (5.4 per cent) and the US 5.2 (per cent) (Table 4.3). With the increasing significance of the semiconductor industry, the export weight of Korean semiconductors has shifted from 4.5 per cent in 1990 to 15.1 per cent in 2000 (Jung, 2000). Following in the footsteps of the big success of the semiconductor industry, it seems likely that the TFT-LCD will become another example of a major Korean export product.21 The Korean TFT-LCD industry shares a number of common features with the growth pattern of the Korean semiconductor industry, and Korean producers have already emerged as leading international manufacturers in the short period of time since the beginning of production in 1995. Korean big companies entered Table 4.3 Top ranking export goods by weight (1997): Korea, Japan and US (unit: %)

1 2 3 4 5 6 7 8 9 10

Korea Korea products weight

Japan Japan products weight

US US products weight

Semiconductors 11.8 Automobiles 6.8 Ships 4.7 Gold 4.5 Computers 3.9 Petrochemical products 3.7 Synthetic fibre 3.4 CRTs 1.9 Steel 1.0 Cordless phones 0.9

Automobiles 11.4 Semiconductors 5.4 Computers 4.4 Automobile parts 3.5 Electronic parts 3.0 Unclassified goods 2.7

Semiconductors 5.2 Computers 4.1 Automobile parts 4.0 Airplanes 3.9 Electronic parts 3.1 Automobiles 2.5

Ships 2.2 Trucks 2.0 Other machineries 1.8 Xerox machines 1.5

Airplane parts 2.0 Others 2.0 Turbo jets 1.7 Freight automobiles 1.1

37.9 (84.7)

29.6 (68.6)

Top 10 ranking 42.8 HS4 Digital items (73.0) code

Note: Weight of top 10 ranking export goods in total exports by HS four-digit code. Figures in parenthesis are the weight of the top ranking items by HS two-digit code. Source: KIET (1998).

Technology in Global Markets and Korean Chaebol 109

the TFT-LCD industry in the early 1990s, an industry in which Japanese companies enjoyed monopoly in the TFT-LCD world markets at the time. As of 1996, Korea accounted for just 10 per cent of the global market share in TFT-LCDs, with Japanese companies holding an overwhelming 90 per cent. Samsung Electronics and LG-Philips are expected to be listed at first and second among manufacturers worldwide from 2000 onwards, thus accounting for 19 per cent and 16 per cent of the international markets in 1999, respectively. The Korean companies in 2000 shared 39.5 per cent of world markets, followed by 36.1 per cent for their Japanese counterparts22 (EIAK, 2001). Following the Korean semiconductor industry, TFT-LCDs are also expected to lead Korea’s export growth along with digital video disc players (DVDP) and code division multiple access (CDMA) telecommunication equipment. It seems likely that the success of TFT-LCDs currently arises from the Korean electronics companies’ existing distribution networks for sales of televisions and CRTs (K. Kim, 1997). As such, in terms of knowledge-intensive industry, the establishment of the Korean electronics industry as a world-class producer and the subsequent success of Korean electronics products have had a dramatic influence over the global electronics industry. What is puzzling about the achievements of latecomers such as Korea in the TFT-LCD industry is how they were able to overcome such severe disadvantage in terms of high-technology and access to advanced markets so efficiently and so quickly. The most important element of the new approach is related to the previous Korean response to the temporary recession in semiconductors in the world markets (see Table 4.4). From the second half of 1997 to the first half of 1998, the world TFT-LCD market faced severe stagnancy due to oversupply. In the meantime, Japanese producers began to withdraw their investment in the construction of new production lines, with a focus on the production of only 12.1-inch products. Korean manufacturers made strategic investments in building production lines to manufacture products larger than 13.3 inches. Correspondingly, with increasing demand for largesized notebook PCs and computer monitors, the Korean companies have reacted efficiently and quickly to this continuing demand, and successfully turned a catching-up disadvantage into a potential advantage, putting them in first place in terms of international competitiveness from then onwards (Jung, 2000). At the same time, the increasing competition among the domestic market fuelled R&D-related innovation products in the electronics market. Especially in dot-com boom periods (1998–2003), most computer

110 Newly Industrialising Economies and International Competitiveness Table 4.4 Business strategy factors: the Korean TFT-LCD and semiconductors Corporate strategy

TFT-LCD

Semiconductors

Maximising late-starter advantage

Catching up with Japanese technology within a short period.

Successful adoption and utilisation of advanced technology.

Audacious investment in next generation lines when Japanese manufacturers are reluctant to make new investments.

Expanding export to the US when Japanese export was depressed due to anti-dumping measures.

Concentrating firms’ core capacity in the new sector.

Strategic choice of memory products suitable to Korean circumstances.

Strategic choice of target market, development of their own parts and equipment, and outsourcing.

Audacious investment despite market recession and accumulative losses.

Innovative and timely decision-making process

Resolute expansion of investment at the time of crisis in 1998; reduction of production costs and improvement of product quality.

Advance investments in times of market recession.

Making the most of the related industrial sectors

Maximised utilisation of the existing industrial sectors, e.g. semiconductors and related consumer electronics parts.

Appropriate to mass production.

Sufficient availability of the existing market channels, workforces and production networks originating from the semiconductors industry.

Shortening development period and enhancing efficiency by placing R&D institutions and plants at the same site.

Organisational determination to overcome crisis in 1998.

Decision on a new production mode of 4M DRAMs which leads to a significant cut in production costs.

Strategic choice and concentration

Corporate leadership

Organisational recruitment of superior human resources.

Source: Samsung Economic Research Institute (1999) and individual research survey by the authors.

Technology in Global Markets and Korean Chaebol 111

products have been a consumer market leader and increased the total expenditure of consumers’ spending. Unlike traditional consumer group behaviour in the ‘386 generation’ (the first wave of the 1960s baby boom in Korea), most of the young consumer group have enjoyed shortening their purchasing products’ time-scale from product endurance to new model-pursuited trends. This has had a tremendous product impact in Korean electronics industries. Most of the small-medium electronic manufacturers could survive without their own brand strength. New products, which are surveyed on the internet as prime products, are simply placed on the top of the market trend, and even Samsung, for example, has to follow new model design. This is not the general trend of the consumer market nationally, but applies to electronic products alone. Notwithstanding the current contraction in Korean exports since early 2000, mobile phones have become a major electronics item in Korea’s export list (Table 4.5). Surprisingly, the market share of Motorola, a US-based manufacturer of mobile phones, fell to almost zero in 1997, from more than 50 per cent prior to 1995. The mobile hand-set market has been led by the teen-generation. Again, unlike other electronics products, the mobile phone industry has targeted its products for the teenage generation alone. This has resulted in a change to consumer behaviour since the dot-com boom. By filling the vacuum left by the foreign first-comers, leading Korean companies such as Samsung Electronics and LG Electronics, and venture companies like Appeal, Sewon Telecom and Pantech, have attained a 54 per cent market share in the world markets for mobile phones using the CDMA format normally adopted in the US, which is one of two main voice transmission methods, the other being TDMA (time division multiple access) technology. Furthermore, Korean electronics firms have aggressively extended their business interest to GSM (global system of mobile communications) based on telephony largely popularised in Europe,23 Table 4.5 The market share of Korean mobile phones in the world market (2000) (unit: $ billion, %) Transmission method

CDMA GSM Total

World market (volume)

Production by Korean companies

Market share

14.0 36.6 50.6

75 37 112

53.7 10.1 22.1

Source: Samsung Economic Research Institute (2001).

112 Newly Industrialising Economies and International Competitiveness

and amounting to sales of $11.2 billion, thus leading to a share of 22 per cent of mobile phone markets worldwide. Since the Asian financial crisis, though the Korean government sought to reassert itself for a time and forced the chaebol’s corporate restructuring, it is too early to conclude that the Korean private sector is now completely dominated by the Korean state. Given the importance of the electronics industry as the leading sector closely related to the survival of the Korean economy, the influence exerted by the few leading big firms is sure to act as a major stimulator of the policy-making and implementation process. One implication is that the government’s attempts to carry on its own objectives seem now to be compromised by industry (Hong, 1997: 113–14).

International competitiveness of Korean electronics multinationals: Samsung Given that the Korean electronics industry has undergone rapid phases of development, the opportunity now exists for it to become strong enough to withstand normal business fluctuations arising from external factors, except in exceptional cases such as the forcible economic restructuring undertaken by the Korean government since the Asian financial crisis (EIAK, 1996). In general, Korea’s firms differ from foreign ones in terms of corporate culture. In terms of business–labour relations, firms have taken a ‘holistic approach’ towards workers. As Pecht (1999: 5–6) says: Korean companies often provide for all basic needs of bluecollar employees, providing housing, medical care, and recreation. Employees, in return, work with dedication and perseverance. Workers are unionised across the industry, so wages are basically for a certain level of education and experience. Even when a company is enormously successful, workers tend not to argue for higher wages, which could hurt their companies’ – and their country’s – profitability and future prosperity. In return for employee loyalty to their companies, companies appear to show great loyalty to employees. In support of this, there is an indication that the Korean labour force played a critical role in the success of the electronics industry. Until the mid-1980s, the well-educated Korean labour force contributed to the success of the Korean industries despite their relatively low incomes (Kenny, 1998; L. Kim; 1997b; Pecht, 1999). This was confirmed by one Samsung manager. He argued that ‘When it comes to Korean semiconductors, one of their most conspicuous strengths seems to be their

Technology in Global Markets and Korean Chaebol 113

workers. When memory chips are in heavy demand, they work tirelessly to meet demands from foreign customers in a proactive way. In terms of labour quality, there is no challenge from workers in other countries.’24 In addition, we need to examine the elements of Korean chaebol’s corporate strategy concerned with the development of international markets (Fitzgerald and Kim, 2004). First, on the positive side, Korean firms tend to approach global market leaders actively, in direct competition with developed countries, especially Japanese companies, in order to establish an equity partnership with advanced leaders over time. According to Linden et al. (1997: 11), ‘the Koreans generally license when they must, then undertake extensive internal development so that future partnerships can be on an equal footing’. Likewise, with respect to foreign direct investment, in the case of Korean consumer electronics, according to Jun (1987), ‘reverse direct investment’ was attempted to make investments in developed countries, such as the US and European markets. In his analysis of Goldstar’s (today, LG) overseas investments, Jun (1987) contends that the conventional FDI theories have not offered an adequate explanation of the ‘reverse direct investment’ phenomenon of Korean firms. Traditional FDI by industrialisers was made to ‘exploit monopolistic firm-specific advantages’ (Jun, 1987: 102), while the ‘reverse direct investment’ is basically viewed as an outcome of ‘market security seeking’ (1987: 100), directed towards ‘a premature defensive strategic move’ (1987: 102). In this context, initially, between 1981 and 1987, Goldstar proactively made investments in the US and West Germany, whereas Samsung invested in the US, the UK and Portugal in the consumer electronics products such as CTVs, microwave ovens, and VCRs. Positively speaking, as mentioned above, leading Korean firms have tended to evoke a ‘crisis’ in order to expedite technological learning. It is generally recognised that they created a crisis even in the absence of a real crisis as a means to further and accumulate technological capability at the individual and organisational levels25 (L. Kim, 1999). L. Kim argues that ‘constructed crises generate intense pressure to create a mandate for change, enabling management coalitions to reach consensus on organisational goals and prompting members to accept them’ (L. Kim, 1999: 125–6). This was illustrated by the leading Korean chaebol. From a negative perspective, the chaebol’s technological capability remains vulnerable, in that component suppliers and assemblers are still weak. The suppliers’ exclusive dependence on chaebol firms provides little opportunity for interactive feedback with other assemblers.26 Occasionally, the Korean chaebol persuaded skilled employees working at

114 Newly Industrialising Economies and International Competitiveness

suppliers to move to the chaebol’s subsidiaries. As a result, the Korean electronics industry lacks the number of technologically enhanced subcontractors that can be seen in Japan (Kenny, 1998: 6–10).

Internationalisation strategy of Samsung Electronics In the 1990s, there was broad agreement between the Korean government and chaebol on the issue of globalisation. One of the key features of the ‘globalisation policy’, or segyehwa scheme, launched by the Korean government aimed to upgrade a number of industrial competitive indicators to international standards in a number of industrial sectors (Kim and Kim, 2006). Significantly, this globalisation has resulted in increasing exports and encouraged outward foreign direct investment (Sachwald, 2001: 3). Concerning the internationalisation strategy, Korean conglomerates have adopted quite different corporate attitudes. Korean big business has generally embraced globalisation but has modified its corporate strategy to adapt to its intrinsic circumstances. Unlike other Korean chaebol, the Daewoo Group’s globalisation strategy was paradoxically not based on an internationally well-known brand recognition nor technological innovativeness. As Ungson et al. (1997: 123) put it: Daewoo’s globalization effort was in large part a reaction to its poor international market presence in the early years. Daewoo Electronics, for instance, had a limited technology base, negligible brand recognition overseas, and hardly any international presence    Chairman Kim Woo-Chung    sought to improve Daewoo’s position through globalization. Foremost was the need to build a quality brand name and to create consumer identification with and loyalty to Daewoo products [emphasis added]. By contrast, for Samsung, the globlalisation logic suggests that ‘in its new competitive posture, Samsung no longer views domestic competitors – Hyundai, LG and Daewoo – as its primary competitors’ (Ungson et al., 1997: 115). Samsung Electronics has successfully translated its internationalisation strategy into expanding world market share and market-driven ‘network enterprises’ (Castells, 2000), including location of overseas manufacturing operations. Compared to other Korean companies, Samsung has a much more stable market share in the domestic market and the gap between Samsung and other companies is not easy to overcome. At the national level, the globalisation strategy of Korean electronics MNCs has been related to the Korean government’s

Technology in Global Markets and Korean Chaebol 115

policies which include the liberalisation of the domestic market for foreign electronics MNCs and a change in defining the objectives and goals of the FDI strategy (Kim and Kim, forthcoming). Following Korea’s participation in the OECD, the Korean government had no choice but to open its local market to foreign companies in most industrial sectors. Unlike the analogue age, in terms of international competitiveness, the advent of knowledge-intensive technology and the coming of the digital age certainly gave Samsung the critical momentum to become an international competitor; it underwent a radical transformation into a leading innovative-driven MNC to the extent that it can compete with, or surpass, American, Japanese and European start-ups in particular electronics sectors (Figure 4.1). Accordingly, CEO, Yoon, Jong-Young of Samsung Electronics maintains that ‘with the digital age, we can catch up with our competitors. We were 30 to 40 years behind in the analogue

Analogue era

Digital era

Samsung’s competencies

Digital requirements

Cost efficiency through economy of scale

Demand and value creation

Acceptable quality, value and price

Speed and convergence capability

Vertically integrated manufacturing

Strategic alliance

Manufacturing-driven strategy (Volume and product focus)

Market-driven strategy (Innovative technology and innovative organisation)

Figure 4.1 Technological paradigm shift and Samsung’s market-driven strategy Source: Authors’ research based on Samsung Electronics Research Institute (2001) data.

116 Newly Industrialising Economies and International Competitiveness

age, but in the digital age, the playing field has been leveled’ (Forbes Global, 16 April 2001). Another senior manager of Samsung Electronics told us that it was difficult at first to visualise the success of digital technology in the UK. However, Samsung’s strategic change from analogue to digital was successful after their sponsorship of Chelsea Football Club. Like Samsung, Chelsea wished to coordinate its marketing image with one of the leading MNCs in the world (interview with Deputy Head of Samsung Electronics in London, 11 September 2005). Drawing on the 400 top companies in twenty-seven industrial sectors worldwide, Forbes Global in January 1999 reported that Samsung was awarded the only ‘A+ ’ rating among nine leading consumer electronics corporations, including Philips, Sony, JVC, Matsushita and LG Electronics.27 Among those that received an A+ rating in other industrial sectors were Daimler-Chrysler in the auto industry, Pfizer in pharmaceuticals, Dell in computers, Vodafone in communications and Unilever in food and beverages (Forbes Global, January 1999). It is important to point out that even the European champion, Philips, was behind Samsung Electronics. Thus an attempt needs to be made to explore the global competitive dynamics of the Korean chaebol with an emphasis on Samsung Electronics. With sales revenues amounting to $17 billion in 1998, Samsung Electronics has grown to become a world-class competitor with operations in more than fifty countries and with 75 000 employees worldwide (Samsung News, 11 January 1999).28 Significantly, as far as net profit is concerned, whereas Philips achieved record net profit of $2.77 billion for 1997 (Financial Times, 13 February 1998), Samsung Electronics reported net earnings of up to $2.8 billion for 1999 which was a ten-fold increase on the previous year, partly due to the weakness of the Korean currency, thus leading to a price advantage against Japanese exports. Semiconductors accounted for 45–50 per cent of net profit in 1999, down from 90 per cent in 1995. As of early 2000, Samsung’s debt/equity ratio had fallen to below 100 per cent from nearly 300 per cent in 1997, which in turn resulted in the reduction of costs, thus adding to net profit. As for semiconductors, Samsung was expected to reach total sales revenue of $9.3 billion which includes $6 billion for memory chips, $2.2 billion for LCDs and $1.1 billion for non-memory chips. As a result of this, Samsung intended to invest $2.8 billion in semiconductors, including $1.8 billion for plant and $600 million for R&D (Financial Times, 20 February 2000). Samsung Electronics was founded in 1969 as part of the Samsung Group. In 1972, Samsung started with the production of black and white TVs. By the mid-1990s, the size of Samsung had grown rapidly,

Technology in Global Markets and Korean Chaebol 117

amounting to 50 per cent of a total of export values by the big four electronics chaebol, largely based on consumer electronics, semiconductors, computers and, more recently, the information sector (Pecht, 1999: 7). Since Samsung’s entry into the electronics industry, it expanded its activities through the 1980s with a reliance on OEM (original equipment manufacture), ODM (own-design and manufacture) and joint ventures (Hobday, 1994). Samsung had achieved its goal of becoming a vertically integrated manufacturer of TV sets through a series of joint ventures. In March 1973 Samsung-Sanyo Parts, which later evolved into Samsung Electro-Mechanical (SEM), was set up, with joint shares from SamsungSanyo, SEC and Sanyo. This firm produced parts for television, turners, deflection yokes, transformers and condensers. In December 1973, with a 50:50 equity partnership, Samsung collaborated technologically with Corning Glass Works of the US in order to produce glass bulbs for the production of cathode ray tubes (CRTs) (Y. S. Kim, 1997a). Here it is important to point out that Samsung succeeded in developing microwave ovens (MWO) and VCRs through ‘reverse engineering’. In the 1970s, Samsung attempted to gain access to technology for the two products with no success. As a result, Samsung formed a product development team to develop both of them on its own. MWO development was successfully completed in 1978, quickly followed by the success of the VCR in 1979, allowing Samsung to take a leading position compared to other companies, in particular Goldstar, then the first-runner in consumer products. This dominance was confirmed by Samsung’s acquisition of Daehan Semiconductors in 1979 (Y. S. Kim, 1997a, 1997b). In the early 1980s, Korean firms faced anti-dumping duties on their CTVs exported to the US. From then on, especially in electronics, the chaebol have made heavy investments in overseas production. Over the last decade, chaebol firms have evolved into significant foreign investors relocating their plants abroad, especially in the US and Southeast Asia in the early 1980s, and between the late 1980s and the early 1990s incrementally in Europe. In this context, owing to stricter local content requirements, Samsung Corning in Germany, the sister company of Samsung Group, decided to relocate its operation through the acquisition in 1994 of the TV glass bulb manufacturers FGT (located in former East Germany), thus turning from ‘screwdriver plants’ to FDI-related localised production facilities (Hobday, 1997a). According to one interviewee, more recently, especially for digital products, Samsung’s primary focus has gradually been towards OBM (own-brand manufacture). In the earlier period, Samsung’s high priority

118 Newly Industrialising Economies and International Competitiveness

had been an increase of export performance, rather than its own brandname recognition for two reasons. One was to conform to the exportled policy originally prompted by the government. A second and more important factor was bank loan incentives. As one Samsung executive revealed: In 1979, for the first time, Samsung offered its brands in the US market. Before then, we didn’t need to sell our products on ‘Samsung’ own brand. Rather, our primary emphasis was upon how many products we were able to export for the reason that we may be allowed to borrow money from banks far below the normal borrowing rate, 15 per cent, on the basis of a total of export amounts. Otherwise, we had to pay interest rate of 15 per cent. As a result, we had no choice but to put top priority on the export performance regardless of the image and advertisement of Samsung brands. We don’t need to show interest in product quality. As time passed, we realised that we should have offered our own brand as early as possible.29 With regard to HDTV, Samsung attempted from the beginning to build up its own brand recognition in the US market, whereas LGE acquired Zenith for its brand name and US distribution outlets. In consumer electronics, in the US, Samsung initially produced VCRs under Thomson OEM in the late 1980s, and gradually shifted to using its own brand name. In 1998, Samsung made a decision to begin as an OEM supplier to Toshiba and RCA mainly as a result of its profitability. In the European market, from the beginning Samsung Electronics offered its own brand, thus attracting much attention from European customers compared to other products such as CTVs. Samsung cannot be considered a poor brand name in Europe.30 In MWO, Samsung was ranked first in 1998 with 12.0 per cent, followed by Sharp with a share of 10.5 per cent, and Moulinex and Whirlpool with 8.6 per cent and 8.4 per cent respectively, while in 1997 Samsung was ranked second with 10.8 per cent just behind Sharp with 11.5 per cent (see Table 4.6). Hobday (1995a, 1997a, 1997b) has argued that OEM is one example of the catch-up strategies pursued by industrialising countries, but in this respect Samsung may be exceptional. Samsung’s MWO example shows that OEM may be one of the deliberate corporate strategies chosen by leading firms to maintain international competitiveness in world markets. Though Samsung offers MWOs under its brand name worldwide, from 1999 it was expected to start production and marketing

Technology in Global Markets and Korean Chaebol 119 Table 4.6 Microwave oven production, 1999 Maker 1 2 3 4 5 6 7 8

Sharp Samsung Mitsubishi LG Daewoo Sanyo Whirlpool SMC

Domestic

Overseas

Total

900K 3,500K 950K 2,970K 1,900K 280K – 1,200K

4,650K 2,000K 3,160K 910K 1,550K 2,370K 1,050K

5,550K 5,720K 4,110K 3,690K 3,056K 2,650K 1,050K 1,200K

Source: LG Electronics (2001).

under OEM from 1999 for various reasons. One reason is that Samsung is not willing to become a target for other global competitors. Along with this, on the other hand, the general implication is that Samsung will become highly competitive in gaining access to world markets profitably and with fewer burdens. This compares to the corporate strategies of the European big firms normally pursuing multi-brand marketing in local and world markets.31 The deliberate OEM undertaken by Samsung Electronics can be seen as one aspect of its internationalisation strategy to evade direct competition from its rivals. In the case of MWOs compared to CTVs, its competitiveness largely emanates from production efficiency based on minimisation of production costs, the cheapest components and maximum number of units of production per hour.32 In the EU market, Korean companies are very strong when it comes to microwave ovens. In terms of marketing strategy, it is more advantageous for Korean chaebol to approach the EU market on an OBM basis for various reasons. The first is that local European firms appear to be smaller in terms of their size and production volumes compared to their Korean counterparts. By contrast, the local European firms intended to challenge the Korean chaebol on an OEM dependence strategy.33 It is evident that the case of Korean MWOs in the EU market adds a new dimension to the analysis of catch-up strategies in contrast to the conventional belief that Asian latecomers tended to place higher priority on OEM for the US and the EU markets in the initial stages. Samsung Electronics in 2000 emerged as the world’s largest manufacturer of MWOs, surpassing Sharp (Korea Times, 5 October 2001). In 1997, Samsung was in dispute with the Ministry of Information and Communication (MIC) during the decision-making process

120 Newly Industrialising Economies and International Competitiveness

with regard to an HDTV standard for two reasons. Firstly, Samsung assumed that the introduction of an HDTV standard would allow their rival LG to gain an advantage partly by virtue of the fact that LG had already purchased Zenith. Secondly, in terms of marketability and profitability, a digital SDTV standard is likely to bring about a broader market share than HDTV, ranging from Europe to non-European regions, including Africa, the Middle-East and several countries in the Asian region. According to an interviewee, Samsung had a preference for SDTV. Interestingly, one LG manager contends that ‘LG defeated other Korean counterparts as far as an HDTV format is concerned’,34 but such a judgement seems to be still controversial. The decision about an HDTV format by the Korean government was greatly influenced by the fact that the US is solely concerned with choosing an HDTV standard, whereas the EU preferred an SDTV standard.35 In the 1970s, Samsung made a decision to shift its focus to a more high-tech industry, semiconductors, following the two oil shocks. With regard to semiconductors, it could be that the personality of management has had a decisive influence on Samsung’s entry into such a nongovernment-led traditional HCI sector. The Chairman of the Samsung Group, Lee, Byung-Chul, as a founder of Samsung Group, thought of semiconductors as the last new venture of his life. He was already over seventy years old when Samsung’s decision to participate in the semiconductor industry was finally made. Initially, as Choi (1994) observed, much emphasis was placed upon inhouse development, coupled with Samsung’s potential in good management and in human resources. Samsung intended to pursue aggressive risk-taking strategies to close the technology gap with leading foreign firms, with much emphasis upon overseas markets being targeted for its overall products. Samsung’s business priority was exclusively concentrated on ‘long-term growth’, rather than ‘short-term profitability’, thus enabling it steadily to make massive investments during related industry recession (Choi, 1994: 87–9).36 As Figure 4.2 indicates, based on Samsung’s proactive ‘convergence’ technology strategy in the new century which reaps a synergistic effect arising from the tripartite interplay of three kinds of higher-end technology – semiconductors, wireless and digital media – Samsung has already accumulated sufficient in-house competence to be able to leapfrog its major competitors in consumer electronics, semiconductors, TFT-LCDs and, moreover, mobile phones in world market (Table 4.7). Unlike other competitors in the domestic market, such as LG and Hyundai, Samsung moved from technology-intensive industry into the

Technology in Global Markets and Korean Chaebol 121

Semiconductors

SAMSUNG

Wireless

Digital media

Figure 4.2 Samsung’s ‘convergence’ technology strategy Source: Authors’ research based on various issues of Samsung Electronics company reports.

Table 4.7 TFT-LCD market share worldwide (1999/2000) Ranking

1999 Company

1 2 3 4 5 6 7 8 9 10

Samsung LG-Philips LCD Sharp Hitachi NEC Toshiba Sanyo Electric IBM ADI Matsushita Others Total

2000 Market share (%) 18.6 15.5 10.8 10.4 8.8 7.9 6.2 5.7 4.0 3.2 8.9 100

Company

Samsung LG-Philips LCD Hitachi Sharp Toshiba NEC Sanyo Electric IBM Acer ADI Others Total

Market share (%) 20.5 14.0 10.1 7.6 6.8 6.6 5.0 4.6 3.6 3.1 18.1 100

Source: EIAK (2001).

wireless-based human-innovated technology industrial sector. A heavily invested software development plan since 2000 would move Samsung from its manufacturing base into a service-friendly wireless virtual company in the multi-media industry. Its new plan has been supported

122 Newly Industrialising Economies and International Competitiveness

by a human-intensive investment plan, which sought more than 1000 employees who have PhD-level educational ability. As G. H. Lee said, Samsung would be the first knowledge-dominated company in Korea. At the same time, Samsung employs less well-educated but highly motivated employees in the ‘think of the unthinkable’ sector, setting them the task of imagining virtual products to be developed in the future.

Shifting market situations and Samsung’s response From the mid-1990s, due to a drop in international prices for chips, Samsung suffered a sharp decline in net profits. Moreover, the Asian financial crisis aggravated Samsung’s difficult position in the electronics market. The response of Samsung Electronics was to embark on wellorganised corporate restructuring and downsizing, and to devote itself to adopting global standards. Going beyond market fluctuations, Samsung has focused principally on the higher value added segments of IT-related industries. Since then Samsung has strived to respond to new market situations. As a means of tackling the economic crisis it faced, Samsung shut down several operations in the US, Latin America and China, and also other operations in the Asian region. Global product managers (GPMs) were appointed within a new management structure to replace the previous one in which manufacturing and sales were structurally and functionally separated. The GPMs are required to take responsibility for overall operations such as production, domestic and overseas sales, profitability and marketability, because of the need to pay more attention to corporate flexibility and efficiency. As a rule, an executive managing director or vice-president of a company is normally appointed a GPM, based upon each product such as TV, VCR, MWOs or semiconductors.37 Similarly, in narrower terms, LG has a programme management officer (PMO), focusing on the development of digital TV. In this regard, the PMO is given responsibility for R&D, sales, marketing and after-services, including overall management. For a limited time, the PMOs will connect overseas and domestic operations with a view to bringing all kinds of DTV-related activities into the normal business. It is intended that the PMO will eventually be integrated into the mainstream organisation.38 Interestingly, it can be seen that Samsung’s profitable entry into the mobile phone market contributes to its achievements as a chip-maker. It has sold $5.8 million handsets in the US (average retail price: $124), making more profit than Nokia, the world number-one handset maker (average price: $48). Samsung makes half the phones sold by Sprint and

Technology in Global Markets and Korean Chaebol 123 Table 4.8 Mobile terminal and market share worldwide (as of third quarter 2001) Company

Nokia Motorola Ericsson Samsung Siemens Others Total (‘000)

Third quarter 2001 Shipment

Third quarter 2001 Market share (%)

Third quarter 2000 Shipment

Third quarter 2000 Market share (%)

Percentage change

31 552 14 770 7 532 7,108 6 769 26 633 94 364

33.4 15.7 8.0 7.5 7.2 28.2 100

32 058 13 903 10 100 4,506 8 966 35 070 104 603

30.6 13.3 9.7 4.3 8.6 33.5 100

9.2 18.0 –17.5 74 –16 –15.8

Source: Wall Street Journal Europe (5 December 2001).

has emerged as the leading supplier of CDMA mobile phones worldwide with a 26 per cent share (Forbes Global, 16 April 2001). As shown in Table 4.8, Samsung alone held a 7.5 per cent share of the world market in the third quarter of 2001, a rise from 4.3 per cent in the same quarter from one year earlier, enabling it to overtake Siemens AG with an increase of 74 per cent. Samsung has recently developed a colour-screen handset that can download and play video clips. Strategically, Samsung aims to lead the mobile market in terms of ‘technology’. Samsung is taking risks to lead the world in third-generation mobile telecoms, e.g. superior 3G technologies called CDMA 2000 and W-CDMA, though W-CDMA, the 3G standard that has been adopted by the Japan and Europe is incompatible with CDMA, the version normally used in the US, Korea and elsewhere (The Economist, 12 January 2002). Since Samsung’s entry into the semiconductor industry in 1983, it has become the largest manufacturer of DRAMs and SRAMs, with a 21 per cent share in 2000, and the fourth-largest maker of all kinds of semiconductors in terms of revenue (see Table 4.9). In this area Samsung in 2000 achieved an estimated value of $4.8 billion, constituting 82 per cent of the total, and 30 per cent of sales. In the long term, Samsung intends to reduce its excessive reliance on commodity semiconductors, or DRAMs, whose profits tend to be heavily dependent on the fluctuation of the product cycle (Forbes Global, 16 April 2000). Based on the analysis of aggregated empirical data, the worldwide semiconductor industry, which encountered the worst sales decline

124 Newly Industrialising Economies and International Competitiveness Table 4.9 Semiconductor memory market landscape: DRAM & SRAM (2000) Ranking

1 2 3 4 5 6 7

DRAM

SRAM

Company

Market share (%)

Company

Market share (%)

Samsung Micron Hyundai Infineon NEC Toshiba Hitachi Others Total

21 19 17 9 7 6 4 17 100

Samsung IBM Cypress NEC Toshiba Hyundai Hitachi Others Total

21 10 9 8 8 6 6 32 100

Source: Morgan Stanley Dean Witter (2000).

in its history in 2001, is now recovering. According to The Economist (12 January 2002), ‘there is widespread agreement that things have at least stopped getting worse’ and were expected to improve in 2003.39 With regard to the potential semiconductor market, it is increasingly recognised that China is becoming a target of leading chip-makers worldwide. Samsung Electronics has set up a special team to conduct a detailed survey of the Chinese market, assuming that demand for both memory and non-memory products is increasing at a significant rate in China (Korea Times, 10 August 2001) and that China’s domestic sales of computers, air conditioners, DVD players, and other products that need chips will continue to flourish. At present, given that China imports 90 per cent of its semiconductors, it is acknowledged that China’s semiconductor industry has a lot of catching up to do. Business Week (21 January 2002) predicted that ‘the Chinese will be a couple of generations behind’. Fuelled by China’s participation into the WTO, other US chip-makers, including Intel and Texas Instruments (TI), intended to strengthen their presence in China by starting assembling and testing the chip set for its Pentium 4 processor at one of its plants in China (Forbes Global, 7 January 2002).40 As for consumer electronics products, Korea’s performance lags behind semiconductors in both technological capability and brand-name recognition. However, Samsung has had considerable success in recreating its brand name even in the US market, thanks to the availability of sufficient funds resulting from the success of its semiconductor business. In 2000, Samsung ranked fourth in the US in the number of patents registered

Technology in Global Markets and Korean Chaebol 125 Table 4.10 World class brands: consumer electronics Rank (US $Bn) 1 2 3 4 5 6 7 8 9 10

Nokia Hewlett Packard Sony Compaq Nintendo Ericsson Samsung Apple Philips Motorola

2001 brand value

2000 brand value

Percentage change

3504 1798 1501 1235 945 707 6.37 546 49 376

38.53 20.57 16.41 14.6 n.a. 7.81 5.22 6.49 5.48 4.45

–9 –13 –9 –15 n.a. –9 +22 –17 –11 –15

Source: Interbrand (2001).

(Forbes Global, 11 January 2001). As for consumer electronics products, it appears less likely that latecomer companies can cope in the short term with the barrier presented by the lack of a recognised brand image in the advanced markets.41 However, encouraged by its success in innovative technology in semiconductors, it seems likely that Samsung has achieved a new brand recognition in world markets, thus adding a new dimension to the latecomer’s catch-up strategy. As far as consumer electronics are concerned (Table 4.10), it cannot be argued that profitability increases in accordance with the proportion of market share, whereas the market share in semiconductors has tended to add correspondingly to profitability in the face of the fluctuation of the chip pricing system.42 Korean semiconductor companies have maintained higher competitiveness than conventional consumer electronics products, as customers for semiconductors are quite different from conventional customers, that is, they are manufacturers, since semiconductors are intermediate components rather than finished goods. In regard to digital products, Samsung finds that DVD players (DVDPs) seem to be more profitable than other digital goods, and so has decided to expand market share by shifting from VCR to DVDP. According to a Samsung senior manager, the production of DVDP constitutes a turningpoint in terms of strategy. However, VCRs are still likely to sustain the current market share or slightly below it for the time being. This is partly because video cassettes already distributed and purchased are expected to be readily available and in demand (see Table 4.11).43 Mathews and Cho (2000: 327) argue that the success of the East Asian semiconductor industries was ‘not because of a reliance on external,

126 Newly Industrialising Economies and International Competitiveness Table 4.11 VCR and DVDP demand worldwide (unit: $ million) Product

2000

2001 (P)

2002 (P)

VCR DVDP

52.0 12.9

47.0 25.0

40.0 40.0

Note: (P) indicates ‘prospect’. Source: LG Electronics (2001).

contingent factors (like low costs, government handouts), all of which are transient or non-repeatable, but on the concentrated and determined efforts of the countries themselves’. Likewise, in establishing a highly competitive electronics industry, Samsung has pioneered organisational innovativeness and ‘developed unique institutional framework adapted for “industry creation” itself rather than technological innovation’ (Mathews and Cho, 2000: 313). As shown in Table 4.12, as far as top brands focused on the electronics industry are concerned, Samsung Electronics MNC has ranked eleventh in world markets, pushing aside European Philips, American Motorola, and Japanese Panasonic. More importantly, this strategy seems to represent one type of latecomer catching-up strategy, which has a broader applicability to other knowledge-intensive technologies that can lead to wealth creation. Table 4.12 Major electronics MNCs’ ranking among the top 100 brands (2001) Rank Company

Country (of 2001 brand 2000 brand Percentage ownership) value value change

1 2 3 4 5 6 7 8 9 10 11 12

US US Finland US US Japan US US Sweden Japan Korea US

IBM GE Nokia Intel HP Sony Compaq Dell Ericsson Canon Samsung Xerox

Source: Business Week, 6 August 2001.

5275 4240 3504 3467 1798 1501 1235 827 707 658 6.37 602

53.18 38.13 38.53 39.05 20.57 16.41 14.60 9.48 7.81 n.a. 5.22 9.70

–1 11 –9 –11 –13 –9 –15 –13 –9 n.a. 22 –38

Rank among the top 100 3 4 5 6 15 20 24 32 36 41 42 45

Technology in Global Markets and Korean Chaebol 127

As mentioned above, in explaining the competitive dynamics of the Korean electronics industry, Castley (1997) argues that the export growth of the Korean electronics industry was largely the result of external factors, such as Japanese investments and the regional marketing network ‘determined’ by the advanced country. Castley’s statement that the Japanese model of the electronics industry has been generally replicated throughout East Asia may only be partly true (Bernard and Ravenhill, 1995). Given the Gerschenkronian notion of industrialisation according to which backward countries can benefit from borrowing technology initiated by the ‘leader’, we argue that the analogy of the ‘flying geese’ idea is not applicable to the development of the Korean electronics industry.

Market imperfection and Korean electronics MNCs as market-makers Among all Korean industries, the electronics industry has contributed the most to economic development. It might be suggested that the electronics industry has been ‘politicised’ because ‘government as well as firms are trying market environment to their advantage’ (Lee, 1996: 167). Until the end of the 1980s, the Korean government offered incentives to help firms create a favourable climate for the development of industry. Korean ministries and public services also kept expanding their support to meet the demands of increasingly complex technology. In contrast, by the 1990s the Korean government’s role had tended to diminish in the wake of globalisation. Following big business’s control of comparable resources to determine the direction of R&D as it saw fit, changing market conditions, whether domestic or worldwide, and the nature of new technology such as knowledge-intensive technology, led to changes in government–industry relationships.44 This trend made the Korean chaebol alone a mainstay of innovative technology, while the government simultaneously began to find it difficult to influence the development of new technology in the domestic market as it had before, let alone in overseas markets. In this context, the Korean chaebol can be seen as an important actor affecting market conditions. As Mody (1990: 292) maintains, firms have emerged as an important part of explaining the dynamic ‘theory of comparative advantage’. Further, as far as the Korean electronics firms are concerned, conventional treatment of economy categorisation – such as macro (‘the economy’), micro (‘the firm’) and meso (‘the industry’) – does not fit into the notion of Korean chaebol governance, even though such typology may apply to particular European experiences, for example, ‘national champions’.

128 Newly Industrialising Economies and International Competitiveness

With respect to market access, it is hypothesised that latecomer firms function economically as part of the market, from which firm ‘market power’ can also derive, thus adding a new dimension to a substitute for market imperfection, given that a firm’s market power varies across industries. Faced with barriers to entry into the advanced markets, latecomers’ entry into international markets has been restricted by trade regulations originating from the advanced markets. As Rowley and Bae (1997/1998a: 11) argue, ‘under environmental uncertainty, firms built their capabilities through internalisation and diversification on the assumption of market failure’ (emphasis added).45 Under such market failure, only big business, such as the Korean chaebol based upon the electronics industry – higher-end consumer electronics and, especially, semiconductors – has endeavoured to overcome market barriers to compete against global players. It can be argued that Korean chaebol governance should be interpreted as an example of a substitute for ‘market failure’ in international markets which have been affected by trade regulations initiated by the advanced countries. As Best (1990: 3) argued, ‘new competition’ refers to competition among large firms, but ‘not competition over price’, while markets are controlled by only large industrial organisations related to organisational flexibility committed to innovativeness. Thus, ‘competitive advantage’ of the Korean electronics industry paves the way for firms to influence the relevant part of a market and for big business firms to manifest themselves as market-makers. It is concluded that the Korean electronics MNCs typically have contributed to the making of the ‘meso-market’ at the domestic and international levels.

Conclusion In assessing the cause of FDI and industrial development in Korea, a number of factors need to be considered. According to Fitzgerald and Kim (2004: 442): Firstly, the chaebol had come to prominence during a period of industrialisation guided by state direction and personal connections, and it is the network of official and unofficial relationships that has to be understood in detail. Secondly, in such a system, the government’s unconsidered support for outward FDI would greatly influence the actions of the chaebol, even though they might not possess the requisite ownership or technological advantages anticipated in

Technology in Global Markets and Korean Chaebol 129

theories of FDI. In Korea, the policy of globalisation was implemented under the guise and not the reality of economic liberalisation. Thirdly, the chaebol were motivated by a strong sense of political rivalry and market competition, with profound stakes for each company. Samsung Electronics has not pursued the traditional Korean MNEs’ FDI policy strategy. After the Asian financial crisis in 1997 it concentrated on market penetration of developed and developing countries. Since the globalisation process has matured, Samsung Electronics has come to dominate the world market in terms of its business strategy formulation and its market penetration policy, compared to other electronics MNCs from the East Asian economies, even including Japan. Intrinsically, the governance of Korean big business organisations – chaebol governance – can be understood as ‘market-driven networks of firms’, initially designed and to a large extent orchestrated by the Korean state for a period of time. Arguably, the electronics industry as a ‘global industry’ is more sensitive to the international market situation. As for latecomers, since the early 1980s, given the advent of international trade barriers in the global economy, the nature of new technology transformed the logic of international competitiveness, changing from comparative advantage to competitive advantage, or ‘new competition’. The development of knowledge-intensive industry demands that innovative firms incorporate innovative technology, on the one hand, and innovative organisational logic on the other. Under the market logic of knowledge-driven competition, individual electronics MNCs, such as Samsung Electronics, have been well equipped to emerge as worldclass competitors. Institutional frameworks of this kind are linked to ‘network enterprises’ which encompass ‘interpenetration of market and business organisation’, which seems to condition the abstract ‘market logic’ as suggested in Chapter 2. In light of the electronics industry as a global industry, the Korean electronics MNCs can be seen as principal actors affecting conditions in the international markets and affected by the international trade regime. Increasingly, large business organisations have tended to replace, or refashion, part of the market mechanism, mainly driven by competition among large firms. We argue that the individual Korean MNCs (in some cases, even ‘individual’ chaebol rather than the chaebol system as a whole) have a significant impact on the meso- (industry-) market at the international level, the example of Samsung Electronics being a case in point.

5 European Integration, National Champions and the Politics of EU Industrial Policy

This chapter provides an empirical account of EU governance of the European electronics industry led by the ‘national champions’ or ‘European champions’, along with some examples of inter-firm or intra-firm strategic alliances. The chapter is mainly concerned with the background of the response of European governments and the EU to Korean major manufacturers by way of trade policies, as described in the next chapter. The second section examines the reality of the European electronics industry in a global electronics context, and the third section explains EU involvement with European R&D and technology policy. The argument of the concluding section is that European public policies, including S&T policy, are influenced considerably by European large firms, such as Philips, when it comes to EU-level R&D projects.

From comparative advantage to ‘comparative competitiveness’ Technology and firms: new implications for competitiveness Technology, coupled with a rapid rate of innovation, has been one of the most dynamic factors behind change in the world economy over the past years (Lawton, 1999: 5). As Forester (1993: 2) maintains, access to technological know-how may be considered a determinant of the ‘new’ wealth of nations.1 Importantly, in past years, according to Zysman and Borrus (1994), there can be no doubt that technology and trade have been understood as having an impact on society in two contradictory ways in terms of 130

European Integration and Industrial Policy 131

concern about mounting unemployment: they are not only the ‘villain’, but also the ‘saviour’. As Zysman and Borrus2 (1994) put it: When we consider technology, we must remember that the Luddites, the machine breakers of the English industrial revolution, were right; they did lose their jobs. England became rich, but the Luddites were part of the costs, the social frictions in contemporary parlance, that came along with industrial advance. And trade can displace jobs in two ways, both through imports and substitute foreign for domestic production and by competition that forces technical and organisational adaptation that compels surviving domestic firms to shed jobs. According to Lawton (1999: 5), ‘the technology which knowledge brings shapes the rules of competition’. The acquisition of technology necessarily relates to productivity, thus leading to intensifying competition (Mathews and Cho, 2000). The neo-classical notion of comparative advantage centred on ‘only differences in national endowments of the two primary factors, capital and labour’ and underestimated such factors as differences in technology and efficiency (Lall, 1995: 106). Besides, as suggested in Chapter 2, in this neo-classical perspective, large firms such as MNCs, or transnational corporations (TNCs) are assumed not to exist. As Lall (1995: 106–7) also contends: Since all firms are assumed to be small and to have access to the same knowledge, skills, and other inputs, firms cannot create advantage through individual efforts; such advantages can evolve only at a national level. There is, then, no role for government in influencing advantage    and free trade – by assumption – ensures the optimal allocation of resources, and – by implication – long-term growth [emphasis added]. For neo-Schumpeterian theorists, the term ‘competitive advantage’ came to be favoured while neo-classical assumptions of comparative advantage may not capture the full implications of international competitiveness. As a consequence, technology differences give rise to international investment as well as trade through major breakthroughs in products and processes based on innovations (Lall, 1995: 108). For much of the IPE literature, the nation-state is seen not only as the key actor in the global economy but also as the alternative to the market. In this respect, the focus has been upon the ‘states and markets’ dichotomy. However, Eden (1993) maintains that we should consider the firms as

132 Newly Industrialising Economies and International Competitiveness

new key actors within the context of IPE by referring to their growing role in the world market. Eden (1993: 25–6) finds that until recently, large firms such as MNCs have emerged as new competing rivals vis-à-vis states – beyond rivalry between states as well as rivalry between firms. The concept of states vs. markets is, however, flawed because the market is a structure, not an actor, and hence a poor counterpoint to the state. The appropriate counterpoint is the MNE, the key non-state actor dominating both domestic and international markets    the crucial problem in the study of political economy as we move into the 21st century is the tension between states and multinationals, not states and markets [emphasis added]. Consequently, governments have come unwillingly to recognise their increased dependence on the power of new technology, such as knowledge-intensive technology, dominated in great part by large firms3 (Stopford and Strange, 1991). In this chapter, with regard to the European electronics industry, much emphasis is placed upon ‘comparative competitiveness’ rather than comparative advantage. This kind of approach is related to the corporate strategies of national champions in Europe as well as the public policies of European states in their own right, along with European public policy, such as technology policy. As the EC’s (1993) White Paper on ‘Growth, Competitiveness and Employment’ argues: The globalisation of economics and markets [means]    we must think increasingly in terms of competitive rather than comparative advantages. Comparative advantages traditionally relate to endowment in factors such as national resources and are therefore fairly rigid. Competitive advantages are based more on qualitative factors and can thus be influenced to a large degree by corporate strategies and by public policies. (Cited in Peterson and Sharp, 1998: 213)4 More recently, firms and technology have combined in order to have an impact on the relationship between firms and governments as well as the power and autonomy of states. Over time, technology has constituted a ‘core’ variable in the competitiveness, whether national or international, of firms. Corporate competitive advantage lies substantially in ‘enabling’ technology deriving from a particular firm’s technology

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base, along with the firm’s ability to innovate and adopt new technologies (Lawton, 1999: 8–9). In the coordination of national and international economic activities, MNCs that control core technologies, for example semiconductors, have affected and influenced ‘market’ mechanisms to a considerable degree. In some sense, they tend to surpass the market internationally as well as nationally in terms of providing a more ‘tangible and influential’ force5 (Lawton, 1999: 10). Traditionally, technological success has affected the relational power between rival states, as economic, military and political power is, to a great extent, based on technology (Del, 1987: 33–4). Similarly, it is undeniable that the relational power deriving from technology may apply to power relations between states and firms as well. As Lawton (1999: 10) maintains, MNCs have emerged to ‘challenge’ not only market forces in world markets, but also to exercise contending leverage vis-à-vis the very states ‘from which they emerged’. Lawton suggests that ‘states have been forced to cede policy power in return for access to technology which global firms control’. Therefore, it is important to address EU governance and policies for the electronics industry as well as MNCs and national champions in the European market in this context. In the EU case, it is noted that states and the EU have only very restricted means to gain access to technology or to exercise relational power against firms that are at the forefront of controlling the core, enabling technologies (Peterson and Sharp, 1998: 226).

Competitiveness and EU technology policy as ‘strategic industrial policy’: firms versus government In response to globalisation, Western governments have realised that there is a need to shift their public policy, such as technology policy, ‘from the macro to the micro-level’ by putting their emphasis on the performances of firms and particular industries for market access (Peterson and Sharp, 1998: 18). In addition, many European policymakers have urged national champions to increase the competitiveness of European firms, for example, by a focus on the information industry. Various arguments with regard to the concept of ‘competitiveness’ have been provoked by the globalisation process. The focal point is ‘who is, and will compete in the world market in terms of competitiveness’. According to Zysman and Tyson (1983), the concept of ‘competitive advantage’ is viewed as closely related to firms of particular states by defining the notion as: ‘the relative export strength of the firms of one country compared to the firms of other countries selling in the

134 Newly Industrialising Economies and International Competitiveness

same sectors in international markets’ (cited in Lawton, 1997: 4). With respect to the ‘competitiveness’ of European firms, some controversial arguments may need to be addressed. First, as Lawton (1997) confirms, agreeing with Wood (1987), the competitive weakness of European firms derives not from a technology gap, but rather from structural obstacles accompanied by ‘the marketing, commercialisation, and adaptation of technology’ (Lawton, 1997: 42). Second, Zysman and Borrus (1994) contend that the primary source of advanced electronics technology originally comes not so much from indigenous European manufacturers, but more from US and Japanese firms. As a result, the dependence on foreign firms’ technology supply sources has constrained their political autonomy as well as their economic development and, in particular, European firms’ ‘corporate strategies’. Third, ‘the number of firms competing within an economy is far more important to international corporate success than the size of individual firms’ (Hobday and Heighes, 1999: 335; Porter, 1990; Pavitt, 1990). In a similar, but slightly different context, Linden (1998: 4) also registers concerns about the number of firms in terms of the competitiveness of European national champions (such as Siemens, Philips and Thomson). He adds that, ironically, limiting foreign competitors through various protectionist measures by European countries caused European large firms to be less competitive than their US counterparts. [U]nlike in Asia, there has been no ‘second tier’ of European producers to threaten the leading firms, Siemens, Phillips, and Thomson. And whereas North American producers were forced to compete in their own domestic markets with Asian producers, European markets have been more protected from the brunt of foreign competitors. This protection resulted from national political bargains which limited foreign access to European markets through quantitative restrictions, in effect, dampening cost pressures for European producers [emphasis added]. (Linden, 1998: 4) Over the last decade, proponents of ‘strategic industrial policy’ have argued that under conditions of market failure, government intervention is necessary and preferable. Thus the traditional excuse for public technology policy has been ‘market failure’. As Sharp and Pavitt (1993: 133) put it: Since the Second World War the main policy objective, in Europe and elsewhere, has been not so much to correct market failure as

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to promote technological change at home to counter the perceived competitive ‘threat’ from changing foreign technological capabilities. As a result, policy has shifted from being minimalist towards having a far more proactive role for the state. In particular, in high-technology industries, it is apparent that competition exists in imperfect competitive markets. For semiconductors, such phenomena became more remarkable because it is a global ‘oligopoly’ in which a relatively limited number of firms compete strategically in order to penetrate world markets. Furthermore, in terms of enormous sunk costs, semiconductors have tended to be seen as a strategic industry, affecting the destiny of national, or regional, European economic performances to a considerable extent6 (Lucchini, 1998: 544–5). In addition, the 1980s witnessed the decline of American supremacy in technology-intensive industries. The illustrations provide European policy-makers with a vision of a new pattern of technology policy, with a focus on ‘vertical’ policies related to specific firms’ competitive enhancement. It is frequently accepted that between the 1960s and the 1970s, the policy of ‘national champions’ pursued by the European countries, especially the UK and France, turned out to be a failure. In short, European technology policies have not succeeded in pushing large EU firms into overtaking leading competitors in the development and application of all new technologies. However, such experiences have given European firms opportunities to collaborate over technological innovation, thus contributing to a deepening of ‘European’ knowledge as well as technological horizons at the EU level, or across national boundaries (Peterson and Sharp, 1998: 273). Despite the fact that the national champion policy had a negative effect on European firms’ international competitiveness, it is important to emphasise that a rapidly changing international economic and technological situation had the positive effect of influencing government– industry relations in favour of large European firms, particularly in the electronics industry. In other words, in terms of leverage, for European national champions, strategic alliances or inter-firm collaboration have transformed national champions into principal actors in a process towards European integration. Whilst in the consumer electronics industry, the targeted firms relied heavily upon government subsidisation, it is ironic that since the 1980s the ‘hostile brothers’ (Cawson et al., 1990; Dai, 1996) – competition and collaboration between the leading firms – have emerged as collaborative partners of government, and even become leading actors at the EU level, rather than remaining

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outsiders in the EU decision-making process. The transfer of policymaking leverage from national governments to the EU level marked a watershed in dealing with trade, technology and overall industry from the mid-1980s. In particular, the demise of the European VCR format – Philips’ V2000 – prompted EU decision-makers to intervene directly or indirectly over policy choices to protect European national champions. Also, it allowed the EU to try to overcome the wide-ranging differences and conflicts across domestic competition, or trade policies within the EU (Dai, 1996: 319–20). In the consumer electronics industry, as Dai (1996: 323) maintains, what matters is the lobbying power of domestic firms to influence government policy-making, and further, the EU-level authorities: It is believed that the Philips office in Brussels functions as the company’s ‘embassy’, whose major task is to maintain good contacts with EU authorities. Empirical research    suggested that Philips keeps formal communications with the European Commission. On the one hand, Philips’ position papers on major issues concerning technology and the industry were read by Commission officials within related sections; Community audio-visual policies and the Commission’s communication papers were often drafted in direct consultation with European firms, including Philips, and their professional associations on the other hand. In addition, it was found that the EACEM (European Association of Consumer Electronics Manufacturers), in which Philips has been a leading member, had officially lobbied the European Commission to take further action to support HD-MAC. During its initial period, EU technology policy, as implemented through ESPRIT and other Framework Programme projects, did not succeed in expanding European manufacturers’ market share, for two main reasons. The first is that most of the research conducted was upstream-oriented in character. Consequently, it did not help to improve industrial competitiveness in the short term. Moreover, it was not felt that there was any need for European producers to shift away from out-dated technologies, and adapt to rapidly changing competitive technologies in international markets. By the second half of the 1990s, the focus for EU technology policy has increasingly moved from top-down, Commission-coordinated initiatives, to bottom-up, that is, firm-led policy choices (Lawton, 1999: 45).

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The late 1970s witnessed the emergence of EC policy for the electronics industry, as the failure of national champion policies was widely acknowledged. Compared to the consumer electronics industry, we assume that the EC’s proactive intervention in the semiconductor industry as a meta-technology, constituted a significant turning-point in the conventional view of government–industry or Commission– industry relations in the EC. The empirical evidence suggests that semiconductors as a core enabling technology have exerted an important influence over the world economy beyond the national domain.7 More importantly, in the semiconductor industry, MNCs and knowledgeintensive technology have combined to have a significant impact on traditional notion of ‘state vs. market’ dualism as well as ‘states vs. firms’, and adding a new theoretical dimension to government–industry relations as well. Lawton (1997: 6) put it another way: Meta-technologies are technologies whose development affects not just their own industry, but the entire world economy    Metatechnologies create new industries and structures and help to destroy others. A meta-technology has such wide-ranging implications that it is accompanied by structural crises which may create tensions in the international system [emphasis added]. During the initial stage, between the 1940s and 1950s when the focus of the semiconductor industry was on transistor technology (1947–57), the indigenous European semiconductor industry remained relatively internationally competitive, although it failed to globalise later. Such ‘relative’ competitiveness implies that European firms had no market presence outside of their domestic markets at that time. In particular, Philips and Siemens remained at this technological frontier in terms of market position and related patents (Malerba, 1985: 65–6). The advent of the integrated circuit decisively transformed the international competitiveness of EU semiconductor firms. During this transition period, while US producers successfully attempted to meet the changing technological environments, Philips and Siemens failed to respond properly to the introduction of new technology. It was only in the late 1970s that European public policy had a major influence on the overall industry. In comparison with the improper response of the 1960s, the proactive approach towards semiconductors by European governments marked a further departure from previous decades (Malerba, 1985: 188). At the EU level, some scholars have underestimated the role of business elites as being subordinate to nation-states (Moravcsik, 1994). Our

138 Newly Industrialising Economies and International Competitiveness

research disagrees with that contention. We argue that at times firms tend to exercise a critical role on government as well as in the EC policy process (Sandholtz and Zysman, 1989; Cawson et al., 1990; L. Cram, 1997, 140; Lawton, 1997).8 During the semiconductors industry’s early stage (between the 1950s and 1960s), firms had little decision-making power relative to government. That is, ‘government created policy and firms acted within parameters’ (Lawton, 1997: 241). Since the beginning of the 1980s, EU industrial policy derived mainly from policy bargaining between corporate and governmental actors. It is recognised that large electronics firms have emerged from being subordinate partners to being principal partners since the early 1980s. As for semiconductors, in particular, as Lawton states, ‘the EC has always been the junior partner in JESSI, as in all EUREKA initiatives’ (Lawton, 1997: 243). Our findings support Lawton’s argument that knowledge-intensive technologies such as semiconductors can have an impact on the relationship between firms and national governments, or firms and supranational bodies such as the EU, which represents a marked turning-point in redefining government–industry relations in specific circumstances.

European electronics and firms’ competitiveness in a global electronics context Overview Over the 1990s, the electronics industry has been the global economy’s driving engine for growth and prosperity. The electronics sector, Zysman and Borrus (1994) argue, emerged symbolically as the base of high technology industry in the late twentieth century. During the 1980s European electronics policies, whether pursued by national governments or the Commission, failed to secure a competitive position in world markets relative to the US and Japan. The same can be said about EU-based electronics firms. Much of Europe’s demand for electronics is satisfied by imports, and large national firms have almost consistently been lagging behind in the introduction of new technologies (Bowen, 1991a: 209). With regard to the electronics industry, it seems unlikely that any of the policy options of the Commission and national governments have had a positive effect on European electronics at two levels: ‘policies of promotion’ (such as HDTV projects) and ‘policies of protection’ (related to FDI) (Zysman and Borrus, 1994). To examine the performance and competitiveness of the European electronics sector, it is necessary to analyse the Japanese electronics industry in the European single market

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compared with the European MNCs. A detailed account of the Korean electronics MNCs in the EU market is given in Chapter 6 where the Korean FDI and anti-dumping measures by the EU are addressed in detail. In this chapter, we confine ourselves to an account of EU electronics within the context of the global electronics industry relative to its Japanese as well as its US counterparts.

The consumer electronics industry In consumer electronics, European firms appear to have withstood the Japanese challenge better than their American counterparts in the sense that the European big firms have strived to compete against the Japanese electronics firms, especially in the EU market (Zysman and Borrus, 1994). The Japanese consumer electronics industry aggressively penetrated the European consumer electronics industry. Numerous Japanese MNCs, such as Sony, Matsushita and Toshiba, had established modest European marketing, sales outlets and distribution channels by the late 1960s, but FDI remained minimal in this sector. It was not until the latter half of the 1980s that Japanese firms began to invest heavily in the sector. In Europe, the consumer electronics sector has significant implications for the entire European economy. European consumer electronics production was estimated to amount to 25 per cent of the value added of the EU’s overall electronics industry (Mason, 1997: 81). In the mid-1990s, the European consumer electronics market accounted for $28.4 billion, but European firms supplied only $15.8 billion, thus leading to a trade deficit of $12.6 billion (Zysman and Borrus, 1994). Declining international competitiveness prompted European producers to engage in major restructuring in the European industry. With regard to consumer electronics, the European large firms were far less competitive than their Japanese counterparts. Along with the demise of US consumer electronics, the rise of the Japanese consumer electronics industry led to Japan’s extensive presence in the world market, which caused the European firms’ modest position to weaken further against their Japanese competitors (Table 5.1). In this context, by the end of the 1980s the European consumer electronics industry was more concentrated than ever before. Clearly, the Japanese challenge had prompted European firms such as Philips, Thomson and Nokia to emerge as Europe’s pre-eminent national or European champions as a result of mergers, acquisitions and the major structural changes in the European electronics industry (Mason, 1997: 84).9 Around this time, Korea and Taiwan also achieved large market

140 Newly Industrialising Economies and International Competitiveness Table 5.1 The global consumer electronics industry: production, trade and consumption across the Triad (1988) ($ billion) Country or region Japan EU US

Production

Imports

Exports

Trade balance

Total market

Import ratio (%)

322 107 54

07 93 112

168 12 09

+161 −81 −103

161 188 157

43 495 713

Source: Adapted from Mason (1997: 83).

shares in consumer electronics, with a prominent balance of trade surplus with the West. It should be emphasised here that the European consumer electronics industry was characterised by the fragmentation of the intra-regional market in the EU, deriving partly from the incompatibility of the technical standard in CTV, and partly from the differing tastes and preferences of national customers in relation to consumer electronics products (Cawson, 1989; Cawson and Holmes, 1991; Mason, 1997), which rendered market penetration of Europe by the Japanese firms even more difficult and costly.

Colour televisions (CTVs) US-owned colour TV firms have disappeared from the consumer electronics industry. The number of US-owned CTV firms totalled twentyseven in 1960. By 1990, Zenith was the only one left – and in the end this was taken over by the Korean LG – all other companies had either been acquired or had disappeared. This was because few innovative products had been launched by the US consumer electronics industry as a result of their failure to invest in innovation. Technical differences in CTV transmission standards largely contributed to the fragmentation of the European industry as well as the intra-European market. In the US, the Federal Communications Commission (FCC) adopted the NTSC (National Television System Committee) format for CTV in 1953, which the Japanese also preferred. Subsequently, in 1962, RCA licensed its CTV technology to the Japanese firms. By the 1960s the Japanese had begun to export high-quality, low-priced televisions to the US. At that point the Japanese, with an exclusive focus on the production of small CTVs, were in a better position to provide the US market with small-screen TV, when either coincidentally or simultaneously, US preferences for CTV started to turn

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from large-screen to small-screen CTVs. In response to this, US producers failed to react defensively to the rapidly emerging market situation compared with the Japanese who were already well prepared to adapt to it. As far as the small-screen CTV market is concerned, the EU market is not an exception although some factors such as the PAL standard seemed to prevent the Japanese from dominating it initially.10 However, this was only a matter of time. As Cawson (1989: 57) contends: Once these small sets started to arrive in quantity in the early 1970s, a market did develop – and rapidly! Within a short while there were accusations of dumping, and political means were sought to blunt the competitive pressure which was eroding the market share of the European firms. By the early 1970s, in the EU market, partly in response to antidumping complaints from EU manufacturers, Sony and Matsushita set up manufacturing operations in Britain and Germany. Government policies such as a 14 per cent tariff on CTV imports allowed European producers to retain a major portion of the Community’s CTV production. In 1986, the Japanese share amounted to only 15 per cent of the EU market (Bowen, 1991b: 260). Compared to the US market, the preference for small and medium-sized televisions had not manifested itself in the same way in the European market. In the European market, the different standardisation of TV format tended to have a significant influence on the success of any particular format. In this sense, Japanese firms had difficulty in gaining access to essential technologies for manufacturing PAL-compatible sets because Telefunken initially refused to license its PAL patent to any Japanese companies. In 1973, the German company conditionally agreed to offer licences to particular Japanese firms for the purpose of the creation of a trade barrier.11 Licensing policy towards Japan played a decisive role in hindering the export by the Japanese firms of large-screen sets which were widespread in EU CTV products. As Marion (1992: 153) points out, ‘European industry did not share the fate of the Americans, partly because Telefunken held the PAL patent.’ Partly by virtue of the strategic alliance of the PAL format by EU firms within the European market, Japan in 1986 had held on to no more than a 14 per cent share (Table 5.2). The share of imports from Korea has grown gradually (0.7 per cent in 1985; 3 per cent in 1986; 7 per cent in 1987), whilst imports from Japan have been declining (7 per cent in 1985; 5 per cent in 1986; 3 per cent in

142 Newly Industrialising Economies and International Competitiveness Table 5.2 European vs. Japanese CTV production capacity (unit: thousand) Firm

1984

1986

1988

Philips Thomson Nokia Sony Sanyo Hitachi Matsushita Mitsubishi Bang & Olufsen Sharp

3,050 2,100 500 310 – 200 230 95 130

3,100 1,050 680 535 150 370 300 125 145 5

3,400 2,625 2,250 850 700 500 400 200 150 10

Source: Cawson and Holmes (1991: 171).

1987) (Bowen, 1991a: 214). As for High Definition Television (HDTV), a vigorous attempt to have their standard adopted as the world standard was being made by the Japanese and their EU counterparts. In fact, the HDTV project eventually failed, as shown below.

Videocassette recorders: a standard war, and compact discs Originally invented in the US, but surprisingly never commercially produced by US-based firms, the videocassette recorder (VCR) was initially commercialised in the EU market by Philips (Mason, 1997: 88). In the US, Philips produced the first VCR in 1964, but the marketing of the machine was premature, as CTV had not yet been introduced, except in the US. Philips marketed the model 1500 in the EU in the early 1970s, and subsequently later in the decade produced the more advanced N1700. These products enabled Philips and its German partner, Grundig, to gain major shares of the EU market as a whole after 1977. Despite Philips’ initial lead, the advent of new standards of VCR by the Japanese firms thoroughly transformed the global market as well as the EU market. Already technically and commercially superior to its rival standards, Sony’s Beta and its EU counterpart, Philips’ V2000 format, Japan Victor Company (JVC) in 1977 allied with EU electronics firms based in each of the three major European VCR markets which had not joined Philips or its junior German partner, Grundig. In collaboration with Thorn EMI in the UK, Thomson in France and Telefunken in West Germany, JVC exported its VHS system through OEM agreements under the Thorn, Thomson and Telefunken brand names.

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As one of the last independent UK manufacturers, Thorn EMI’s shift to JVC had considerable repercussions on the position of VHS in the UK and, later, in the rest of Europe as EMI was also engaged in music and films. These combined businesses led JVC to establish a joint VCR production facility in Newhaven with EMI. The high share (about 90 per cent of VHS format in the UK market) of the JVC club served to have a decisive spill-over effect in the EU market. In addition, joined by Telefunken with its powerful television brand and distribution outlets in other European markets such as Germany, Italy and Spain, together with its European allies, JVC accounted for 480 000 units in 1983, a major share of the market (Marion, 1992). Mainly due to its significant cost advantage deriving from scale economies related to the huge market share in Japan and US, JVC and other Japanese firms increased their export penetration of the EC’s VCR market to a significant extent from 1978 onwards (Table 5.3). In 1983, in the UK market, Philips accounted for only 3 per cent with their V2000 system, compared with 70 per cent for the JVC format and 27 per cent for the Sony Beta system. As for the US and European markets, Philips’ share reached the ‘zero point’ (Cawson et al., 1990: 256).12 Thomson’s subsequent collaboration with the JVC camp as a result of its acquisition of Telefunken considerably strengthened the JVC position in the world market as well as the EU market.13 It is possible that collaboration between Philips and Thomson would have affected the long-term development of the European VCR industry, and also the overall European consumer electronics market in favour of European electronics firms as a whole. As Dai (1996: 112–13) adds, in VCR technology inter-firm collaboration had a significant impact on the process of rivalry between competing technical standards. In this regard, Sony’s failure derived from its refusal to license production or to provide its technology on the OEM agreement as a consequence of its intention to maintain a firm hold on its technology. This might not seem to Table 5.3 VCR market share by standard, 1983 (%) Country/region US Japan Western Europe UK Source: Dai (1996: 110).

VHS

Beta

V2000

75 70 66 70

25 30 23 27

– – 11 3

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have contributed to the widespread acceptance of the format and the popularity of Beta system VCRs. On the other hand, the key reason for the failure of Video 2000 was that its machine lagged far behind in terms of reliability relative to the VHS format, thus leading to the loss of potential customers. In the meantime, the VHS system of the Japanese JVC came to be adopted as the world standard (Bowen, 1991b: 261–2). Japanese rising exports to the EU market prompted strict responses and strong trade restrictions at the national and Union levels. Specifically led by Philips and Grundig, with the support of key member states, coupled with the possibility of anti-dumping measures filed against the Japanese VCRs, Japan’s Ministry of International Trade and Industry agreed to accept the Union’s first-ever voluntary restraint agreement (VRA). Following that, the EU offered to raise the Community’s import tariff on VCRs from 8 to 14 per cent at the end of 1985 as a consequence of the expiry of VRA. Responding to renewed EU trade pressures, the Japanese VCR makers attempted to localise their EU operation rapidly through FDI or joint ventures with the European firms.14 Overwhelmed strategically by Japanese international competitiveness, Philips in 1985 made the decision to license the JVC standard at the expense of its own format. Thereafter, Sony’s Beta system was also abandoned, thus leading JVC technology to dominate worldwide production in VCRs. This outcome had a negative impact on Philips’ position and also that of the EU consumer electronics industry. Dai (1996: 121) observes that: Although the failure of V2000 did not trigger a domino effect on the business operation of the Philips empire    in the space of 10 years, Philips group’s consumer activities sharply declined from 47% to 23% of its total turnover in the decade 1975–1985. This decline was largely due to the company’s very costly but extremely unprofitable VCR business. Despite this, Philips continued to give a high priority to the consumer electronics industry and ‘ironically’ it became the most profitable division in 1989 (Dai, 1996: 122). At present, Philips continues to declare that it is willing to reaffirm its commitment to the consumer electronics sector. As Gordon Cram (1997) adds: Philips is to develop more products as potential winners, price existing lines aggressively and increase spending on marketing as a part of a plan to reassert itself in consumer electronics worldwide. After more than a year of cuts and closure, the Dutch group yesterday

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announced itself in shape to renew battle with its mainly Far Eastern competitors in the market. The position of the Philips and Grundig alliance rapidly improved once it adopted the Japanese VHS system. More recently, as one analysis shows, when estimated on the basis of individual VCR makers, surprisingly, Philips remains in the first place in terms of VCR share in the EU market ahead of its Japanese counterparts (Table 5.4). Fearful that it might repeat its failure with VCR, Philips decided to choose the final specification of the CD jointly with Sony. Furthermore, Philips formed a number of alliances with respect to future developments in CD technology for the purpose of securing ground for determining any promising future format in global markets. Clearly these options in the form of global alliances were intended to respond to rapidly changing innovative technologies (Bowen, 1991b: 263). As for VCRs, since 1987, EU policy has turned away from the issue of Japanese market share to Korean import penetration of the EU market. At that point, Korea’s share of the EU market had risen rapidly from Table 5.4 VCR market share in Europe by company and country (%) Company Philips Panasonic Sony JVC Sharp Grundig Samsung Daewoo Toshiba Goldstar All others Total Country Philips Group TCE Group Japanese Korean Source: Samsung (1999).

1997

1998

9.4 9.3 8.7 6.2 4.8 5.0 4.6 3.1 3.8 2.4 42.7

11.4 9.4 9.1 6.2 4.8 4.3 4.2 3.6 3.3 3.2 40.5

100.0

100.0

11.3 6.7 47.7 9.9

14.5 6.3 45.2 10.7

Electronics:

company

reports

146 Newly Industrialising Economies and International Competitiveness

6 per cent to 16 per cent between 1986 and 1987.15 During the 1980s purchase of consumer electronics production and exports to Europe from Asian NIEs rose sharply, especially in VCRs. By 1986 three Korean companies – Samsung, LG and Daewoo – had developed their capacity to produce 4.7 million VCRs, thereby surpassing total VCR production in Europe (Cawson and Holmes, 1991: 170). In sum, we argue that the VCR standards war constituted a decisive turning-point for Philips’ corporate strategy, and later on to some degree influenced its policy options towards the Community’s public policies such as technology policy as a whole, and the HDTV project in particular. As with CTVs, since the end of the VCR format battle, it is evident that Philips has remained a corporate power in its relations with the Commission, especially in terms of technology policy. Cawson (1989: 71) confirms: Unlike CTV, where almost all the EC countries had a domestic industry, however small, only Philips (and its junior partner Grundig) had any credibility as actual or potential VCR manufacturers. As a multinational domiciled in the Netherlands, Philips was used to pleading its cause through more important national governments, and by the late 1970s was already a well-organised lobbyist in Brussels [emphasis added]. For the consumer electronics industry, ironically, Philips and Thomson tended to collaborate with their Japanese counterparts in competition with each other. But in the end it was over HDTV that Philips and Thomson finally collaborated with each other. Unlike motor industries in the EU, most of the electronic industries’ collaboration projects failed because each government believed in its own national champion as a world leader. However, when Japanese and Korean MNCs built their overseas production base, most of the EU manufacturers had been losing their domestic market share continuously. Since 2000, most light electronics manufacturers have had to move from the EU manufacturing base to Eastern European countries.

HDTV: from national to European levels In the 1970s, in the consumer electronics industry, policy-making was confined to national governments in Europe. When all the national industries turned out to be failures, EU national governments had no choice but to shift the attention of European industries from the national level to the EU Commission level (Cawson, 1989: 70). One of

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the significant cases was the HDTV project. From the 1980s the shift in policy-making power from national government to the Community helped the latter to lead policies such as trade, technology, competition and industry at the EU level. The launch of the High Definition Television (HDTV) project was orchestrated by the Japanese and the Europeans separately in an attempt to have their standard adopted as the world format. The Japanese MUSE system required the complete replacement of current broadcast and receiving equipment. Although in 1986 the US had the intention of adopting MUSE, the proposal failed, due to the refusal of European firms to have the Japanese standard adopted as the world standard. Certainly, the Europeans were fearful that the repetition of the VCR format defeat against the Japanese VHS standard might apply to another case, that is, CTV (Cawson and Holmes, 1995: 652–3). The international regulating authority, the CCIR, allowed the European firms until 1990 to develop their own HDTV system based on the MAC standard.16 The research programme, led by the European TV makers Philips, Thomson and Bosch, was carried out with 30–50 per cent of its funding from EU through EUREKA (the European Research Coordinating Agency). Like Japan, the EU allocated enormous public funds to the HDTV development programme. The Union also invested $4.65 billion in eight years in Siemens, Thomson and Philips through the JESSI project to develop semiconductors, including those related to HDTV (Gabel and Cardot, 1996a: 197–8). Philips invested heavily in the European HDTV project standard, amounting to $250 million by the mid-1990s, with a third of this funding from governments. In its joint HDTV R&D effort with Thomson, Philips decided to invest $1.9 billion more. When France’s minister of industry announced a plan not only to invest $345 million in cash into Thomson, but also to offer it a $103.4 million research grant for HDTV, the Commission’s Competition Directorate confirmed that the French state aid was legitimate. Thus, Thomson was likely to be financially more advantageous and more stable than Philips (Gabel and Cardot, 1996b, 1996c). Japanese research on HDTV began in 1964 through direct and indirect government support. In particular, the enhanced status of Japan in world consumer electronics served to bridge HDTV with semiconductors, whilst for the US policy-makers, the lack of an American presence in the CTV and VCR markets tended to raise further doubts as to whether the invention of HDTV was related to scale economies in real terms. This logic had prevented the US from entering into HDTV research a decade

148 Newly Industrialising Economies and International Competitiveness

earlier. It was unlikely that ‘the externalities’ created by HDTV would be consumed in the US market (Busch, 1999: 97). Finally, the EU system, HD-MAC, was officially abandoned by the Union in January 1993. Instead, a new digital video broadcasting (DVB) project has been supported by private and public domains as a whole in Europe.17 The European analogue MAC system was considered to be technologically out of date compared with the US counterpart, digital TV. Interestingly, the failure of HD-MAC in early 1993 did not constitute a severe setback to Philips and Thomson. In the process of the development of the HDTV project in Europe, in fact, the two leading European firms had not exclusively concentrated upon research into HD-MAC system. Simultaneously, they have invested their private funding heavily in digital research in the US to become the forerunners in digital TV, including digital HDTV. The failure of this HDTV project highlighted the issue of European champions in a similar way to how the VCR format war had cast doubt on national champions. Moreover, the collapse of the EU95 HDTV project reflected doubts about the government’s proactive intervention in ‘picking winners’ between rival technologies. In some ways, this illustration confirms Porter’s (1990) and Pavitt’s (1990) contention, as noted above, that in terms of international competitiveness, the number of firms, or severe ‘competition’ between numerous large participating firms, is still more important than the size of individual firms, or subsidies offered by governments or transnational institutions. In the US, the FCC has provoked ‘competition’ to choose a HDTV standard rather than pick an existing standard. According to Dai (1996: 321) The difference between the strategies adopted by the EU, Japan and the US was that, firstly, the EU and the Japanese government have backed only one system from the very beginning of technological development, while the FCC has sponsored a competition to choose an HDTV standard. Secondly, the EU and Japanese governments have committed substantial financial subsidies to their domestic firms, but the US government has not affected any funding to any firm except for only one small-scale research project funded by the Pentagon’s DARPA    Thirdly, foreign firms have been excluded from participating in the EU and Japanese HDTV R&D activities sponsored by governments, whilst the FCC process allowed for European and Japanese firms, with both capital and technologies in their hand, to participate in HDTV competition with the US [emphasis added].

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This is not to suggest that Philips and the other European champions involved failed to wield influence over the national governments or the Union. It should be noted that the European large firms find it easy to become influential actors in the policy-making process, due to ‘their contribution to the performance of the economy’ rather than ‘their collective strength’ as evidenced mainly in small and mediumsized firms (Kohler-Koch, 1997: 57–8). Despite the failure of the EU95 HDTV project, this logic may be applicable to the government–industry relationship, or the Commission–industry relationship in Europe, in the sense that international competitiveness of important industrial sectors enhanced by European large firms is decisive for national competitiveness, and furthermore for European competitiveness.

Semiconductors and the new dimension for the EU, governments and firms Europe is weak in semiconductors relative to the US and Japanese in terms of investment and innovation dynamics. Semiconductors have tended to reflect ‘the most evident area of European weakness’. European manufacturers in 1991 gained only a 10 per cent share of entire world production compared with 38.4 per cent for the US and 46.4 per cent for Japan. The European chip-makers were able to satisfy less than 40 per cent of the needs of their own market (Zysman and Borrus, 1994).18 In the 1980s, European firms and governments decided to adopt new initiatives which would encourage them to respond ‘collectively’ to the falling market share of the European high-tech industry, and especially aimed at competing against Japanese companies. The semiconductor industry, at that point, emerged as one root cause of friction between the EU and its trading counterparts. During the latter part of the 1980s the national champions transformed themselves into pan-European champions, led mainly by the EU itself rather than national governments, partly as a consequence of overall corporate restructuring in electronics in the form of mergers and acquisitions (Table 5.5) (Lucchini, 1998: 545; Hobday and Heighes, 1999: 339). This was supplemented by a series of megaprojects and the Joint European Sub-Micron Silicon Initiative (JESSI). In the 1980s the global semiconductor industry was plagued by fierce competition between the US and Japanese companies. The role of government and national policy was a central issue in the battle to the extent that activist trade and technology policies were to serve the interests of national large firms related to high-technology (Flamm, 1990: 225). A turning-point came with the agreement between the US

150 Newly Industrialising Economies and International Competitiveness Table 5.5 European projects, M&A in semiconductors Date

Venture

Firms

1983–9 1986 1986 1987 1988–95

Megaproject Mostek acquisition Megaproject 2 Merger JESSI

1988

Acquisition

1989

Acquisition

1989

Acquisition

Siemens/Philips Thomson SGS/Thomson SGS/Thomson Siemens/Philips, Thomson/SGS/Plessey Ferranti Semiconductors by Plessey Inmons by SGS/Thomson Plessey Semiconductors by GEC and Siemens jointly

Cost ($ million) 930 120 655 3700

Source: Hobday and Heighes (1999: 340).

and Japan in September of 1986, when both sides formally concluded five-year Semiconductor Trade Agreements (STA). Since foreign competitors in the industry held only 0.2 per cent of the Japanese market at that point, there followed a series of revisions and renewals of it. The STA stipulated that the Japanese government would allow foreign-based firms to gain market share up to 20 per cent in the Japanese market over five years. At the same time, it would prevent the Japanese from dumping semiconductors on the US market. Over time, in the global context, the Japanese semiconductor industry has become gradually ‘sandwiched’ between the US and Asian competitors, represented by the Korean catchup in DRAM manufacturing, and strenuous efforts by the US to recover or maintain their leadership under SEMATECH or 13001 (Inoue, 1998: 195–8). When the STA was renewed in 1991, only a 14 per cent market share was held by foreign firms in the Japanese market. This continued to increase from 14.3 per cent in the third quarter of 1991 to 14.4 per cent, and in the end to 20.2 per cent through the fourth quarter of 1992 (Busch, 1999: 87–9). Here it is necessary to examine the impact of STA on both the European semiconductor industry and firms. In short, from the EU perspective, the STA was perceived as being extremely negative. First, in procedural terms, the secret bilateral agreement was to be implemented without prior consultations with the EU and other parties concerned, although the agreement inevitably would affect international market

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conditions for semiconductors. Second, psychologically, the key implication of the STA was that Europe had ceased to be a critical actor in the global semiconductor industry and could to some extent be ‘ignored’. These perceptions prompted the EU to inform the GATT about agreements in September of 1986, leading to the request to the GATT to review the EU’s appeals by means of a panel to be held in February 1987 (Flamm, 1990: 248). In 1986, 30 per cent of total global production stemmed from only four companies: NEC, Hitachi, Toshiba and Motorola. Relatively speaking, European firms accounted for a smaller portion than either Japanese or US firms, although they were attempting to become leading global players. Compared with the Europeans and the Japanese, the US government played a minimal role in the development of the electronics industry in its early stages. In semiconductors the US government’s role had a negative effect due to limited anti-trust exemption, thereby provoking the Semiconductor Industry Association (SIA) to establish the non-profit Semiconductor Research Cooperative in 1982 to fund basic research at American universities. In contrast, between 1986 and 1987 the US government began to adopt a more active initiative, followed by an allocation of $100 million to subsidise a consortium (SEMATECH) of computer companies, chip-makers and semiconductor equipment manufacturers. SEMATECH was set up to help US companies to regain supremacy in mass memory chip manufacturing. SEMATECH remains an industry- and government-sponsored research consortium of fourteen member firms, aimed at developing new techniques and capabilities, with funding from the US Department of Defense (DoD).19 Importantly, the US decided to reduce its funding to SEMATECH in 1992 shortly after the US and foreign firms finally gained a 20 per cent market share in the Japanese market; the US government was reluctant to spend more, observing that its objectives had been achieved. For the US, additional spending on SEMATECH can be seen as an ‘unacceptable investment in an international public good’.20 At that point the US had a preference for limited intervention (Busch, 1999: 87–9). The share of Japanese firms and US semiconductor companies tended to decrease gradually compared to other Asian competitors. The Japanese firms’ share started to decline in 1990, and fell slightly below 40 per cent in 1995. Surprisingly, other Asian countries, especially Korean competitors, gained a 12 per cent market share in 1995, whilst the US semiconductor firms have regained their share since the 1990s (Inoue, 1998: 197).

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In 1996, the Japanese large semiconductor firms collaborated to establish a private ‘national’ Test and Evaluation consortium, SELETE (Semiconductor Leading Edge Technologies, Inc.), aimed at avoiding duplication of work and waste of time by individual companies. Although in the past decades they have not been willing to pursue their goals cooperatively, this time they did successfully set up a consortium without any support from government, in contrast to the VLSI case in which MITI had ‘some’ leadership (Inoue, 1998: 206). In a sense, it appears that this trend may reflect changes in MITI’s historical role in relation to the Japanese industries as a whole. At present MITI is inclined to stay out of the Japanese semiconductor industry. Inoue (1998: 207) put it another way: Particularly after the collapse of the political stability formerly provided by the ruling Liberal Democratic Party (LDP), it has become more difficult for MITI to show leadership with specific individual ‘industrial policies’ against the resistance of a group of very large companies. Of course this does not mean the complete wane of MITI’s influence over or through the administration (i.e. the cabinet). MITI, or more correctly MITI officials, seem unable or unwilling to ‘lead’ the Japanese semiconductor industry, but they hope to help industry, companies, and divisions ‘coordinate’ with each other for directions that are advantageous for innovation in information technology [emphasis added]. The largest European-based semiconductor company is Philips N.V. with headquarters in the Netherlands. Philips was involved in the Megaproject with Siemens over the period 1983–9. With one-third of the approximately $1 billion expenditure subsidised by the governments of the Netherlands and West Germany, the two firms collaborated to develop state-of-the-art semiconductor manufacturing technology. The second largest European manufacturer is SGS-Thomson Microelectronics (STM), established in 1987 by a merger of the semiconductor division of the French electronics company Thomson-CSF with the Italian semiconductor producer SGS-Ates, as SGS and Thomson in 1986 had launched a joint project (Megaproject 2). The third member of the European big three is Siemens, which began the Megaproject with Philips in 1990 in an attempt to catch up with Japanese semiconductors. In addition to its partnership with Philips, Siemens engaged in a licensing arrangement with Toshiba to acquire new generation technology. That is, while the Europeans were supported through JESSI, unlike the national champion

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approach by the French government, the German option of encouraging proactive cooperation (i.e. with non-European firms) turned out to be the ‘dominant’ strategy (Ziegler, 1991: 169).21 This shift of strategies by European companies arose as a result of the unsatisfactory consequences of the severe competition with American and Japanese firms in the drive to sustain independence and to protect the domestic market throughout the 1980s.22 It is apparent that European firms’ partnerships with foreign-based firms such as those in the US and Japan contributed to the improvement of European technological competence. In the 1980s, the US and Japanese firms encouraged European-owned firms to outsource technology, both ‘through technical venture and via takeovers’ (of US companies) (Hobday, 1995b).23 In the semiconductor industry, European governments have pursued inward-oriented policies which have made the European firms remain internationally vulnerable. With regard to corporate strategy, Erker (1994: 141) emphasises that Philips’ and Siemens’ adherence to traditional or older technology has inhibited and negatively affected the emergence and diffusion of the new technology, semiconductors. Martin (1996: 733) also points out that: EU governments offered only love, and for a time diverted their home firm’s attentions inward rather than outward in a way that slowed down unavoidable structural change. As far as semiconductors are concerned, the cases of Siemens and Philips show that ‘firm strategy takes priority over government policy’ (Hobday, 1995b: 6). The EU policy was focused on pan-European alliances or partnerships such as JESSI. In fact, despite their involvement in European programmes, simultaneously, Siemens decided to form a joint venture with IBM and collaborate with Toshiba. Moreover, in the wake of conflict with EU policy objectives, Philips demonstrated its intention to withdraw from an enormous SRAM project in JESSI. In this regard, firm priority, as noted above, may be applicable to EU level policy. Hobday (1995b: 12) illustrates this contention: With respect to EC policy, these events indicate that large firms retain control over decision making, regardless of EC policies, wishes and subsidies. This is, of course, quite proper. Only firms are in a position within the market to take strategic decisions (rightly or wrongly). This strongly suggests that the EC and individual European government should be very wary of influencing near-market decision-making

154 Newly Industrialising Economies and International Competitiveness

among firms. Governments are not in a position to decide on such matters [emphasis added].

EU involvement in R&D24 and technology policy: the electronics industry The EU and the technological community The early 1980s witnessed the manifestation of European technological collaboration. Thereafter the EU played a critical role in R&D policymaking. With the Single European Act in 1987, and the Treaty on the European Union (Maastricht Treaty) in 1993, the Union exercised extensive political powers in this domain. Until the 1980s, technological cooperation at the Union level had been limited to a few fields such as nuclear energy, aerospace and agriculture. Before the mid-1990s, the EU was a major actor in R&D policy (Grande and Peschke, 1999: 45–6). With regard to information technology (IT), collaboration in the Union was relaunched in 1981 on the initiative of Etienne Davignon, the then European Commissioner for Industrial Affairs, between the Union and twelve large European electronics companies – German, British, Dutch, Italian and French. At that time, emphasis was given to the IT industry, characterised as an evident area of ‘European weakness’. Davignon’s initiative led to the formation of the ESPRIT programme for cooperation in IT as a way of integrating and coordinating nationalbased fragmented R&D activities across national frontiers within the Union (Grahl and Teague, 1990: 152–3). In this regard, the Union shifted its focus from ‘sunset’ to ‘sunrise’ industries (Peterson and Sharp, 1998: 70). The early 1980s was a period of policy transition in the EU, primarily an enlarged role for the EU. European technology policy tended to be carried out at the supranational level, in other words, in Union institutions, often at the expense of national governments. Alongside this, the Union’s ‘strategic role’ served to put more emphasis upon the new knowledge-intensive industries, in particular IT, rather than more traditional industries (such as steel and coal) (Lawton, 1999). In accordance with this, there was a considerable shift in policy authority in IT from Western national governments to Brussels. As Lawton (1999: 27) contends: The EC actively sought this new policy competency, arguing that competitiveness could best be achieved if policy was implemented at a European level [emphasis added].

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As far as R&D is concerned, against the background of this Europeanised tendency, it raised some questions about the paradoxes of the reality of Europeanised R&D. First, although Sharp (1991) argues that national R&D policies have been effectively ‘Europeanised’, Peterson (1996: 226) highlights the underlying fact that research policies seem to be highly nationalised in Europe, and thus ‘illustrate a more general, global paradox’. Peterson, however, recognises that EU programmes often place high priority upon ‘leading-edge’ technologies relative to national programmes. In comparison with 2.9 per cent for the US, and 3 per cent for Japan, Europe’s overall R&D budget is ‘modest’, amounting to only about 2 per cent of total European GDP (Peterson, 1996: 230). Second, as one EU working paper suggests, an exclusive focus on intraEuropean collaboration and exchange of R&D know-how can restrict the economic and technological development to a marginal extent. A more recent ETAN (European Technology Assessment Network) working paper points out: The European RTD Framework Programmes and other related technological support programmes were set up, aiming at fostering intraEuropean cooperation mainly in the field of pre-competitive R&D. As Europe has invested in intra-European collaboration and exchange of S&T know-how, the advantages of such geographically ‘bounded’ collaboration have become gradually marginal, given the increased opportunities for fast and worldwide cooperation and exchange. This intra-European exchange has taken place to some extent at the expense of extra-European exchange. (European Commission, 1998: 16)

ESPRIT, EUREKA: European enterprises and responses EU involvement in R&D activities is manifested in two separate and distinct sectors which involve EUREKA projects, and its own Framework Programme such as ESPRIT. Launched in 1984, ESPRIT was commonly regarded as the first Framework Programme’s flagship initiative. Also launched in 1985 was EUREKA, which is another major technological collaboration project, slightly different in nature compared to ESPRIT. EUREKA has a more commercial and marketable emphasis, while projects supported by ESPRIT are assumed to be concentrated upon the ‘pre-competitive’ stage, i.e. removed from commercial exploitation. As for EUREKA, firms are the primary actors, while public sectors or institutions have only a secondary role (Grahl and Teague, 1990: 154). In operational terms, it is important to note that EUREKA can be

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favoured by European firms in terms of international competitiveness in comparison with ESPRIT. The European Research Coordination Agency (EUREKA) was initiated by President Mitterrand as a direct response to Ronald Reagan’s Star Wars Research. EUREKA is a pan-European framework which involves ‘near-market’ R&D projects in all fields of advanced technologies. EUREKA was generated against European concern over a new ‘technology gap’ in the mid-1980s.25 In particular, the US initiative of SDI (Strategic Defence Initiative) was announced without consultation with any EU government, thus provoking a profound EU response in early 1983. According to Peterson (1997), purely in technological terms, at this time Japan’s programmes in integrated circuits (IC) and computers – particularly the 5th generation project – also had an impact on the advent of EUREKA, either directly or indirectly (1997: 326–7). At that time, on the face of it, EUREKA’s idea of a ‘near-market’ project was an attempt to distance EUREKA from the EU itself, since the Treaty principally restricts EU funding to only ‘pre-competitive’ research. The basic attitude of the relationship between EUREKA and the EU varied across the member states. France and the UK expressed their willingness to exclude the Union as far as possible. By contrast, Germany (with support from Austria and Denmark), reiterated that EUREKA should involve pre-competitive projects, in particular related to environmental protection technologies (Peterson, 1993: 261). Other states, including Italy and the Benelux countries, suggested that EUREKA be incorporated within the Framework Programme. The resultant compromise was that the Union would remain an extra ‘member state’ of EUREKA (Peterson, 1997: 336–7). Initially, following its inception in 1985, EUREKA had twenty participants. Consequently, EUREKA was the first Western European institution to accept Central and Eastern Europe countries into its membership, thus expanding membership to twentysix between 1992 and 1997 (Peterson and Sharp, 1998: 90).26 As far as R&D is concerned, in general, in the early 1990s about 75 per cent of the Union’s R&D was undertaken by the major member states – Germany, France and the UK (Higgins, 1991: 510). Significantly, according to The Economist, the EU’s research budget reflected only 4 per cent of civil R&D spending in Europe (9 January 1993). By the mid-1990s, around 1000 EUREKA projects were either underway or had been completed (Peterson, 1997: 342). In the process towards European integration cooperation between different national companies and governments was a logical outcome. In the early 1980s, as noted above, Etienne Davignon decided to bring together the twelve most influential European IT industries to form an

European Integration and Industrial Policy 157 Table 5.6 Twelve IT round table members in 1981 Company

Country

Philips Siemens, AEG, Nixdorf Thomson, CGE/Alcatel, Bull GEC, ICL, Plessey Olivetti, STET

Netherlands Germany France UK Italy

Source: Ledeboer (1992: 494).

IT round table (Table 5.6). They confirmed that something had to be done to secure the enhancement and availability of new technologies in high-tech areas. An analysis of ESPRIT objectives shows that IT is considered a key industry. At that time Europe was struggling to encroach on the dominance of US technology, and at the same time, restrict the drastic Japanese inroads into the consumer electronics and components industries. This is reflected in Davignon’s words in 1984 (quoted in Ledeboer, 1992: 495): ESPRIT is a first phase in the effort of the European IT industry to conquer a place on the market, now dominated by others, and regain a place on the market, now dominated by others. From the firm’s perspective, as far as ESPRIT is concerned, one senior executive of Philips insists that ESPRIT is a ‘success’ in that it created many useful records and also gave to Europe much self-confidence irrespective of its partial deficiency: ESPRIT created a network of nearly 1500 companies and over a hundred universities and institutes. More and more the national R&D programmes were shifted towards European cooperation. A total of about 5000 to 7000 scientists and engineers are working on projects. A regained belief in the potential of Europe as an important factor in the world of high technology is evident among scientists and engineers. (Ledeboer, 1992: 503) As with ESPRIT, it is difficult to say that EUREKA has been a failure, although specific projects such as the EU 95 HDTV project might be considered an example of failure. At least it can be said that EUREKA may be valued to the same extent as the EU’s Framework Programmes are

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considered to be of significance, despite the fact that EUREKA and the Framework Programmes are not ‘linked’ (Peterson, 1993: 262). Arguably, EUREKA has encouraged more firms to join in collaborative research, whilst EUREKA itself is not favoured by its industrial participants. As Peterson (1993: 262) argues: Eureka has made a genuine difference in the overall European R&D effort by motivating more firms to engage in collaborative R&D and creating new links between firms    its participants are more enthusiastic about the experience of collaboration than they are about Eureka itself.

JESSI and semiconductors Launched in 1989, EUREKA’s flagship, JESSI, invested 3.8 billion Ecu to compete against SEMATECH, a semiconductor R&D consortium supported by the US government. JESSI’s goal was to help European companies such as Philips, Siemens and SGS-Thomson, a Franco-Italian venture, jointly to develop new microchip technology. Interestingly, large US firms such as IBM, AT&T and Hewlett Packard, and also many small firms, obtained access to the first and second Framework Programmes and EUREKA, whilst the US prevented European firms from participating in SEMATECH. Philips wished to join SEMATECH since it has its R&D facilities in the US. To this end, Philips persuaded JESSI to accept IBM. In June 1990, JESSI’s president, Raimondo Paletto, announced that the US and Japanese firms that were willing to ‘commit’ to Europe could join JESSI (Wyatt-Walter, 1995: 433). As a consequence, IBM was allowed to join EUREKA projects as the US computer company. Siemens, which collaborated with IBM, allowed for the latter’s participation in two JESSI projects – semiconductor manufacturing equipment and lithography. At this time, Philips, SGS-Thomson and Siemens were considering the joint development of chips and, possibly, a combined merger of the big three European producers to form a single European chip-maker, but without success. In 1990, Philips, as a result of financial difficulties, withdrew from its involvement in the high-profile JESSI project for developing SRAM chips. In addition, JESSI’s 1992 budget abruptly fell by about a third since both the EU and the companies concerned refused to pay their contributions. It was quite amazing that considering its problems JESSI in the end ‘survived’.27 But as The Economist said (9 January 1993): ‘its (JESSI’s) raison d’être was undermined in December 1991, when Siemens

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agreed to develop new chip technology with IBM (now a JESSI member) and Toshiba’. In 1991, as far as the market share in the EU market was concerned, Philips, Siemens and SGS-Thomson ranked first, second and third, thereby amounting to 27 per cent of the intra-EU market. Thereafter, the share of the European producers of semiconductors steadily continued to decrease. It fell from 38 per cent in 1991 to only 26 per cent in 1996, while that of US and Asian competitors was on the rise in 1996, at 50 per cent and 24 per cent, respectively (Lucchini, 1998: 550). In fact, after 1993 the largest share in the EU market for semiconductors went to US firms, for example Intel. By 1996, among the worldwide top ten chip-makers, there was only one European company – SGS Thomson. Subsequently, one could argue that this focus on research (rather than development) constrained the ‘quantitative’ effects (Lucchini, 1998: 551; Forester, 1993).

Conclusion From this analysis the main conclusions to be drawn can be summarised as follows. Regarding the European electronics industry, firm bargaining power was strong in situations in which national government or the EU set the critical objectives, such as the enhancement of international competitiveness in the electronics industry whether at the national, or at EU levels. In particular, this tendency has been strengthened in the process towards transferring national government policy authority to European institutions or the Union by way of creating European technology policy such as major European-level R&D collaborative projects. Specifically, individual European firms such as Philips, Thomson and Siemens have collectively emerged as political actors in their national arena in the electronics industry, thereby extending their corporate power and or their influence vis-à-vis the Union on vital ‘comparative competitiveness’-related issues on the development of HDTV. Since the advent of IT, corporate competitive advantage lies to a great extent in knowledge-intensive technology such as semiconductors in the light of the nature of its impact on the individual national economy, or the ‘new’ wealth of nations. In this regard, far beyond the consumer electronics sector, more recently semiconductors have constituted a ‘core’ variable in competitiveness. As Cawson et al. (1990) emphasise, without corporate actions the specified policy ends cannot be achieved. At this time, particularly in the case of the European semiconductor industry, regardless of the success or failure of the policies (set by the

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national governments or the Union), we would argue that European public policies, including technology policy, will depend disproportionately upon large firms. This suggests that the ‘core’, or knowledgeintensive technology is at the forefront of competitive performance in terms of the importance of near-market orientations. Coupled with the fact that this trend reflects a global process, the European electronics industry has become more representative of the process of European integration.

6 EU Trade Policies, Korean FDI in the EU and the Emergence of Korean Electronics Multinationals

In this chapter, we develop the proposition that initial Korean manufacturing investment in the EU was mainly attributable to non-tariff trade barriers, especially anti-dumping duties imposed by the EU. We argue that EU trade policy measures can be interpreted as the first major factor in driving the internationalisation of large Korean electronics firms. EU trade policies, including anti-dumping duties on imports, local content and rules of origins, are shown to have been related to the emergence of Korean electronics MNCs. From the global perspective, trade protectionism in developed countries, in particular the EU, has significantly prompted Korean chaebol to become multinationals in terms of dealing with the electronics sector in the advanced markets. The chapter provides an overview of the major factors motivating Korean FDI in the EU and related empirical analyses illustrating the significant and strong connection between EU trade policies and Korean FDI into the EU that has consequently led to the internationalisation of Korean electronics firms. As Asian first-tier latecomers, in contrast with other Third World multinationals such as those from Taiwan, Singapore and Hong Kong, we suggest that the rapid increase in Korean electronics firms’ European investment in the late 1980s and mid-1990s represents an unusual phenomenon that seems unlikely to be replicable in other regions, but which is quite similar to the pattern of Japanese European investment (Y. C. Kim, 1997, 2002). During the same period, EU trade policies had prominently shaped Korean electronics firms’ FDI in the EU. Since then, with respect to Korea’s continued FDI in Europe, it can also be observed that the trade regime-motivated factor has partly given way to other proactive or pulling factors such as corporate strategic objectives – internationalisation, technology outsourcing, and emerging market potential. This kind of synergistic effect has increasingly 161

162 Newly Industrialising Economies and International Competitiveness

contributed to the deepening of the multinationalisation of Korean electronics chaebol. As discussed in Chapter 3, this trend has also influenced Korean government–industry relations in the Korean chaebol’s favour. In the context of the globalised economy, Hirst and Thompson (1999: 11) recognise that: Government would no longer be available to assist as they have been for ‘national champions’. Firms would therefore seek to share risks and opportunities through inter-corporate investments, partnerships, joint ventures, etc. However, this does not mean that, as Palan and Abbott (1999: 201) suggest, ‘the state is about to disappear or wither away under the pressure of globalisation’. For NIEs, it is clear that particular MNCs increasingly have tended to replace the government’s conventional role in terms of a ‘governed’ market. Evidently, the Third World multinationals (Dicken and Yeung, 1999: 107) are likely to create ‘market power’ in its own right by way of overcoming entry barriers, especially trade barriers in developed countries. What is more important is the question of which industrial sector will have a major effect on building market presence in the world market which cannot any longer be governed by national governments as a result of trade protectionism – the advent of the single market under the pressure of globalisation. Here we show that, with regard to Korea, the electronics MNCs have acted as a vital means of deriving market power from the world market correspondingly governed by the international or regional trade regime.1 To develop the main argument further, the first section deals with EU trade policies in parallel with the emergence of the single market. The second section provides an account of Japanese FDI in the EU, which serves as an introduction to the following two sections which explore the pattern and motivations for Korean FDI in the EU. The final section concludes that trade policies enacted by the EU have significantly influenced the globalisation of Korean electronics MNCs. Before turning to the main argument, one should distinguish between globalisation and internationalisation. Generally the term ‘globalisation’ needs to be more elaborately specified and distinguished from that of ‘internationalisation’. As some scholars suggest (Dicken and Yeung, 1999; Lane, 1995), the term ‘internationalisation’ may be applied to firms’ ‘economic activities across national boundaries’ as the concept can be applicable to firms rather than countries. Basically, it refers to a ‘quantitative process’ (Dicken and Yeung, 1999: 124). As an example,

EU Trade Policies, Korean FDI and Korean Multinationals 163

we may cite the intensification of inward and outward FDI (Lane, 1995: 82). By contrast, globalisation is related to a ‘qualitative process’, namely, ‘the functional integration of a firm’s international operations’ other than its geographical location. Ironically, Dicken and Yeung (1999: 124) contend that a globalising firm ‘need not be more globally dispersed’ than an internationalising firm. In particular, globalisation can be characterised by the emergence of MNCs which produce and market on a ‘global scale’ (Lane, 1995: 83). According to Dicken and Yeung (1999), until recently, the emergence of MNCs has been an exception in the Asian region. Clearly, Japanese and Korean firms have become multinationals in real terms while firms in the rest of the Asian countries have been unwilling to extend beyond the Asian region (1999: 118). They remain mostly Third World multinationals, the ‘Asian firms with international operations, rather than international firms with Asian operations’ (1999: 119). In so far as outward FDI is concerned, Korean chaebol have tended to follow the Japanese FDI pattern in North America and the EU rather than that followed by other Asian firms (Y. C. Kim, 2002). Surprisingly, as Belderbos (1997a) notes, it was not until the mid-1980s that Japanese firms even sought to become MNCs. The reason for this is that until the 1980s, Japanese electronics firms had enjoyed their export success based on ‘competitive advantage’ stemming from their home market. As Belderbos (1997: 15) puts it: Japanese firms had been reluctant to become multinationals because it was not evident that these firm-specific advantages could be transferred abroad successfully, since they were dependent on characteristics of the workforces and inter-firm relationships in Japan. From another perspective, as illustrated in Chapter 4, Korean electronics firms made ‘reverse direct investments’ – which may be seen as the ‘unconventional’ FDI case in Jun’s (1987) words – in developed countries, the US and EU. It appears that this experience enabled Korean electronics chaebol to grow into MNCs in real terms.

EU trade policy and the single European market The trade protectionism rationale in the EU The EU emphasises that its trading system is based on free trade. The rhetoric in the trade literature served to defend its external trade protectionism. Anti-dumping actions have existed under Article VI of the

164 Newly Industrialising Economies and International Competitiveness

GATT and the WTO Anti-dumping Agreement. Dumping is classified as selling a good for export at a price which is lower than its normal value in the exporter’s domestic market. Significantly, ‘neither in the EU nor the US is it illegal for a domestic seller to sell at a price lower than cost of production’ (Hindley and Messerlin, 1996: 14). Both the EU and the US have reiterated a principle of fair competition to justify their interests in the international trade regime. As a matter of fact, between the 1980s and 1990s, the EU resorted to the use of anti-dumping measures as a manifestation of this principle. Between 1980 and 1986, the EU undertook 213 anti-dumping duties, whilst the US undertook 195. In 1996 alone, twenty-three anti-dumping investigations were undertaken, and by the end of that year, in the EU a total of 153 measures has already came into effect (Farrel, 1999). The relationship between free trade and anti-dumping may constitute a paradox. As Kempton et al. (1999: 6) say: Some would argue as a consequence that the significant liberalisation which occurred as a result of the Uruguay Round would not have been possible without the retention of the anti-dumping instrument. With regard to the anti-dumping regime, it is often argued that anti-dumping is justifiable to defend weak domestic interests against powerful foreign rivals. Ironically, the reality is that anti-dumping is a means through which influential domestic interests strive to restrict foreign competition (Hindley and Messerlin, 1996: 52). Concerning trade law, the General Agreement on Tariffs and Trade (GATT) allows a country to tax imports if they can be proved to have been either dumped or subsidised, and if the domestic industry has been injured by the specific imports. As explained above, dumping indicates selling goods abroad at lower prices than in the home market, or at prices that do not include a ‘reasonable profit margin’ along with cost of production (Winters, 1992: 571).

Anti-dumping protection As anti-dumping measures became more widespread, the problem was whether anti-dumping protection could develop in parallel with, or be reconciled with, the explicit objectives of trade liberalism. Antidumping protection in the form of non-tariff rules is different from conventional trade restrictions such as tariff and import quotas for two reasons. First, the latter comprised multilaterally agreed rules, and were entirely abolished in the light of the GATT’s announcement of

EU Trade Policies, Korean FDI and Korean Multinationals 165

the free trade principle. Second, anti-dumping is inherently discriminatory, in that anti-dumping rules tend to be applied ‘selectively’, on a case-by-case basis. Regarding the negative effect of anti-dumping protection, however, there is an assertion that anti-dumping aims to secure the interests of particular manufacturers at the expense of domestic consumers and ‘downstream’ producers in the sense that they have to pay higher prices for domestic goods imported from foreign markets (Stegemann, 1991: 380). In this context, Schuknecht (1992: 3) emphasised that the EU’s trade protection is highly ‘politicised’: Relief from import competition is granted especially to well-organized and politically influential producers, such as the textile, steel, vehicles, or consumer electronics industries amongst others [emphasis added]. Through the 1980s, as one of its most potent trade policies, the EU’s anti-dumping regime was instrumental in targeting certain manufactured products. Compared to the US’s 389 cases for 1980–7, the EU took over 400 cases and 900 decisions from 1980–90 (Schuknecht, 1992: 58). EU anti-dumping actions included product dumping, sub-assembly dumping and input dumping. Until 1987, dumping investigations normally tended to be undertaken for finished products. Thereafter, sub-assembly dumping targeting ‘screwdriver plants’ was initiated on the basis of regulation 1761/87. In 1987, the EU attempted to enforce amended anti-dumping rules against Japanese assembly plants set up in the EU region largely due to their ‘unfair’ assembly process. The new amendments, the local content rule in the EU, required that at least 40 per cent of components had to be sourced from other EU countries. This anti-dumping law arose from the evasive Japanese response to antidumping duties on final products imported to Europe. Anti-dumping actions under the 1987 amendment were undertaken ‘solely’ against Japanese electronics firms related to Japanese assembly of electronic production such as electronic scales, electronic typewriters, copiers, printers and VCRs (Belderbos and Sleuwagen, 1998: 604–5).

Countervailing duties: subsidy Countervailing duties emerged as a response to subsidies provided by the exporting government. Countervailing duties can be imposed if there is a subsidy on the export, the manufacturing or the transport of a good imported into the EU. Countervailing duties are the least important and least effective barrier in EU trade policy. Only twelve cases were imposed during 1979–80, including five for Brazil and three

166 Newly Industrialising Economies and International Competitiveness

for Spain (Schuknecht, 1992: 59–60). In the EU, subsidy is the most ambiguous concept and is still controversial in the recent politicoeconomic arena. It attracted little attention before the Treaty of Rome. It can be said that subsidiarity marks a difference between the new EU and the previous European Economic Community (Bianchi, 1996: 42–3). In contrast, the US countervailing duties are much more frequently imposed, resulting in 389 proceedings between 1980 and 1987. Indeed this derives from the differences between US and EU attitudes towards subsidy practices.2

Voluntary export restraints (VERs) Voluntary export restraints have been a popular restriction set by the developed countries on the quantity of products that can be exported out of a country during a definite period of time. Faced with increasing competition from exports of developing countries, VERs typically arise when advanced countries seek particular industries protection. Some typical examples of VERs occurred with auto exports from Japan in the early 1980s and with textile exports between the 1950s and 1960s. As a strategy for circumventing the rule of the GATT, these non-tariff barriers have been designed to protect and stimulate the industry concerned. Since the initiation of VERs in the 1930s, the trade barriers have been extensively applied to products ranging from textiles and footwear to steel, machine tools and automobiles. Given VERs are normally implemented on a bilateral basis, VERs are provided by the exporter to appease the importing countries and to avoid the effect of potential trade restraints on one importing country. More importantly, the initiation of VERs allows the price of the restricted goods to rise in the importing country market. Thus exporters tend to benefit much more from the exporting industry than would have been possible otherwise (Pomfret, 1991: 112–16). Specifically, by the mid-1990s, as is shown below, several VERs were imposed on the export of electrical and electronics household equipment from Japan and Korea (Table 6.1). VERs are among the EU’s most important ‘grey area’ measures because they were not authorised by the GATT. They have been considered an appropriate form of protectionist strategies during the 1980s, in part because they did not violate countries’ agreements under the GATT. Following the regulations completed by the Uruguay Round of the GATT in 1994, WTO members agreed not to implement any new VERs and to phase out any existing VERs over a four-year period. Exceptions can be approved for one sector in an individual importing country.3

EU Trade Policies, Korean FDI and Korean Multinationals 167 Table 6.1 VERs and similar restraint arrangements in the EU as of the early 1990s: consumer electronics products Targeted countries

Initiators

Products

Types

Japan Japan Japan Korea Korea Japan Japan Japan

EU EU EU EU EU Germany France EU

Colour TV sets Colour TV tubes Video tape recorders Microwave ovens Video tape recorders Colour TV sets TV tubes Video tape recorders

VER VER VER IRAa IRA IRA IRA IRA

a The EU Commission or national government is not informed of these restraints. Source: Schuknecht (1992: 117).

‘Community interest’ clause Before the Uruguay Round, the EU anti-dumping regulations already contained a ‘Community interest clause’ which was reinforced afterwards (Article of the Basic Regulation). The Union suggested that it should take responsibility for promoting the interests of the EU (as stated in Article 10.2 of the Merger Treaty). This clause contains a precondition which must be overcome before certain measures are applied. As Holmes and Kempton (1996: 651) stress, ‘this is the least well-defined and least used of the anti-dumping criteria, but in many ways it is the most interesting from a regulatory perspective’. The initial language of the Union’s interest was mentioned in the first anti-dumping regulation of 1968. By 1994 this had been considerably amended. According to regulations at that time, although the other regulatory procedures were passed, the interest of the Union enables it to take any measure against imported products whenever necessary. Conversely, measures may not be implemented if they are considered significantly harmful to the Union’s interest. Compared with other anti-dumping regulations, such as the US case with its ‘no public interest’ clause, it allows the Union more discretionary authority beyond the original rule-based concept of dumping and injury (Holmes and Kempton, 1996: 652). In terms of economies of scale, the Union apparently discovered that the imposition of anti-dumping duties provides the Union’s industries with considerable benefits in the context of market share and jobs.

168 Newly Industrialising Economies and International Competitiveness

The trade regime in the EU Differences between EU and US anti-dumping Recently, the application of anti-dumping measures has become more widespread, extending from a few conventional initiators, such as Australia, Canada, the EU, New Zealand and the US, to numerous new users, including Argentina, Brazil, India, Korea, Mexico, Turkey and South Africa. As mentioned above, the rise in the implementation of the anti-dumping laws has been in part perceived as a reaction to the recent trend towards trade liberalisation. In this regard, anti-dumping protection has reflected two contradictory features of trade liberalisation. As Miranda et al. (1998: 5) argue, on the one hand, the anti-dumping laws are considered to be ‘a virtual back-door escape’ from trade liberalisation. On the other hand, some analysts assume it to be ‘a price to be paid’ for the establishment of trade liberalisation. Interestingly, as Finger (1993: 13) maintains, import substitution represents the rhetoric of developing country protection, while the notion of anti-dumping is used as the rhetoric for developed countries to ‘excuse’ their regulatory practices under the free trade environments. In this section, we undertake a comparative examination of the use of anti-dumping by the US and the EU, which will make the EU case more distinguishable. Regardless of the fact that US and EU anti-dumping systems are based on the GATT code, it should be noted that there are remarkable differences between the two jurisdictions in the context of law and practice. Since 1979, the US and the EU have sought to adjust their laws to the provisions of the GATT anti-dumping code negotiated in the Tokyo Round. For most countries, in the early twentieth century the tariff was the major weapon for regulating imports. The early US anti-dumping regulation was a mere extension of the anti-trust law. In this context, antidumping has a different origin in the US compared to other countries, especially Canada. Moreover, since the advent of GATT in 1948, antidumping remained a minor issue until 1958. Anti-dumping first proved to be a significant issue in the Kennedy Round of 1964–7 by diplomatic manifestation rather than by direct application (Finger, 1993). Few would deny that anti-dumping laws are the primary instrument of protectionism in the EU. The EU’s anti-dumping regulations are more broadly defined than those of the US in that they are mainly based on the GATT anti-dumping code rather than any economic concepts regarding anti-dumping. What this means is that the GATT code is less specific and relatively ambiguous, thus leaving a significant margin for the discretionary interpretation of whether a particular instance is

EU Trade Policies, Korean FDI and Korean Multinationals 169

exactly related to dumping. As far as anti-dumping is concerned, the US considers it as a protectionist ‘rule’ while the EU tends to put more emphasis on protectionist ‘discretion’. With reference to anti-dumping laws Eymann and Schuknecht (quoted in Belderbos, 1998: 222) give an example of the relative differences between the US and the EU: The US has added precise specifications to the GATT general lines, leaving little discretion to the agencies that evaluate dumping petition    The EC has taken the alternative approach of translating the GATT code into general operational language, without adding extensive detail    both the US and the EC use anti-dumping measures to prevent injury from imports to domestic producers: the US formulates protectionist rule while the EC applies protectionist discretion. In the US, concerning procedural arrangements for anti-dumping measures to be undertaken, both dumping and material injury need to be proven during an investigation. The two measures are investigated separately: dumping by the US Department of Commerce (DoC) and injury by an independent agency, the International Trade Commission (ITC). If there is a positive dumping finding by the DoC and a positive injury finding by the ITC, the DoC issues the anti-dumping order. Consequently, an anti-dumping duty has to be imposed in accordance with the dumping margin. It has been argued that a positive finding for one agency may lead to a prejudice towards a positive finding for the other during investigation (Belderbos, 1997b). In contrast, the EU antidumping process is quite different. The EU translates the GATT code into operational rules, but does not add clarity beyond the code. In the end, the administrative agency, the EU Commission, can make a final judgement as to whether the regulations may be applicable to the case. From the foreign targeted exporters’ perspectives, compared to the US anti-dumping rules, it is thought that it is more difficult for them to properly respond to the EU’s anti-dumping protection largely due to its ambiguity of operational and procedural processes. In an interview conducted with Samsung Electronics, one manager complained about the EU’s black-box related to anti-dumping: When the US producers lodge anti-dumping complaints against foreign companies, the US government discloses the process of review at all times. Also, they deal with the complaints in a logical, systematic and legal way. In addition, they have taken the responsive

170 Newly Industrialising Economies and International Competitiveness

approach of recognising the errors foreign defendants indicate in the process. By contrast, in the EU, the dumping margins have tended to stand higher than we might expect along with the fact that the review process by the EU can be simpler, and to large degree ambiguous. Really, we cannot understand how the review may be processed. Under the circumstances, we are not well-prepared to react to antidumping actions initiated by big firms in the EU. In a sense, it cannot be explained in quantitative terms, consequently, unpredictable through reviewing.4 Since 1984, the EU has applied a ‘sunset’ provision to its antidumping measures. Generally, anti-dumping measures expire unless the EU industry asks for a ‘sunset review’ in which dumping and injury are renewed. According to Belderbos (1997b: 425), anti-dumping measures for Japanese CTVs have been applied for more than twenty-five years. Beyond that, over the same period, the scope of anti-dumping rules targeting Japanese CTVs has been extended to include projection television and liquid crystal display (LCD) televisions. With regard to definition of de minimis requirements, article 9(3) of the Basic Regulation (Council Regulation 1994) stipulates that the anti-dumping action shall be immediately terminated whenever it is evident that the margin of dumping is less than 2 per cent on the basis of the export price. Further, it is important to indicate that the necessary condition for the imposition of duties should be that a foreign exporter accused of dumping has a significant market share in the EU market (Tharakan et al., 1998). Definitive anti-dumping measures must be later decided by the Council, not the Commission, while provisional anti-dumping duties come from the Commission. Essentially the termination of an investigation by the Commission depends on a decision by the Council. When an investigation by the Commission is finalised, the Commission has to provide the Council representing EU member states with a proposal either to terminate the proceedings, or to impose definitive duties. Undoubtedly, for anti-dumping measures to be applied, the European Council of Ministers normally tends to follow the decision by the Commission without exception. Holmes and Kempton (1996: 655) put it another way: It is true that the Council virtually never rejects a Commission proposal for anti-dumping measures to be applied, implying that the Council tends to play a fairly passive role in this area of policy [emphasis added].

EU Trade Policies, Korean FDI and Korean Multinationals 171

Privatisation of anti-dumping protection Here we need to mention the ‘privatisation of anti-dumping’ (Hindley and Messerlin, 1996; Schuknecht, 1992). What this implies is that antidumping enforcement mainly emanates from a part of corporate strategy attempting to represent business interests (Greenwood, 1997; Cawson, 1992, 1997; Coen, 1997, 1998, 1999), whether parent firms or subsidiaries (Table 6.2). In Hindley and Messerlin’s (1996: 42) words, ‘antidumping laws defending the public interest are a myth’. It should be noted that in practice anti-dumping action has been initiated by firms. Various sources identify a few large firms as the driving force behind a high proportion of complaints.5 Surprisingly enough, in the EU market, a few of the large non-EU firms, for example, Alusuisse, Du Pont, Esso, Norsk Hydro, Nokia and Motorola, have been major initiators of the EU dumping laws, either participating directly, or through subsidiaries. Traditionally, in terms of its economic and political objectives, the Union has sought to foster the organisation of formal business representation. It is more important to note, however, that large firms were not allowed to form industrial coalitions or to participate in EU policymaking after the creation of the European Coal and Steel Community onwards. First, in the formative years of the EU, among the EC leaders, especially Jean Monnet, it was believed that big businesses would pose a barrier to the European integration idea mainly owing to their strong nationalistic tendencies. Second, during the post-war period, the large firms were not concerned with direct involvement in the new European institutions. Rather, in an economic sense, they preferred to demonstrate their willingness to create the GATT (Cowles, 1997: 116–17). Over time, the Commission admitted that firms might act as a political catalyst for cooperation between member states. Also, the Commission began to

Table 6.2 Complaining firms in EU anti-dumping cases: consumer electronics – ten cases (1980–9) Parent companies

Origin countries

Philips Thomson Nokia AEG Motolora Siemens

Netherlands France Finland Germany US Germany

Source: Hindley and Messerlin (1996: 44).

Frequency (%) 70.0 70.0 50.0 20.0 10.0 10.0

172 Newly Industrialising Economies and International Competitiveness

recognise a need for a ‘Commission intermediary’ to facilitate governmental negotiations (Coen, 1998: 79; 1997, 1999). In that context, it is often arguable that the lobbying process allowed for the European private actors, or to a lesser extent even US lobbying groups, e.g. the EU Committee of the American Chamber of Commerce (AmCham) (Cowles, 1996) to encroach upon the enactment of anti-dumping laws by the EU, as Coen (1999: 27) suggests: What is more, the US firms have acted as a catalyst for change in the European business–government relationship and have themselves adapted to the EU public policy process. Under similar conditions, in the US, the same phenomenon has been observed, especially in the chemicals industries. Most of the complaints have tended to be lodged by EU firms, including BASF, Hoechst, ICI, Monsanto and Rhone-Poulenc – in some cases, ironically against EU exports (Hindley and Messerlin, 1996). Cowles (1996: 348) provides an excellent example: By the mid-1970s, American companies were paying increasing attention to the Commission’s activities    In 1978, the EEC Committee was officially established and ‘charged with monitoring EEC proposals relating to business’    The membership consisted of representatives from US MNEs and consulting groups    Today, the EC Committee has emerged as    one of the most powerful organisations in Brussels    By 1995, the EU Committee was comprised of some 133 companies with 650 active participants    the EU Committee included ten of the top ten, fifteen of the top twenty, and forty-five of the top one hundred US industrial organisations    The primary reason for the rapid increase in membership can be attributed to US companies’ growing awareness of the Single Market programme during this period    Rather, the EU Committee was established for larger purposive, political incentives – namely, to enable firms to influence EU legislation more effectively. This shows that trade friction cannot be viewed as being isolated from government trade policies, either strategic or regulatory. Frequently, government plays a critical role in setting trade policies. At the same time, non-governmental actors in the creation of trade policy can be represented by ‘major business organisations’ (Kim and Chung, 1989). For example, with regard to anti-dumping measures imposed upon

EU Trade Policies, Korean FDI and Korean Multinationals 173

Korean exports, the Korean government has always strived to contact its counterparts through a variety of regular and longstanding channels, such as Korea–EU ministerial meetings, Korea–EC high-level consultations, and the Korea Mission in Brussels. For an anti-dumping order to be withdrawn, or terminated, it is often assumed that the Korean government may resort to bilateral trade consultations for the sake of concessions. In short, it may be considered fruitless to resort to bilateral consultations because it often requires enormous bargaining power from exporting countries. Arguably, as one Korean diplomat maintains, ‘antidumping action must not be a matter of government vs. government’, but it is indeed related to firms, mostly MNCs: Anti-dumping cases are initiated by one firm, or collectively, e.g. the association such as the European Association of Consumer Electronics Manufacturers (EACEM). It is misleading to suggest that anti-dumping initiations are largely due to manipulation deliberately contrived by government agencies although corporate power as lobbyists tends to be significantly affected by preferred policies of government. Basically, it must be remembered that the antidumping problem is a matter of firms, or inter-firms across national boundary.6

EU anti-dumping as an incentive for FDI As the empirical evidence suggests, the mere presence of anti-dumping legislation gives foreign firms an incentive to strategically respond to avoid prospective anti-dumping actions. In operational terms, as Belderbos (1997a, 1997b) discovered, the differences between the US and EU anti-dumping systems reveal that an EU anti-dumping action provides foreign firms with greater incentives to prefer to rely on a relocation of production (Y. C. Kim, 2002: 52–6), that is, FDI, rather than continuing exporting compared to the US case. According to Ashgate (1973) on Japanese FDI: FDI was the last stage of a process that began with exports, which meant that FDI would eventually substitute for exports. Firms start to enter into a foreign market with exports. But the firms may find it necessary to invest there when they face or fear tariff or non-tariff barriers from the foreign market or when their export volume reaches a critical size. (Cited by Y. C. Kim, 2002: 21)

174 Newly Industrialising Economies and International Competitiveness

Of course, it should be stressed that FDI has been occurring without overt trade policy, especially as shown in Vernon’s product cycle hypothesis. In so far as FDI by Asian MNCs (especially, Japanese and Korean MNCs) are concerned, we would argue that an EU anti-dumping action against Japanese and Korean firms is more likely to cause Japanese and Korean MNCs to become involved in outward FDI, or to become ‘insiders’ in the EU than a US anti-dumping action. Belderbos (1997b: 431, 434) comments on the main reason underlying this assumption by pointing to the Japanese case: An EU anti-dumping action implies fewer incentives to continue exporting and greater incentives to establish a local manufacturing plan than a US anti-dumping action. The prospective duty system increases the export cost and works as a disincentive to raise prices, whereas in the US raising export prices reduce payable duties    the substantial disincentive available to the EU in the anti-dumping procedures can be used to the detriment of Japanese exporters, while US producers are relatively predictable. The great uncertainty associated with EU actions will make reliance on exports a more risky strategy    Although no anti-dumping investigation was initiated, several Japanese firms explicitly stated    that EU anti-dumping was the main reason for their investments. With regard to anti-dumping measures, it is important to look at the practices of Asian MNCs mainly from Japan and Korea compared to other ‘NIE multinationals’. Here, in the globalised economy, we assume that the leading Asian MNCs’ ‘globalising’ tendency of outward FDI has also been to a great extent related to trade regulation measures by EU countries, given the European MNCs’ ‘regionalisation’ of outward FDI, mainly focusing upon Europe itself. According to Dicken and Yeung (1999), except for Japan and Korea (and sometimes Taiwan), most Asian NIEs’ firms – as in Singapore and Hong Kong – have tended to remain ‘regional’ in that they place a high priority on the regional consumer market rather than developed countries, i.e. North America and Western Europe (Table 6.3). Furthermore, it may be that the Asian financial crisis will reinforce this trend for a time. The same might apply to Europe, where most European countries (except for the UK) stick with Europe in terms of outward FDI. In the process towards European integration, it appears that the European MNCs were faced with the difficulty of averting the ‘regionalising’ trend in light of the growing market size for the future, possibly through the single European market.

EU Trade Policies, Korean FDI and Korean Multinationals 175 Table 6.3 Foreign direct investment from Asian NIEs by region Country/Region Developed Countries 1988 Mid-1990s North America 1988 Mid-1990s Western Europe 1988 Mid-1990s Developing Countries 1988 Mid-1990s East, South and Southeast Asia 1988 Mid-1990s

Singapore

Koreaa

Taiwan

120 60

23.0 20.0

52.0 44.0

71.0 34.0

100 53

2.9 5.5

48.0 29.0

61.0 27

– –

13.0 10.0

4.0 15.0

– 5.5

880 940

77.0 57.0

48.0 56.0

29.0 66.0

880 940

64.0 57.0

30.0 49.0

24.0 38.6

Hong Kong

Note: a Korea’s FDI (total permitted) for 1995 is from the Korea Federation of Banks (1998); others are adapted from Dicken and Yeung (1999: 177). Sources: Korea Federation of Banks (1998) and Dicken and Yeung (1999).

Consequently, we can certainly say that they are mostly European firms with international operations, rather than international firms with the European operations.7 As Dicken and Yeung (1999: 126) describe: A major reason why most Asian firms will probably remain ‘regional’ is the growing size and depth of the regional consumer market. In that sense, the position today is beginning to approach that of Europe, where the majority of international investment by European firms (other than UK firms) is located within Europe itself. It should not be forgotten that in some cases the trade regulatory measures of European firms reflect an irreversible trend of regionalisation which is meant to be motivated by a desire to modify or counteract globalisation. Specifically, according to Hveem (1999: 103–4), regionalism is not a simple response to globalisation, but ‘a matter of identity’ frequently initiated by state institutions, often ‘more importantly’ by less competitive manufacturing firms. In response to trade regulations such as anti-dumping measures by European firms, Asian globalising

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firms, or MNCs from Japan and Korea have become ‘multinationalised’ in developed markets, which is related to the conflicting dynamism, the trade frictions between Asian ‘globalising’ MNCs (Japanese keiretsu and Korean chaebol) and the European ‘regionalising’ MNCs (national champions, or European champions). This is not to suggest that Asian globalising MNCs were more multinationalised than their two major counterparts. Rather, they were ‘still less internationalised in terms of foreign production than the European and US competitors’ (Belderbos, 1997a: 15). It was proved that the Japanese and Korean MNCs were considerably challenged by trade friction with the developed countries (Eymann and Schuknecht, 1993, quoted in Belderbos, 1998), which eventually gave way to globalisation, or the ‘multinationalisation’ of them in parallel with the progress of anti-dumping measures. Particularly in the wake of internationalisation of the electronics industry after the world recession of the early 1980s, Asian major electronics firms needed to gain a strong foothold in the major markets of Europe and the US, partly aiming at the avoidance of trade protectionism and the instability of exchange rates, and partly due to their need to facilitate useful information on technology and marketing. These conditions prompted Asian conglomerates to accelerate the process towards becoming more multinationalised than before, thereby emerging as major competitors vis-à-vis the US and the EU in the electronics sector in the global market. In a sense, for the electronics sector, it is tempting to argue that the Japanese and Korean MNCs have become more ‘globalised’ as a consequence of jumping trade barriers, i.e. FDI, whereas the European counterparts have tended to remain largely ‘regional’, owing to the ultimate creation of the single European market. At present, however, there is no specific FDI policy in the EU, let alone a formal statement or rhetoric concerning FDI, although the EU’s interest in the activities of MNCs dates back to the 1970s on the grounds that the EU sought to curb European-based US MNCs’ potential monopoly power derived from the growth of US FDI into Europe at that time. Brewer and Young (1995: 41) contend that: [T]here does not even exist an official statement of philosophy and attitudes towards inward and outward FDI, although these could presumably be inferred from support for OECD and GATT/WTO rules and agendas    While there is no FDI policy, no Commission officials who deal 100 per cent with FDI and few indeed with ‘investment’ in their title.

EU Trade Policies, Korean FDI and Korean Multinationals 177

Japanese electronics FDI in the EU Overview With regard to responses to anti-dumping measures by the EU, some scholars (Shin, 1998; Jung, 1999a; Turner and Kim, 2004) maintain that Korean investments in the EU have been largely due to ‘defensive’ factors, rather than offensive factors partly accompanied by proactive motivations (Dent, 1999; Dent and Randerson, 1996). Before turning to Korean FDI in the EU, Japanese FDI in the developed countries should be examined briefly, thus making the characteristics of the Korean cases more salient. Obviously, anti-dumping measures were perceived as the most important of the EU’s reactions to the Japanese presence in Europe’s market. As Table 6.4 shows, anti-dumping had been disproportionately targeted against Japanese firms between 1980 and 1990. Japan accounted for 50 per cent (85 cases) of total anti-dumping duties imposed upon the developed countries during the same period, exceeding the 39 per cent for the US. It becomes evident that the numerous and widespread use of anti-dumping actions allowed Japan to adjust itself to the EU regulations through its overseas direct investment. In the meantime, it led to the growing internationalisation of Japanese firms’ relationships with the EU market, and beyond that, the world market (Bourke, 1996: 55–6). Inward FDI has been a feature of international production for more than a hundred years. As estimated in Table 6.5 as a percentage of GDP, at the world level, between 1980 and 1995, FDI has more than doubled from 4.6 per cent to 10.1 per cent. However, the absolute levels for 1995 still remain modest for most countries, including developed countries, except for the UK. Surprisingly, compared with other developed

Table 6.4 EU anti-dumping cases against developed countries: 1980–90 Region/Country Developed Countries Japan US Canada Spain Norway Others

Anti-dumping duty

Price undertaking

Number of cases

170 85 67 6 5 1 6

171 59 47 4 10 10 41

341 144 114 10 15 11 47

Source: Eymann and Schuknecht (from Belderbos, 1998).

178 Newly Industrialising Economies and International Competitiveness Table 6.5 Inward FDI stock as a percentage of GDP: 1980–95

World Developed Countries Of which, EU (UK) (Germany) US Japan

1980

1985

1990

1995

4.6 4.8 55 117 45 31 03

6.5 6.0 82 140 60 46 04

8.3 8.3 109 223 74 72 03

10.1 9.1 134 285 69 77 03

Source: Hirst and Thompson (1999: 76).

countries, the US and the EU, Japan remains conspicuously neglected by inward FDI, consistently holding no more than a meagre 0.4 per cent of GDP from 1980 to 1995 while outward FDI in 1995 accounted for 6.0 per cent of GDP, still a modest level (Hirst and Thompson, 1999: 77). Remarkably, among the EU countries, inward FDI has been welcomed by the UK at all times. However, most inward FDI did not occur as a result of simple political or economic factors. According to Mr Shimada, who was head of JETRO UK from 1995–9, social environment was another important decision-making factor (Y. C. Kim, 2002: 120). He said: All Japanese MNEs managers have to think about the host country’s resident rates. Because we are social people, this is more emphasised within Japanese society. We needed wider educational chances, and a more favourable environment to live with other Japanese people. Racial discrimination, high crime rate, and rapid social change will be discouraging to Japanese who have to work overseas. Here, we need not examine the existing FDI theories. Regardless of various arguments relating to FDI, the central tenet of this section is that FDI mainly motivated by trade regulatory measures tends to serve as a marked turning point for the growth of Asian MNCs, which explains the multinationalisation of the Japanese or Korean conglomerates. Unlike their European counterparts, it is clear that their comparable exportcentric economy – conventionally based on ‘competitive advantage’ rather than comparative advantage – typically characterised by the two countries must inevitably depend on the creation of market power in overseas or world markets in the wake of the ‘regionalising’ trend of the European single market. As a result, a ‘firm-specific’ response, that is,

EU Trade Policies, Korean FDI and Korean Multinationals 179

FDI, has been preferred in order to ‘jump’ trade regulations largely filed against the emerging Asian MNCs over the past years. In the context of a firm-specific response, as Benito and Gripsrud (in Caves, 1996: 62) remark, the internationalisation of firms implies ‘a process whereby firms gradually increase their international involvement’. The decision about the location of production into the developed markets enabled Asian big firms to tackle a substantial amount of uncertainty through a process of ‘learning by doing’. And hence, some Japanese and Korean conglomerates have assigned a primary role to their ability to innovate, while Japan was assumed to have entered the ‘innovation-driven’ stage (Porter, 1990) ahead of Korea.

Japanese electronics firms’ FDI: US vs. EU Japanese FDI in industrial countries is a relatively recent phenomenon. According to Dent (1999: 82), in the early post-war period, the Japanese government was controlled by a US caretaker administration, which impeded Japanese firms from investing abroad until 1951. Meanwhile, the Plaza Agreement in 1985 marked a remarkable departure in terms of the extraordinary expansion in Japanese FDI (Y. C. Kim, 2002: 52–3). Since then Japanese industries have expanded their outward FDI at an ever faster pace, owing to the economic recession and sluggish corporate performance in Japan. However, after the industrial slowdown in Western economies in the 1990s, Japanese FDI started to decline steadily, and by 1992 had fallen to $34 billion, nearly half of the 1989 peak level. Since the late 1990s, most of Japanese FDI into the EU has been diverted from the leading keiretsu to first- and second-tier manufacturing component industries (Y. C. Kim, 2002: 286–7). According to Nicolaides and Thomsen (1991), Japanese FDI increased enormously between 1986 and the early 1990s by more than 500 per cent. Seemingly, this unusual phenomenon originated in Japan’s ‘defensive’ or ‘tariff jumping’ response to the widespread protectionist policies conventionally being used by other countries. Compared to global patterns, Japanese FDI in Europe has mainly focused on the service sector, including finance (banking and insurance), while Korean corporations have invested mostly in the manufacturing sector (Dent, 1999; Randerson and Dent, 1996; Dent and Randerson, 1996; Turner and Kim, 2004). Until recently, according to Nicolas (1995: 7–8), the global pattern of FDI has tended to be located within the service sector: FDI in non-manufacturing activities, particularly in services, has been increasing at a much faster rate than in manufacturing    FDIs are

180 Newly Industrialising Economies and International Competitiveness

nowadays heavily concentrated in the service sector, which account for more than 55% of annual FDI flows worldwide and for about 50% of the world stock of FDI in 1990, compared to 25% at the beginning of the 1970s and less than 20% in the early 1950s. Nonetheless, this does not mean that the relative importance of the manufacturing sector is small in terms of FDI. While outwardly the service sector accounts for a disproportionately large share of FDI, it is important to indicate that the service sector has, to a great extent, been one of most important factors behind manufacturing activities. As Nicolas (1995) also describes, the importance of the service sector may be overestimated with regard to FDI. In fact, the important financial services are often more likely to relate to manufacturing firms or the service sector. Clearly such investment in the service sector may to some extent contribute to the operations of manufacturing firms. As emphasised by Nicolas’s (1995: 9) words, what it means is that FDI in the service sector will inevitably be transferred to the manufacturing sector: First of all, in some countries investments in services, particularly in banking, are mere conduits for manufacturing investment elsewhere. Similarly, important financial services are very often at the disposal of manufacturing firms    Investments in the financial sector for instance may ease eventual investments in the productive sector [emphasis added]. In this regard, the evidence is that the relatively higher share of services for Japan may not contradict the observation that Japanese manufacturers decided to invest abroad as a way of relocating production. Moreover, Nicolas (1995: 10) goes so far as to argue that FDI in the nonmanufacturing sector is mainly due to a ‘deliberate strategy’ necessarily contributing to the ‘productive and marketing efficiency of manufacturing firms’. Beginning in the mid-1980s, Japanese firms have significantly expanded their investment in the US manufacturing sector through FDI (Table 6.6). In addition, motivated by rapid appreciation in the value of the yen and threats of protectionism from Japan’s two Triad partners, from the mid-1980 up to the mid-1990s, Japanese FDI has expanded extensively in all the major economies of the EU. Specifically, the finance and insurance and manufacturing sectors held a disproportionate amount of Japanese FDI in the EU (Mason, 1997; Y. C. Kim, 2002).

EU Trade Policies, Korean FDI and Korean Multinationals 181 Table 6.6 Japanese foreign direct investment by region (%)

US Europe Asia S. America Oceania Others

1981

1996

2001

247 116 300 162 65 110

421 192 178 113 55 41

306 130 341 106 45 72

Source: Dent (1999: 84) and JETRO reports, various issues.

Table 6.7 Japanese FDI by industrial sectors (1951–2003) (US$ million) Financial & insurance: 23,824 Real estate investment: 9,552 Electronics investment: 3,455

Trading investment: 8,070 Transport investment: 2,553 Service investment: 5,774

Source: Y. C. Kim (2002: 117) and JETRO reports, various issues.

Until the 1970s the presence of FDI was perceived as deriving from MNCs, especially the US MNCs, rather than being a facet of a global phenomenon. During the 1970s, however, the US suddenly emerged as a principal host country. Subsequently, the early 1980s witnessed the end of one-way FDI as an exclusively ‘Americanised’ phenomenon. At that point, this was related to transferring from one-way to two-way flows. In other words, it implies that two-way FDI – outward or inward – was favoured by the developed countries as home and host countries simultaneously. The existence of two-way investments allowed Japan to emerge as a principal investor from the 1970s. Since the mid-1970s, the US and the EU have been major recipients of Japanese FDI (Nicolas, 1995; 10, 18). Compared to the pattern of US FDI in the EU, Japanese FDI in industry is well below its total amount in the EU (Table 6.7). The reason is that the half of Japanese FDI in Europe is located in banking and insurance, with the share of industrial investment amounting to only 22 per cent of total stock in 1990. By way of comparison, more than 53 per cent of US outward FDI in the EU is located within industry. In broad and quantitative terms, this seems to suggest that, as Buigues and Jacquemin (1994: 178–9) argue, Japanese investment in the manufacturing sector

182 Newly Industrialising Economies and International Competitiveness

in the EU has little effect on European industry in contrast with US FDI in the EU.

The globalisation of Japanese electronics MNCs in the EU A number of contending arguments have been presented concerning motivations and strategies of Japanese FDI in the EU. This section examines the reason for Japanese firms’ location of production, focusing especially upon the electronics industry. The process of European integration with the signing of the Single European Act (SEA) boosted both reactive and proactive foreign firms’ inward investments, including Asian globalising firms such as the Japanese and Korean conglomerates. More importantly, it should be noted that the earlier trade barriers in the US market had already acted as a catalyst to the internationalisation of Japanese firms. In that context, Dent (1999: 108) argues that ‘similar responses that were manifest elsewhere, most notably in North America, had already provided a considerable spur to the internationalisation of Japanese firms’. Furthermore, we would argue that subsequent protectionist measures undertaken by the EU motivated the Asian globalising firms to become multinationalised or globalised in real terms well beyond mere geographical internationalisation, despite their protectionist experiences in the US market. As with Asian MNCs’ access to the US market, trade protectionist regulations by the EU acted to give Asian globalising firms another stimulus to circumvent trade barriers, thereby giving rise to MNCs on the basis of accumulative experiences, similar to those of the US and EU competitors, even if Japanese FDI in the EU was still smaller in proportion to US and intra-European investments (Nicolas, 1995). In addition, the question remains as to what factors explain the distribution of Japanese FDI among the EU. With regard to the completion of the single European market in 1992, what matters are the factors that determined their locational decisions. First, according to the analyses by some scholars (Micossi and Viesti, 1994; Dent, 1999; Dent and Randerson, 1996; Randerson and Dent, 1996) the SEA programme has been largely viewed as a major opportunity inducing Japanese corporations to shift their strategies in the EU, both for ‘defensive’ (reactive) and ‘offensive’ (pro-active) reasons. From a slightly different point of view, drawing upon Dunning’s original taxonomy, Thomsen (1993) cites an analysis by Dunning (1989) which provides an account of a tentative dichotomy between ‘market-seeking’ and ‘resource-seeking’ FDI.8 In this context, Thomsen (1993) concludes that the investment of Japanese producers mostly relates to market

EU Trade Policies, Korean FDI and Korean Multinationals 183

access. In particular, they have focused on the electronics sector in addition to transport equipment. Second, the study by Thomsen (1993) revives Vernon’s product cycle model. As Thomsen suggests, the product cycle hypothesis is relevant to ‘the rationale for the pattern of Japanese manufacturing investments in both Europe and North America’ (1993: 314). Third, according to some analyses conducted by Belderbos (1995, 1997a, 1997b), Japanese electronics firms’ FDI directed to the EU and US is seen as being greatly motivated by the trade policy undertaken by these two areas, in other words, anti-dumping duty circumvention, now well known as the ‘tariff jumping’ hypothesis (Y. C. Kim, 2002). In this section, with respect to the electronics industry, we presume that circumventing trade barriers has been the main trigger of Japanese FDI in developed countries. Thus, we are more willing to accept the ‘tariff jumping’ hypothesis rather than any other explanation discussed so far. It is not the only one, but the hypothesis assigns any other perspective a secondary role in explaining the factors behind Japanese FDI. Here we need to accept Belderbos’s tenet but add to it ‘competitive advantage’ as an auxiliary dimension considered as an ‘enabling’ factor. Both trade regulatory measures, i.e. anti-dumping as a push (determining) factor and Japanese firms’ ‘competitive advantage’ – rather than comparative advantage – as an enabling (permissive) factor have combined together to induce FDI by Japanese electronics firms both in the US and the EU. The competitive advantage enjoyed by Japanese electronics firms has been mostly related to firm-specific advantages addressed by Micossi and Viesti (1994: 211). As they put it: ‘[T]he main reason underlying the dramatic increase in Japanese direct investment is Japan’s organisational-technological lead in particular industries.’ In other contexts, this advantage has enabled Japanese firms to seek objectives such as access to technology, design or other particular techniques through ‘ownership advantage’, including joint ventures, and acquisitions and mergers in advanced countries (Micossi and Viesti, 1994).9 This was clearly proved by Y. C. Kim’s research on Japanese car industries’ FDI strategy in the EU market (Y. C. Kim, 2002). Most of advanced design and qualified workmanship had been learned from their collaboration experience with Western big firms. Although Japanese MNCs have enjoyed an advanced technology strategy in the EU market, most software design ability had been copied by their partners in the EU companies. However, some parts of the electronics sector have a different type of approach. Japanese electronics firms’ FDI in the

184 Newly Industrialising Economies and International Competitiveness

EU has been more significantly related to the globalisation of Japanese electronics than their earlier FDI in the US. This hypothesis is supported by various sources. Kimura (1994: 316) states that: Compared with their FDI activities undertaken earlier in Asia and the USA, they seem increasingly to position their European FDI within a broader global strategic framework. And Belderbos (1995: 154–5) adds that: The investments by Japanese electronics firms in the EC are part of a globalization strategy adopted in the mid-1980s spurred by the rise in global protectionism, the appreciation of the yen, and emerging trends in the electronics industry at large. Compared to US anti-dumping measures and similar trade regulations, features mainly peculiar to the EU trade regulations, and partly ‘Europeanness’ itself, have had far-reaching effects upon Japanese electronics firms’ options to rely upon FDI rather than export strategies. In terms of transparency, discretion and the range of liberal applications, compared to the US, the EU procedure has been more restrictive, ambiguous, relatively unpredictable and occasionally politically motivated by member states. Within the EU system, acknowledging the significance of politically motivated public objectives among member states, Holmes and Young (2001: 208) state that: Again, politics matter. Progress on trade liberalisation within the EU has been possible only because the approach acknowledges and respects the member governments’ prerogative to pursue legitimate public policy objectives    The result is that although the EU system is predicated on liberalising inter-state economic exchange, it accepts legitimate national restrictions [emphasis added]. This uncertainty has rendered reliance on conventional exportdependent strategy more ‘risky’ in the light of EU anti-dumping duties. It follows, in practice, that the EU has posed a bigger threat to the Japanese electronics industry and provided greater incentives for its outward FDI to the EU than corresponding anti-dumping investigation in the US (Belderbos, 1997a, 1997b; Belderbos and Sleuwagen, 1998). As a result, the decision to invest abroad is most likely if the chance of affirmative

EU Trade Policies, Korean FDI and Korean Multinationals 185

action is expected in the context of considerable economies of scale. Belderbos (1997a: 243) maintains: Given that it may require time to arrange for local production, deciding on investment after the duties are imposed will mean that the firm will still be forced to pay duties during a transitory period while it relies on exports. Specifically, with respect to anti-circumvention, the EU Commission as well as the DoC have the authority to encompass exports from third countries in the criteria of anti-dumping measures. Preventing an evasive route via third countries from taking place, the EU Commission has more frequently used ‘rules of origin’ to decide whether the antidumping rules are applicable to exports from a third country.10 Also, in terms of discretion as well as injury determination, the EU has provided more margin of discretion on the grounds that neither the GATT code nor EU anti-dumping law identifies detailed criteria. According to Nicolaides and Thomsen (1991), in addition, Japanese exports to the EU are severely affected by the frequent use of VERs, accounting for 53 per cent of total VERs worldwide, which rose to 84 per cent for the electronics sector. Between 1980 and 1988, 13 per cent of total US investigations were directed towards Japan, while the EU accounted for 9 per cent of all cases initiated during the same period (Nicolaides and Thomsen, 1991: 636). In a substantial and qualitative sense, this is more significant than quantitative calculations. Nicolaides and Thomsen (1991: 636–7) concluded that the overall trade regulations imposed by the EU tend to be more ‘punitive’ and more ‘protectionist’ than the US ones: But these numbers do not convey any information about the degree of protectionism, nor are there any comparable statistics about the average rate of duties imposed in those cases. The EC, however, tends to conclude relatively more of its investigations with punitive measures (76 per cent against 54 per cent of the US), and these measures tend to be price undertakings which are more protectionist because they prevent foreign firms from either absorbing duties or passing on to consumers any savings from economies of scale and technological improvements. In the EC, 67 per cent of the cases with punitive measures ended with price undertaking, while in the US only 3 per cent of cases involved price undertakings [emphasis added].

186 Newly Industrialising Economies and International Competitiveness

Specifically, in 1987 the EC amendments dealing with local content (40 per cent) were initiated exclusively against Japanese assembly plants as explained above. This action also represented a new phase in trade policy measures, thereby providing a future trigger for Japanese outward FDI in the EU (Belderbos and Sleuwagen, 1998). EU trade regulations appear to be generally more ‘punitive’ than US measures, followed by Japanese firms’ preferences for locating production in the EU. In that context, during the latter half of the 1980s, numerous Japanese manufacturers attempted to establish assembly or manufacturing operations in Europe. During this period, the manufacturing sector as a whole mainly focused on electronics and automobiles. By the end of the 1980s, in the electronics industry, Panasonic (Matsushita) alone had set up sixteen companies manufacturing such products as batteries, vacuum cleaners, hi-fis and VCRs in diverse regions within Europe, followed by Hitachi, JVC, Mitsubishi Electric, NEC, Sanyo, Sharp, Sony and Toshiba (Mason, 1997). Despite the traditional importance of the US market in terms of access, the EU market has often forced Japanese firms to create or expand more than one manufacturing subsidiary for particular products such as VCRs and CTVs. By contrast, in the US, one large subsidiary alone tended to be sufficient to meet demand. This has reflected the fragmentation of the European market by country, while it also may originate from a variety of typical ‘Europeanness’ such as distinctiveness in tastes and culture, and different technical standards (Belderbos, 1995; Cawson, 1989; Cawson and Holmes, 1991). Moreover, disagreements among influential member states over how to react to Japanese FDI have often provoked different political responses across the EU, thus causing ambiguous barriers to the Japanese (Encarnation & Mason, 1994: 447). Under these conditions, Japanese firms faced stiffer obstacles than in the US market. It is important to note, therefore, that these experiences prompted Japanese firms to become globalising MNCs going beyond geographically internationalised corporations, given that the relatively large number of manufacturing subsidiaries located in the EU did not necessarily indicate that the rate of production was higher in the EU than in the US (Belderbos, 1995). According to Belderbos (1997a), fifteen of twenty Japanese firms located operations abroad, but eleven of these plants are located in the EU. For CD players, the evidence suggests that there is only one plant in the US compared to ten in the EU. In the case of CTVs, however, six firms are producing projection CTVs in the US, while there is only one (Sony in Spain) that assembles such CTVs in Europe. This seems to be a result of effective US trade regulation measures. Because of the

EU Trade Policies, Korean FDI and Korean Multinationals 187

success of Japanese FDI strategy in the EU, Japanese electronics MNEs in Europe did not face the trade regulation measures which they found in the US market. Michael Gomez, the Chairman of Thomsen Electronics comments: Britain believes that an infusion of Japanese capital and management through transplants of factories will revitalise British industries. I do not believe a word of it. A few thousand jobs in Wales or Scotland are not the issue. The issue is the repair of national technological and managerial competence. There is not one example – not one – of the Japanese establishing a major R&D lab outside Japan. To the contrary, they take technology out of other companies. They are buying our scientists and our technology and our high-tech start-ups. They are taking technology out of the US and Europe. How many European managers are working in Japanese transplant factories? If British industry has to be rejuvenated by a transfusion of Japanese manufacturing, it would take thousands and thousands of British managers and scientists working in Europe à la Japonaise, which won’t happen. (Cited in Y. C. Kim, 2002: 279–80) This issue does not just concern the British case and car manufacturing. In the EU, semiconductors, as mentioned above, represent the most conspicuous sector of European industrial weakness. In semiconductors, Japanese FDI depends to a great extent on their relevant technological prowess. Compared to their EU counterparts, the globalisation of Japanese semiconductor firms is perceived as mostly determined by their ‘competitive advantage’ stemming from continuously innovative technological leadership. As Kimura (1994: 316) argues, interestingly, the expansion of the Japanese semiconductor business has also been significantly influenced by their other consumer electronics activities within the corporate structure, though a large part of their output is directed to the open market: [Consumer electronics firms]    tend to subordinate the semiconductor business to other consumer electronics final systems business in their systems of goals and company structure, though they sell today a significant part of their output in the merchant market. It thus seems that their strategies in the semiconductor business are much influenced by those in their downstream businesses.

188 Newly Industrialising Economies and International Competitiveness

In summary, it can be concluded that mainly owing to different responses to trade regulations such as anti-dumping measures imposed by the EU or the US, FDI by Japanese electronics firms has had a more substantial impact on the growth of Japanese electronics MNCs in the EU than in the US. Likewise, it could be argued that this rationale may also apply to Korea’s electronics FDI as well as the growth of Korean electronics MNCs despite the existence of an indigenous peculiarity between the two countries.

EU trade protectionism and motivations for Korean FDI This section illustrates the impact of EU trade protectionism on Korean FDI in the EU and provides basic details about the investments and the major motivating factors underlying these, focusing upon the period between the late 1980s and mid-1990s. Emphasis is placed on the very recent phenomenon of investments by the big three electronics companies: Samsung, LG and Daewoo (and occasionally Hyundai Electronics, Saehan Media, SKM and Inkel). Drawing upon overall primary sources, the material and data are also derived from each company’s internal reports, EU official publications, and a personal interview survey of Korean companies, the Korean government and financial institutions conducted between 1997 and 1999 in Korea and the EU – especially in the UK – supplemented by interviews undertaken between 2001 and 2005. Above all, the importance of EU trade protectionism in shaping the investment decisions of Korean chaebol is manifested in the observations of companies themselves. It requires us to examine to what extent and how the timing of the announcement of European FDI by Korean MNCs has corresponded with the period during which anti-dumping complaints targeting Korean electronics products were being investigated by the EU Commission. Before identifying any connection between EU trade policies and Korea’s EU investments, it is worth exploring the earlier literature with regard to the ‘trade barrier hypothesis’ or ‘defensive investment hypothesis’. It can be seen that when it comes to the major factors motivating Korea’s investments at the first-wave stage, the case of Korean electronics companies is comparable to the pattern of Japanese investments in Europe (Y. C. Kim, 2002).

Literature review With regard to Korean FDI in the EU, some scholars have suggested that Korean electronics firms’ European FDI can be interpreted as being

EU Trade Policies, Korean FDI and Korean Multinationals 189

mainly attributable to non-tariff trade barriers, i.e. anti-dumping duties imposed by the EU (Amsden et al., 2001; Perrin, 2001a, 2001b; Dent, 1999; Young et al., 1991; Hoesel, 1997; Jung, 1999a, 1999b). According to Belderbos11 (in Amsden et al., 2001: 315): A first key factor shaping Korean foreign investment are [sic] trade barriers, notably anti-dumping measures, in the European Union and North America targeting Korean firms. In the analysis of the electronics and manufacturing industries, trade barriers appear to have a significant and substantial effect on the likelihood that Korean firms invest in manufacturing in the US or Europe [emphasis added]. Perrin (2001a: 78) has adopted a defensive investment hypothesis, in a similar vein, in the light of Japanese investment in the US and Europe: Previous studies, notably on Japanese investment in the US and Europe, showed strong evidence of tariff-jumping motivations. Since Korean firms were also hard hit by various import restrictions in developed markets, especially in the 1980s, a similar relationship between trade frictions and the establishment of Korean overseas manufacturing facilities may well exist. If this is the case, it might indicate that Korean firms have pursued defensive investment strategies in these markets. The basic details of the investments and factors underlying Korea’s first wave of FDI in Europe since the late 1980s are based on an interview survey of Korean large firms including Daewoo, LG, Samsung, Saehan Media and Ssangyong. Young et al. (1991) have also maintained that the Korean case is illustrative of reactive outward FDI as a way of coping with protectionist measures. Among a variety of trade restrictions, other studies (Dent, 1999; Jeon, 1992; Jung, 1999a, 1999b; Fitzgerald and Kim, 2004) have suggested that initial Korean manufacturing investments in the EU might originate from the high number of anti-dumping duties confronting Korean exporters. At the early stage of the FDI process, FDI was allowed only in times of balance-of-trade surplus and as a device for deflecting external criticism of unfair trade policies. Overall, this circumvention hypothesis can be clearly observed in the cases of FDI by Korea’s electronics firms that are directed to the EU (Table 6.8). Analysis of Korea’s reactive response to the characteristics underpinning the EU trade restrictions can proceed by considering the Korean

190 Newly Industrialising Economies and International Competitiveness Table 6.8 Korean FDI and major electronics companies in the EU Company Samsung Electronics Samsung Electronics

Samsung Electro-Mechanics Samsung Display Devices Texas InstrumentsSamsung Electronics Samsung Corning LG Electronics LG Electronics LG Electronics

Year

Country

Product

198702 UK

CTVs (a), MWOs, monitors 198901 Spain VCRs, TVCRs, Mobile phones (b), DVDP (c) 199005 Portugal Television tuners, FBTs, DYs 199212 Germany CPTs

Equity/JV (%) 100 100

100 100

199403 Portugal

DRAMs assembly (4 mega, 16 mega)

100 30

199402 198609 198810 199101

CPTs glass CTVs, VCRs CTVs, MWOs Refrigerators, freezers Semiconductors CPTs, PC monitors, FBTs, DYs MWOs VCRs CTVs CPTs Electronic components Refrigerators CPTs glass bulb DRAMs Car stereo Video tapes Audio tapes Audio, speaker Car stereo

100 100 100 99.9

Germany Germany UK Italy

LG Semicon (1) LG Electronics

199608 UK 199610 UK

Daewoo Electronics Daewoo Electronics Daewoo Electronics Daewoo Orion (2) Daewoo Electro-Components Daewoo Electronics Daewoo Electronics Hyundai Electronics (3) Haitai Electronics Saehan Media SKM Inkel Carmen Electronics

198804 198811 199204 199307 199502

France UK France France UK

199609 199704 199701 198909 198704 199105 199007 199303

Spain France UK France Ireland UK UK UK

100 100

100 100 72.7 100 100 100 100 100 100 100 98 100 100

Notes: 1. JV: joint venture. 2. (1) and (3): as of 1999 implicitly cancelled or suspended indefinitely since Hyundai Electronics’ merger with LG Semicon. 3. (a) Samsung relocated from the UK to Hungary (1998). 4. (b), (c): based on interviews conducted most recently (2001). 5. According to Table 5.A1 in Perrin (2001b: 197), (2) is JV (50%), but MoFe (1999) and BOK (1996) indicate wholly-owned (100%) Sources: Derived by the authors from Ministry of Finance and Economy (1999), KITA (1999) reports, and research data including interviews.

EU Trade Policies, Korean FDI and Korean Multinationals 191

firms’ previous perceptions based on earlier US trade restrictions. For example, the first anti-dumping duties on Korean imports of CTVs imposed by the US had a ‘shocking’ impact upon the Korean major electronics exporters such as LG, Samsung and Daewoo, because the dumping margin undertaken against televisions from Samsung Electronics had risen to 52.5 per cent. Bark (1993: 129) observed that ‘the US anti-dumping action against Korean colour televisions came as a shock not only to the Korean electronics industry but also to the Korean government and the general public’. It meant that the manufacturer needed at least to set up subsidiary production facilities to evade advanced countries’ non-tariff barriers that seemed likely to become even more strengthened (Jeon, 1992: 539). This contention was also made in an interview with a senior general manager of LG Electronics responsible for the international trade and tax team: Between 1983 and 1984 when anti-dumping duties for the first time were imposed upon our products, they were likely to be quite unusual and strange. At first, as we were not aware of them fully, it was thought that we could resolve them with ease, because they were not considered serious. However, we realised that they were much more damaging than we had imagined. We couldn’t comprehend to what extent anti-dumping complaints might have an impact on our business. It was not until the advent of WTO that we were able to begin to react to such dumping measures thoroughly. Particularly, for Korea’s small- and medium-sized companies, antidumping measures indeed were designed to be the kiss of death. In reality, they are so financially vulnerable that they cannot even afford to properly respond to anti-dumping procedures in legal terms.12 The importance of the protectionism argument in influencing Korean FDI can be further examined through a survey of responses resulting from interviewees who have had considerable experience dealing with international trade and overseas investments associated with major Korean chaebol. During interviews undertaken very recently – between 1997 and 2001 – with regard to the investment motives of Korean firms in the EU, especially at the first-wave stage (between the late 1980s and mid-1990s), there was almost complete agreement among respondents that the Korean chaebol’s decision to enter into overseas investments

192 Newly Industrialising Economies and International Competitiveness

derived in the main from exogenous factors, ‘jumping’ over the existing and expected trade barriers to export, rather than endogenous factors.13 Curiously, only one respondent related the investment in the EU of his company to the expected anti-dumping rather than actual trade restriction imposed by the EU. Even though one senior manager in charge of the Strategic Planning Team in Saehan Media was not directly involved with his company’s European investment, dating back to 1987, following a personal re-review of the company’s decisionmaking process over investment, he took the view that investment in Ireland by Saehan Media seemed likely to stem from the potential protectionist measures rather than factors relating to corporate internationalisation, which are sometimes exemplified in empirical observations of other Korean companies.14 Arguably, compared to Korean FDI in the EU, Perrin’s analysis of Korean firms’ motivations for investments in North America suggests that motivation of trade restraint appears to have been relatively less important for Korean firms’ FDI in the US and Canada. Rather, the technology-outsourcing factor is becoming a slightly more significant motivation with regard to the Korean investors in North American countries. As Perrin (2001b: 100) puts it: Surprisingly enough, the avoidance of trade restraints is rarely mentioned by Korean firms in the US and Canada, and lags behind the top three motives: ‘collecting information on the local market and establishing a bridgehead for the operating market’, ‘operating the local market’, and ‘seeking technology’. However, tariff-jumping is a strong motivation for investment in Mexico. Interestingly, the technology-seeking motive appears to be specific to the North American market and has little impact on Korean investors’ location in the EU. As illustrated in Table 6.9, it can be proved that this phenomenon was related to the number of anti-dumping measures imposed by the advanced countries. From the early 1980s to the late 1990s in relation to Korean electronics products, compared to the US, the EU seems to have had a more ‘punitive’ impact on Korean firms’ defensive responses and their manufacturing activity in terms of the frequency and intensity of trade restraints targeting Korean strategic exports. Over the last two decades, the EU has brought twenty anti-dumping actions against Korean electronics exports compared to eight cases for the US with particular emphasis on the narrow range of consumer electronics

EU Trade Policies, Korean FDI and Korean Multinationals 193 Table 6.9 Anti-dumping cases (PU) targeting Korean electronics products between the 1980s and 1990s: US vs. EU US

EU

1980s

Colour TVs (1983) Lead acid automotive batteries (12v, 1985) Colour picture tubes (1986) Car phones (1987) Small business telephone system (1988) Lead acid automotive batteries (1989)

TVs (black and white 12, 14 inch) (1981) Microwave ovens (1986) Colour TVs (under 16 inch) (1987) Compact disc players (1987) VCRs (1987) Video cassette tapes (1987) Audio cassette tapes (1988)

1990s

DRAMs (1992) SRAMs (1997)

Car radios (1990) Compact disc players (1991) DRAMs (1991) Colour TVs (17 inch and above) (1992) 3.5 inch microdisks (1992) Large aluminium electrolytic capacitors (1993) Microwave ovens (1993) VCRs and components (1995) Car audios (1997) Fax machines (1997) Audio cassette tapes (pancake) (1998) Colour picture tubes (1999) Colour TVs (17 inch and above) (1999)

Total

8

20

Notes: 1. Anti-dumping cases include PU (price undertakings) 2. The electronics products relate to consumer electronics, home appliances, industrial components, electro-electrical machines and semiconductors. 3. As for CTVs, the EU also decided to impose 15 per cent anti-dumping duties upon the Korean CTVs (Samsung, LG) in October 2001. Sources: The Official Journal of the EU and KITA (1999).

products, including principal strategic exports such as CTVs, VCRs and MWOs. In relation to earlier EU trade policy measures, we need to pay attention to the extended application of anti-dumping actions against products assembled in EU plants. This poses another kind of trade barrier such as local content requirements and rules of origin in the EU which for the first time in 1987 appeared to target Japan’s European assembly

194 Newly Industrialising Economies and International Competitiveness

plants as well. The EU amended its anti-dumping legislation to make it more implicitly applicable to Japanese assembly plants in the EU. As Belderbos (1997a: 46) emphasises, ‘the amended anti-dumping law was administered as a local content rule targeting Japanese plants in the EU’. In the same context, the possibility of second-tier trade restrictions, and the uncertainty that these requirements created for Korean firms provided incentives to invest reactively in the EU. As indicated in Table 6.10, the secondary trade regime consequently has paved the way for the second-tier investment that has reflected the second-phase reactive set-up of main Korean electronics plants in the EU during the 1990s. In addition to EU trade policy issues, it is essential to investigate the external relations between the EU and Korea as an exogenous factor that has significantly influenced EU trade policy directed towards Korean exporters. High-level consultations between the Korean government and the EU have been taking place annually since 1984, with the EU

Table 6.10 EU local content rule and FDI by Korean electronics firms (unit: $mn) Company

Country

Samsung Electro-Mechanics

Portugal

Samsung Display Devices Samsung Corning LG Electronics Daewoo Orion Daewoo Electro-Components Daewoo Electronics

Products

Date

Investment

Television tuners, Radio frequency modulators, Fly back transformers (FBTs) Deflection yokes (DYs) Germany CPTs

1990.05

11.4

1992.12

23.7

Germany CPTs glass bulb UK CPTs, monitors, FBTs, DYs France CPTs UK Electronic components France CPTs glass bulb

1994.02 1996.10

9.7 33.9

1993.07 1995.02

59.9 15.8

1997.04

4.0

Notes: 1. Samsung Display Devices currently renamed Samsung Display Incorporated. 2. Samsung Electro-Mechanics in Portugal actually closed in 2001. 3. Samsung Corning (in Tschernitz, Germany) is to supply glass bulbs to the CPTs factory in Berlin. 4. Daewoo Orion: joint venture (Daewoo Electronics and Orion Electric). 5. CPTs: colour picture tubes (for colour TVs). Source: Ministry of Finance and Economy (1999), Samsung & LG Electronics.

EU Trade Policies, Korean FDI and Korean Multinationals 195

demanding accelerated import liberalisation in Korea, and stricter legislative measures for the protection of intellectual property. Nevertheless, as a result of the bilateral agreement concluded with the US in August 1986, on 1 July 1987 Korea introduced new legislation for the protection of intellectual property so that the Korean government decided to apply transitional measures to the US. From an EU perspective it was clearly ‘prejudicial’ to the Union’s interests, and the Union suggested that the scheme of GSP (Generalised System of Preference) should be indefinitely suspended until the Korean government could make certain legislative measures apply to the EU in response to the EU’s request with reference to the discriminatory treatment against it. According to the Official Journal of the EC (12 December 1987): Consequently, given Korea’s refusal to remove discriminatory treatment against the EC in the sphere of the protection of intellectual property    the Commission proposes that measures should be taken to dissuade the Republic of Korea from applying discriminatory treatment which runs counter to the Community’s interests. The Commission proposes that, in order to do so, the application of the scheme of generalized tariff preferences to Korea should be suspended as long as the discrimination continues. In the end, unresolved differences relating to such a crucial agenda led to the Union terminating all Korean GSP privilege with effect from 1 January 1989. Subsequently, the EU has contrived to place more trade restraints on Korean exports in sensitive sectors including shipbuilding and footwear. In addition, as shown in Table 6.9, it is estimated that there has been a considerable increase in the number of anti-dumping complaints filed against the principal Korean electronics products: MWO (1986, 1993), CTVs (small screen, 1987; 17 inch and over, 1992), compact disc players (1987, 1991), VCRs (1987, 1995), video cassette tapes (1987), audio cassette tapes (1988, 1998), car radios (1990, 1997), fax machines (1997). Since the mid-1990s, it is evident from empirical surveys that some of the Korean ventures in the EU do not correspond to the barrier-jumping rationale. Once the first- and second-tier investments have been established, major Korean companies have begun to pursue new corporate strategic objectives by going beyond defensive investment (Turner and Kim, 2004: 19–20). It is also implied that Korean chaebol have resorted to FDI as part of their strategy of internationalisation. This includes technological outsourcing, extending market potential resulting from

196 Newly Industrialising Economies and International Competitiveness

the ‘single market effect’ or ‘enlargement advantage’, and the rationality of cost competitiveness in the domestic market. Since the Asian financial crisis, in most cases, it is acknowledged that the same Korean electronics chaebol have operated in the EU in two ways: a ‘deepening of defensive investment’ and a ‘widening of proactive FDI’ as part of strategic market-seeking around the globe (Sachwald, 2001). We can assume that cumulative experiences of the first- and secondwave investment by Korean electronics firms resulting from EU trade policy significantly laid the foundation for the internationalisation of Korean electronics chaebol. At the same time, under the pressure of the globalising effect on world economies, Korea is inevitably linked to the advanced market through increasingly complex networks of inward and outward FDI (Thomsen and Nicolaides, 1992). As Sachwald (2001: 3) suggests, ‘globalization primarily meant increasing exports and booming outward direct investment’. Following the initiative of the Kim Young Sam government (Kim and Kim, 2006), the chaebol embarked on an internationalisation drive to catch up with their globalising rivals in world markets by becoming multinationals. Based on the achievement of their initial investments in the advanced countries, leading Korean electronics industries eventually emerged from the status of latecomer firms to become late entrant firms by their strategic decision to enter new industry.15 As for Korean chaebol, Samsung and LG successfully entered the new electronics sector concerning digital electronics products, TFTLCDs, and in the case of Samsung, in particular, DRAMs, DVDP (DVD players) and mobile phones. This development allowed the two Korean MNCs to significantly reduce the market share of world-class competitors, for instance in the TFT-LCDs market worldwide, by pushing aside the Japanese firms. As of 2001, Samsung is the world’s fourth largest maker of mobile phones and the world’s leading supplier of handsets for the EU and US markets (Wall Street Journal Europe, 5 December 2001). Over the last decade, in terms of brand recognition and technological superiority, it is acknowledged that Samsung has achieved the status of a fully-fledged MNC, a quite different profile from the Third World MNC characterised by conventional manufacturing and low-cost competitiveness (Sachwald, 2001).

Anti-dumping cases against Korean exports: between the early 1980s and 2000 As Dent (1999: 206) estimates, the EU held 28 per cent of all anti-dumping duties imposed on Korean exports, compared to the US’s 24 per cent, Australia’s 12 per cent and Canada’s 10.7 per cent. With regard to the

EU Trade Policies, Korean FDI and Korean Multinationals 197

effectiveness of anti-dumping investigations, between 1980 and 1997, 71 per cent of anti-dumping claims were successfully imposed in the EU, against 80 per cent in the US (The Economist, 7 November 1998).

The case of CTVs In the US market, anti-dumping measures against Korean CTVs had started by 1983. Influenced by the EU initiation of anti-dumping complaints filed against Korean MWO in 1986, responding to the allegations by the European Association of Consumer Electronics Manufacturers led by Philips, the association found ‘substantial’ dumping margins on the TV sector it investigated. The EU initiated anti-dumping procedures targeting under 16-inch screen CTVs (in 1987) originating in Korea, subsequently followed by anti-dumping investigations directed at VCT, VCRs, CD players (in 1987), audio cassette tapes (1988) and car radios (1990) (Table 6.11). In February 1988 the Commission initiated anti-dumping proceedings against imports of small-screen CTV receivers originating in Korea. Following an investigation based on a complaint from the EACEM, a provisional anti-dumping duty (19.6 per cent) was imposed. In April 1990, the Council decided to impose a definitive anti-dumping duty on small-screen CTVs exported from Korea, ranging between Daewoo (10.2 per cent), LG (12.3 per cent) and Samsung (13.1 per cent). In November 1990, the Electronic Industries Association of Korea (EIAK) suggested to the Commission that since the non-cooperating Korean exporters would not export small-screen CTVs to the Union, the EU should reconsider this changed situation and reduce the 19.6 per cent general Korean duty, to the level of the highest duty for a cooperating company, to 10.5 per cent. As a result of the review by the Commission, in October 1991 a definitive anti-dumping duty of 10.5 per cent was applied to the Korean companies (Official Journal, 26 January 1991). In November 1992, the Commission received a complaint about imports of large-screen (over 17-inch) CTVs imported from or originating in Korea, Hong Kong, Japan, Malaysia, China and Singapore. The complaint was lodged by the Society for Coherent Anti-dumping Norms in Germany (SCAN). In March 1995, the Council imposed a definitive anti-dumping duty on imports of large-screen CTVs. Between 1995 and late 1998, the Commission imposed definitive duties against LG (13.4 per cent), Samsung (13.7 per cent) and Daewoo (17.9 per cent). Finally, the EU Commission terminated the anti-dumping complaint against Korean exporters such as Samsung and LG in December 1998. However, it decided to continue to impose anti-dumping duties on other targeted

198 Newly Industrialising Economies and International Competitiveness Table 6.11 EU anti-dumping measures and FDI by Korean electronics firms Product

Initiation/Termination

Company

FDI by Korean firms

Microwave ovens (MWOs)

1986.7/1988.12

Samsung

Samsung in the UK (1987.2) Daewoo in France (1988.4) LG in the UK (1988.10) Hyundai (in the case of 1993.12)

LG

Colour TVs (<16 inch)

1993.12/2000.1

Daewoo Hyundai

1987.8

Samsung LG Daewoo

Colour TVs (>17 inch) VCRs

1992.11/1999.12/ current 1987.8 (PU)/1994.2

Samsung LG Daewoo

VCRs & components

1995.4/withdrawn (1996.4)

Daewoo LG Samsung

Compact disc player

1987.1/1993.8

LG

1991.1/1993.8

Samsung Haitai Inkel

Video tapes

1987.9/1998.1

SKM

LG in Germany (1986), the UK (1988.10) Samsung in the UK (1987), Spain (1989) Daewoo in France (1992.4)

LG in Germany (1986) Samsung in the UK (1987.2), Spain (1989) Daewoo in the UK (1988.11)

n.a.

Inkel in the UK (1990.7) LG (26.11%), Samsung (10.73%) Haitai (19.42%) Inkel (14.49%) Saehan Media in Ireland (1987.4)

Saehan Kolon Audio tapes (audio tapes on reels, pancake)

1988.11/1996.5

SKM Keumsan Sungnam Saehan LG

SKM in the UK (1991.5)

EU Trade Policies, Korean FDI and Korean Multinationals 199 Car radios

1990.5/1997.8 1997.9/exempted (1999.1)

Samsung Daewoo LG, Inkel, Haitai, etc. (60 firms)

Haitai in France (1989.9) Inkel in the UK (1990.7) Carmen Electronics in the UK (1993) Sang Min (Polmot) Electronics in Poland (1995)

DRAMs

1991.2 (PU)/1998.7

Samsung

Texas InstrumentsSamsung Electronics in Portugal (1994) LG Semicon in the UK (1996) Hyundai in the UK (1997.1)

LG Hyundai

Notes: 1. PU (price undertaking): VCRs (1989.2), DRAMs (1997.3). 2. CDPs: the anti-dumping review (1991.1) targeted Korean products originating in Southeast Asia. 3. Car radios: 34.4 per cent AD duties applied to most small-medium companies as compared to big companies such as LG (3.9%), Hyundai (10.8%), Daewoo (4.6%) and Samsung (20.8%). 4. CTVs: Samsung decided to produce CTVs along with MWOs in the UK (1987.2) prior to the initiation of the EU anti-dumping measure (1987.8) against Korean CTVs. 5. In the case of video tapes, according to interviews conducted by Young et al. (1991: 9), Saehan Media’s investment in Ireland was due to the protectionist fears and its need to internationalise. 6. Texas Instruments-Samsung Electronics (Samsung 30%), actually closed in 2001. 7. For CTVs, following the notice by the Commission about an expiry of AD as of April 2001, the POETIC requested an interim review of AD applicable to Korean CTVs and other Asian exporters. Sources: Derived by the authors on the basis of Official Journal of the EC, various issues.

companies in April 2000. The Commission concluded that dumping margins against Samsung (1.8 per cent) as well as LG (1.4 per cent) should continue to be at less than 2 per cent, or de minimis, in line with the decision by the US almost two months earlier.16 However, the EU decided to continue to impose a definitive 15.1 per cent anti-dumping duty upon other exports, including those of the Korean company, Daewoo Electronics. In terms of recent dumping duties targeting Daewoo Electronics, it can be assumed that the company is not seriously affected by EU anti-dumping duties, given that Daewoo supplies the EU countries with CTVs originating in Poland, prior to the imposition of definitive duties undertaken against Daewoo CTVs. In contrast, as part of their export strategy towards the EU, Samsung and LG pursued a ‘dual’ market access strategy according to the size of their CTVs. First, the two Korean manufacturing subsidiaries located in the Union would become the major suppliers of small- and medium-sized screens

200 Newly Industrialising Economies and International Competitiveness

in the EU. Second, Korean parent companies might be expected to take responsibility for the export of large-screen CTVs (in particular over 29-inch) directed to the EU (Ministry of Foreign Affairs and Trade, 1998a; Korea Economic Weekly, 6 August 1998). Surprisingly, almost eleven years after the first investigation into Korean CTVs initiated in 1987, it was found that Korean electronics firms had paved the way for the resumption of Korean CTV exports to the EU. On 22 December 1999, following the publication of a notice of impending expiry of the anti-dumping measures affecting imports of CTVs originating in Korea, China, Singapore, Thailand and Malaysia, the Producers of European Television in Cooperation (POETIC) requested an interim review, assuming that ‘the expiry of the measures would be likely to result in the continuation or recurrence of dumping and injury to the Community industry’ (Official Journal, 1 April 2000). Following the notice released by the Commission in the Official Journal (1 October 1999) that the anti-dumping measures with regard to CTVs originating in Korea (including other East Asian countries) would expire on 2 April 2001, POETIC requested an interim review of the anti-dumping measures applicable to imports of CTVs in Korea, China and other East Asian countries (Malaysia, Singapore and Thailand). As of October 2001, the Commission imposed definitive anti-dumping duties on Samsung (15 per cent) and LG (15 per cent), including Turkey and other East Asian countries. However, since Samsung and LG until recently have produced most of their CTVs in Europe, it seems unlikely that this measure will have a significant impact on the two Korean companies.17 This is to say that CTVs currently manufactured by the two chaebol in the EU are likely to be sufficiently provided with European customers without additional exports from Korea in the near future.

The case of VCRs In October 1986, EACEM, mostly controlled by European manufacturers such as Philips-Grundig, Thomson, Nokia and the JVC-Thomson joint venture J2T, filed another dumping complaint against two Japanese producers, Funai and Orion, and Korean exporters. According to the complaint with regard to injury, imports from Korea had increased from 74 000 in 1985 to approximately 276 000 in 1986, by over 270 per cent, representing an estimated increase in market share from 1 per cent to 6 per cent (Official Journal, 26 November 1987). In August 1988 the EU Commission made a decision on 25–29 per cent provisional anti-dumping duties to be levied on VCR exports by Samsung (25.2 per cent), LG (26.4 per cent) and Daewoo (29.2 per cent). Around

EU Trade Policies, Korean FDI and Korean Multinationals 201

this time, Funai and Orion established VCR assembly plants, while NEC also set up its first plant in Europe. As for Korean electronics firms, in 1987 Samsung and LG started to relocate production in the EU in response to anti-dumping actions. Specifically, in the case of VCRs, antidumping measures targeting Japanese firms served to favour locational production rather than heavy reliance on exports directed to the EU (Belderbos, 1997a: 32). In April 1995, DRUM (Direct Remedy against Unfair Merchandise Committee), which included Philips, instigated an investigation by the Commission following their complaint filed against VCRs from Korea and Singapore, as well as key components (scanners and heads) of VCRs from Korea. By December 1995, an investigation into VCR parts was terminated. Subsequently, in April 1996, the EU decided to withdraw the investigation targeting the Korean VCR case.

The case of MWOs In July 1986, the European Committee of Manufacturers of Electrical Domestic Equipment such as Thomson, Moulinex, Candy (Italy) and AEG (Germany) complained to the Commission about microwave ovens (MWOs) imports, notably from Korean, Japanese and Singaporean firms, applying to both domestic production and that from other Asian regions. The Commission decided on definitive duties ranging between 3.3 per cent and 18.8 per cent against the Korean big three, Samsung, LG and Daewoo in January 1996. Along with this, between 1996 and 1997, an ‘anti-absorption’ petition against imports of Korean-made MWOs was being initiated, alleging that in most cases, these prices did not change in any significant way, and furthermore, that the resale prices in the Community were at a very much lower level before the adoption of anti-dumping measures. As of 1999, the Commission determined to withdraw anti-absorption action undertaken against Korean producers, while the existing MWO antidumping duties were still to be applicable to Korean products.18 Actually, in January 2000, the Commission terminated the anti-dumping measures applicable to the imports of Korea, China, Malaysia and Thailand (Official Journal, 11 July 2000).

The case of semiconductors With respect to anti-dumping investigations into Korean semiconductors (Table 6.12), it should be remembered that Samsung alone has successfully, or exceptionally, evaded any dumping complaints filed

202 Newly Industrialising Economies and International Competitiveness Table 6.12 Anti-dumping duties on Korean semiconductors: EU and US Product

Initiator

Imposition date and dumping duties

EECA

09.92

EU DRAM

SEC LG Hyundai 03.93 SEC LG Hyundai 07.95 11.97 07.98 07.98

Provisional duties (10.1%) Dumping Injury 18.1% 122.4% 9.3–20.7% 57.3% Dumping duties 14.6% 120.1% 55.7% Second review targeted against Japan and Korea Anti-dumping duties and second review expired EECA filed another anti-dumping petition (Korea) EU Commission rejected EECA’s complaint

US DRAM

Micron Technology

04.93

08.95

SRAM

Micron Technology

12.95 02.97 02.98 Samsung LG Hyundai 04.98

DOC dumping margin (Samsung 0.82%, LG 4.97%, Hyundai 11.45%) DOC dumping margin revision (Samsung 0.22%, LG 4.28%, Hyundai 5.15%; Samsung was exempted due to de minimis) Anti-dumping duties expired Targeted against Korea and Taiwan DOC decision 1.00%: exempted (de minimis) 4.28% 5.08% ITC decision (no injury) Anti-dumping procedure cancelled

Source: Authors’ interviews with senior manager of Samsung Semiconductors.

by US producers targeting DRAMs and SRAMs originating in Korea. Concerning the US anti-dumping investigations of DRAM in 1992, and SRAM in 1997 filed by Micron Technology, the Department of Commerce admitted at last that Samsung stayed at a less than 2 per cent margin in the two cases, 0.22 per cent and 1.00 per cent, respectively.19

EU Trade Policies, Korean FDI and Korean Multinationals 203

Besides, it is important to note that in August 1997, Korea filed a formal complaint with the WTO against the US for its refusal to lift anti-dumping measures against LG- and Hyundai-made DRAM. This complaint by the Korean government related to a May 1993 provision by the US which made it possible to maintain dumping charges in the case of ‘possible future’ dumping. By July 1997, Korean companies assumed that LG and Hyundai would be excluded from a list of companies concerning annual anti-dumping investigations, given that they had been fined for minimal anti-dumping duties of less than 0.5 per cent for the past three years (Financial Times, 14 August 1997). In fact, since September 1998, Washington has been imposing dumping duties of 9 per cent and 4 per cent respectively on LG- and Hyundai-made DRAM chips. In response to the Korean complaint, the WTO set up a dispute settlement panel in January 1999. Ironically, the final ruling by the WTO was seen as ‘welcoming’ by each side, although the Korean press reported that the WTO came to a ruling in favour of Korea.20 In this case, Samsung had already favourably ended up with de minimis duty of 0.22 per cent in February 1996. In the EU dumping complaints against Korean-made DRAM were launched by the EECA in 1990. Superficially, it was thought that the Commission focused mainly on Korean DRAM, followed by the imposition of definitive duties in 1993 to a greater extent on Samsung (14.6 per cent), LG (12.1 per cent) and Hyundai (57.1 per cent). In the EU, the EECA has mostly undertaken anti-dumping complaints against foreign exporters on behalf of European semiconductor producers, because Siemens is the only major manufacturer of memory chips. In July 1998, the EECA lodged a second anti-dumping petition against Korean DRAM. During the same month of 1998, the EU Commission refused to reinvestigate the same complaint that Siemens filed against Korean exporters, Samsung, Hyundai and LG, as the EU Commission accepted the allegations by Korean MNCs that Siemens had initiated a complaint discriminating against only its main Korean rivals and not the Japanese, the US and Taiwanese companies (Ministry of Foreign Affairs and Trade, 1999b). Japanese semiconductor producers, especially DRAM makers, have been in operation in the EU over recent decades, while Korean chip producers have relied heavily on their parent companies. Korean semiconductor companies, in particular, Samsung, have recently emerged as the world’s leading memory chip producers. In terms of net profit, Samsung was expected to earn up to $3.8 billion for 1999, coupled with a price advantage against Japanese exports due largely to the weak

204 Newly Industrialising Economies and International Competitiveness

Korean currency resulting from the Asian financial crisis. By 1999, the total revenue of Samsung semiconductors reached $9.3 billion against $5.5 billion in 1998, including $6 billion for memory chips, $2.2 billion for LCDs and $1.1 billion for non-memory chips (Financial Times, 10 February 1999). This represents the competitive advantage of Korean semiconductors in the likelihood that for semiconductors, market share may be directly related to profitability, although this proposition is not always applicable to the consumer electronics industry.21 Furthermore, following the merger between Hyundai Electronics and LG Semicon, it is estimated that there will be a ‘synergy’ effect (Samsung Economic Research Institute, 1999). Confronted with anti-dumping measures directed to Korean consumer electronics products, such as CTVs, VCRs and MWOs in advanced countries, Korean electronics MNCs have felt the need to avert anti-dumping measures in order to sustain their market power in global markets. Samsung Electronics has proactively responded to the newly emerging international trade regime by taking seriously the significance of innovative organisation and knowledge-intensive technology. As for semiconductors, in both the US and EU markets, between the early 1990s and late 1990s, Samsung Electronics was regarded as being the only electronics chaebol that had successfully evaded any dumping complaints filed by the US and EU producers. Thanks to low production costs and technological prowess, Samsung can make chips cheaper and more competitively than any other chip manufacturer.22

The case of compact disc players, audio tapes, video tapes and car radios In 1987, the Commission initiated an anti-dumping proceeding concerning Korean and Japanese firms exporting CD players to the EU. This followed a complaint filed by the Committee of Microphonic Producers and Connected Technologies (the Compact Committee). The Commission imposed an average of 24.4 per cent interim dumping duties on Korean firms, such as LG (32.5 per cent), Samsung (23 per cent), Haitai (21.3 per cent) and Inkel (20.1 per cent). Also in 1991, Japanese and Korean firms exporting CD players to the Union were the target of further anti-dumping actions under the ‘anti-absorption’ amendment, alleging that Korean and Japanese firms had not increased prices in response to the imposition of definitive duties in 1989. Thus, the Commission intended to start a full-scale review of the CDP case in December 1991. However, in July 1993 Philips decided to stop an investigation of overall anti-dumping procedures. The reason for this was that Philips planned to transfer all production of CDPs in the EU to Southeast

EU Trade Policies, Korean FDI and Korean Multinationals 205

Asia by the end of 1993. Thus, there was no EU industry left to initiate a complaint against the imports from outside the EU. In October 1988, the European Council of Chemical Manufacturers Federation (CEFIC) lodged an anti-dumping proceeding targeting imports of audio cassettes and audio cassette tapes originating in Korea, Japan and Hong Kong. This complaint also reflected the fact that the prices at which these imports were at that time sold in the EU forced the EU producers to considerably lower their prices by amounts of between 3.4 per cent and 28.5 per cent (Official Journal, 14 January 1989). In 1991, the overall proceeding resulted in the imposition of definitive anti-dumping duties on Korean firms, e.g. LG (9.2 per cent) and SKM (2.6 per cent), while Keumsan, Sungnam and Saehan Media were exempt mainly by virtue of their small amount of exports to the EU. The audio cassette case was withdrawn in May 1996 on the basis of the ‘sunset’ principle. In September 1987, the CEFIC undertook an anti-dumping proceeding against exports of blank video tape cassettes originating in Hong Kong and Korea. In June 1989, the review of the Commission led to the imposition of definitive anti-dumping duties on Saehan Media (1.9 per cent), SKM (3.8 per cent), Kolon (2.0 per cent) and LG (2.9 per cent) and this case was terminated by January 1998. The complaint targeting imports of Korean car radios of a kind used in motor vehicles was initiated by Alarm (the Association for Legal Audio-Radio Measures) representing more than 70 per cent of Community production of radio-broadcast receivers in May 1990. While EU consumption significantly increased from 11.9 million units in 1985 to 18.3 million units in 1988 and 8.6 million units during the first six months of 1989, the applicants estimated that the Community producers’ market share had dropped from 49 per cent in 1985 to 33 per cent in 1988 and 34 per cent during the six months of 1989 in the EU market (Official Journal, 8 May 1990). At that time, exports of Korean car radios to the EU market accounted for a 30 per cent share of the world market. While Korean big business had responded to anti-dumping measures properly (a relatively low margin – under 10 per cent – was levied on them), small- and medium-sized companies inevitably had confronted stronger anti-dumping duties because they were not in a position to secure sufficient resources to carry out legal actions in response to the EU anti-dumping proceedings, and they became subject to inescapably higher anti-dumping duties ranging between 20 per cent and 38.3 per cent. Given the imminent expiry of the anti-dumping action against Korean car radios, in 1997 for the second time, Philips lodged a request for a

206 Newly Industrialising Economies and International Competitiveness

review of anti-dumping measures against Korean car radios, including also exports of the same product originating in China, Malaysia and Indonesia. The Commission refused to investigate a complaint filed by the Dutch competitor and virtually withdrew a review of anti-dumping proceeding targeting Asian electronics firms in January 1999. Regarding the ‘defensive’ character of Korean FDIs in the EU (as illustrated in Figures 6.1 and 6.2), EU anti-dumping measures against Korean CTVs and car radios had a greater impact on the exports of Korean products to European markets. Along with this, the EU market share of overall Korean CTV exports worldwide had devastatingly begun to decline from 22 per cent in 1987 to 4.0 per cent in 1989, thus leading to FDI by Korean investors in the EU. In response to EU anti-dumping action filed in September 1987, LG (1988), Samsung (1989) and Daewoo (1992) had unwillingly responded to the trade regime by accelerating internationalisation. Samsung’s investment in February 1987 some months before anti-dumping action was undertaken against Korean CTVs in July, was substantially attributable to protectionist fears. Unlike Japanese MNCs, Korean manufacturers have normally tended to display inter-chaebol and inter-firm rivalry in

Exports to EU as a percentage of total Korean exports 22%

EU Anti-dumping (1987.8) Samsung (1987)

20

15.9% 15 LG (1988.10) 10 Samsung (1989) 5

4.7%

4.0%

1987

1988

1989

1990

1990.3

Daewoo (1992)

1991

1992

Figure 6.1 EU anti-dumping impact on CTVs and Korean FDI (unit: %) Source: Derived by the authors on the basis of original research.

EU Trade Policies, Korean FDI and Korean Multinationals 207 Exports to EU as a percentage of total Korean exports EU Anti-dumping (1990. 5) 39.1% Inkel (1990.7) Carmen electronics (1993)

30

17.3% Sang-Min electronics (1995)

20 12.9% 10

3.2% 0% 0 1991

1992

1993

1994

1995

Figure 6.2 EU anti-dumping impact on car radios and Korean FDI (unit: %) Source: Derived by the authors on the basis of original research.

somewhat oligopolistic industrial sectors, especially the electronics industry. As more than 70 per cent of Korean manufacturing FDI in the EU was designed by the three leading chaebol (Samsung, LG and Daewoo), any decision contrived by individual Korean chaebol may have an influence on their competitors’ decisions to invest abroad, imitatively and almost simultaneously (Perrin: 1999, 193–4; Knickerbocker, 1973). At the early stage in Korean European FDI, a globalisation strategy initiated by Korean chaebol should have a positive effect on the FDI of Korean medium-sized electronics firms, given the latter had usually little international operations experience. Drastically, even the mediumsized Korean electronics firms had responded to the EU anti-dumping regulations by locating production within the EU. In the case of car radios, following EU anti-dumping measures in May 1990, motivated by the potential loss of EU market share to Korean total export ratio (39.1 per cent in 1991), Korean second-tier big business, e.g. Haitai (1989.9), and small- and medium-firms such as Inkel (1990.7), Carmen (1993) and Sang-Min (1995) electronics firms were largely concerned with overseas investment in Europe, including Eastern Europe and particularly Poland (see Figure 6.2 and Table 6.11).

208 Newly Industrialising Economies and International Competitiveness

Korean FDI in the EU and the emergence of Korean electronics MNCs Korean manufacturing investment in perspective Before turning to Korean outward FDI, we need to give brief details of the overall inward investment of foreign investors or MNCs. Prior to Korea’s participation in the OECD, the Korean government had a preference for ‘indigenous’ local firms, and Korean chaebol over foreign MNCs. Conventionally, fuelled by the incentives provided by the Korean government to encourage inflows of foreign capital and technologies, as is well known, most foreign capital was invested in the form of ‘foreign loans’ rather than FDI (Clark and Chan, 1996; Lall, 1997; Koo, 1985; Turner and Kim, 2004). In contrast to Hong Kong and Singapore where the domestic market is open to free trade, until the recent liberalisation process the Korean local market had been tightly constrained under the strong initiatives of the Korean government. While inward FDI has constituted a catalyst to Korean industrialisation, and the acquisition of technology used by the advanced countries is mainly due to MNCs, it is important to emphasise that for the past decades, the Korean government had assigned foreign MNCs an auxiliary or a secondary role to transfer their innovative knowledge to Korean local firms without allowing foreign MNCs to directly invest in Korea. Clark and Chan (1996: 87) put it another way: Among the four ‘little dragons,’ South Korea’s state has clearly taken the most active role as a ‘gate-keeper’ in regulating MNC access and in asserting national autonomy over foreign investors. With regard to outward FDI, the Korean government has been concerned with overseas direct investment due in the main part to incremental trade barriers, but partly owing to cost competitiveness such as rising labour costs encountered in domestic industries overall. Between the mid-1980s and the late 1980s, Korean overseas investments were significantly driven by reactive motives on being faced with the then prevailing trade barriers initiated by the advanced countries. Since the early 1990s, the international competitiveness of Korean corporations has played a major part in the relocation of production, accompanied by price competitiveness such as labour cost articulated since the mid-1980s (Bank of Korea, 1995). In addition, the Korean government’s segyehwa (globalisation)-driven policy under the Y. S. Kim administration also reflected the ‘domestic-push factor’ to accelerate

EU Trade Policies, Korean FDI and Korean Multinationals 209

Korea’s inward and outward FDI trends (Dent, 1999; Kim and Kim, 2006). This programme, considerably encouraged by the government, has had a far-reaching effect upon the chaebol to proactively globalise their multilateral business. Coupled with this background, the Korean government sought to give Korean firms investing abroad greater incentives to compete against the developed countries. For example, in terms of liberalising FDI policy, investments not exceeding $50 million need only be notified to the appropriate office for approval. Until recently, the procedure for FDI stipulated that ‘any Korean private citizen or firm wishing to make a FDI abroad should obtain approval in accordance with the Korean Exchange Management Regulations’. Under this framework, in broad terms, the Ministry of Finance and Economy (MoFE) was responsible for overall planning and coordinating overall Korean FDI depending upon not only the amendment of the Foreign Exchange Management Regulations, but the issuing of the necessary circulars. Specifically, over recent years, the Bank of Korea has performed the functions of ‘granting permission for FDI and ensuring the follow-up control of direct investment under the mandate of the Ministry of Finance and Economy’ (Bank of Korea, 1995). Drawing upon the above practices, likewise, the Export-Import Bank of Korea and the Foreign Exchange Bank were also authorised to approve applications for FDI. At present, especially since the Asian financial crisis, as part of measures adjusting to the new financial surroundings, the Korea Federation of Banks alone is responsible for overall Korean FDI matters instead of the other institutions mentioned above (Turner and Kim, 2004).23 In considering Korean EU FDI, as Thomsen and Woolcock (1993) have suggested, the size of the local market in which Korean firms choose to locate plants is also important. Despite the significance of the above market-proximity proposition, apparently much inward FDI in the EU seems more likely to derive from other important factors such as central government and local authorities, and the occurrence of competition among ‘regions within a country or countries within a region’ by providing various incentives (Thomsen and Woolcock, 1993: 68) – grants, cheaper green-field sites for factories – to attract the lion’s share of Korean potential investment. Taken together, among fifteen member states, in terms of amount, as Table 6.13 illustrates, Korean FDI has been largely concentrated in a few countries: the UK (38.2 per cent), Germany (22.0 per cent), the Netherlands (13.4 per cent) and France (10.8 per cent), accounting for a majority share of 73.6 per cent of total Korean FDI by the end of 1999 (Turner and Kim, 2004).

210 Newly Industrialising Economies and International Competitiveness Table 6.13 Korean FDI in the EU by member state (as of 1999) (unit: $ 1,000) Member state

Projects (%)

Outstanding amount (%)

UK Germany Netherlands France Spain Italy Portugal Ireland Belgium Austria Sweden Luxembourg Denmark Greece Finland Total

76 (25.9) 94 (32.1) 28 (9.5) 41 (14.0) 13 (4.4) 15 (5.1) 3 (1.0) 5 (1.7) 7 (2.4) 6 (2.0) 2 (1.0) 1 (0.3) 1 (0.3) 1 (0.3) 0 (0) 293 (100)

821,127 (38.2) 474,440 (22.0) 287,957 (13.4) 232,948 (10.8) 100,307 (4.7) 70,244 (3.3) 39,967 (1.9) 49,005 (2.3) 43,618 (2.0) 17,980 (0.8) 10,179 (0.5) 258 (0.1) 100 (0) 20 (0) 0 (0) 2,148,150 (100)

Source: Export-Import Bank of Korea (2000).

Here it is worth emphasising that Korean firms investing abroad have tended to demonstrate a strong preference for wholly-owned subsidiaries rather than joint ventures. Compared to the Japanese cases, Korean electronics investment in the EU has been heavily concentrated in the manufacturing sector (Turner and Kim, 2004), in the main represented by the electronics sector. It should be stressed that ‘ownership’, especially wholly-owned, does matter with Korean electronics MNCs located in the EU and is preferred to majority-owned joint ventures or strategic alliances. As of 1995, 100 per cent equity-owned subsidiaries held 49.9 per cent of the total FDI projects (Bank of Korea, 1995), in particular at present with regard to Korean electronics companies’ investment in the EU, more than 80 per cent of them are whollyowned (see Table 6.8). In 1999, the manufacturing sector accounted for 52 per cent of total Korean FDI24 (Export-Import Bank of Korea, 2000). Among Korean manufacturing FDI in Europe, the share of the electronics sector has risen enormously from 10.4 per cent in 1989 to 51.4 per cent in 1996, amounting to US$5.94 billion (KOTRA, 1998). Furthermore, Korean electronics FDI was concentrated heavily in three regions: North America (38.3 per cent), Asia (31.1 per cent), and Europe (24.4 per cent). In recent years, in 1996 Korea’s electronics FDI in Europe

EU Trade Policies, Korean FDI and Korean Multinationals 211

was significantly increasing, while declining in the former two regions. Notably, in North America, the share declined sharply from 40 per cent in 1994 to 15 per cent in 1996, as compared with Europe’s spectacular increase from 22 per cent to 48 per cent during the same period (Table 6.14). In the mid-1990s, it may be that Korean electronics FDI in the EU was prompted in part by cost competitiveness in terms of comparative advantage, for example, relatively rapidly rising labour costs in Korea over time, coupled with a growing number of labour disputes, culminating in the late 1980s (P. S. Kim, 1997). By this time, Jung (1997b) points out that wages in Korea were higher than in the UK, although UK wage rates were lower than those in other European countries (such as Germany, France, Italy, Austria, the Netherlands and Sweden, (Financial Times, 5 November 1997; Economics for Investors, 16 December 1997). Dent (1999: 213) also observes that in ‘the mid-1990s Korea’s inflating domestic cost structures were alone creating incentives to relocate production in many low-cost EU regions’. Empirical analyses have suggested that Korea’s FDI in the EU is characterised by a disproportionate concentration in the consumer electronics sector compared to semiconductors (see Tables 6.8, 6.10 and 6.12), while the Japanese electronics firms have invested almost evenly across the electronics sector as a whole. In fact, FDI by Japanese semiconductor firms in Europe relative to their Korean counterparts has a comparatively long history, dating back to 1976 (Kimura, 1994). More importantly, it was not until the mid-1990s that Korean chipmakers such as LG Semicon and Hyundai electronics were considering investment in EU. Furthermore, since the financial crisis, Korean chaebol have indefinitely delayed or cancelled their plans to construct,

Table 6.14 Korean FDI in the electronics sector by region (unit: $ million) Region

1968–1989

1990–1993

1994 (%)

97 1,074 307 16 1 14 1,058

708 500 283 41 4 9 1,546

272 (35) 312 (40) 172 (22) 17 (2) 0.1(0) 3 (1) 777 (100)

Asia North America Europe Latin America Africa Oceania Total Source: KOTRA (1998).

1995 (%)

1996 (%)

554 (50) 229 (23) 234 (21) 154 (15) 211 (19) 477 (48) 114 (10) 136 (14) 2 (0) 5 (0) 3 (0) 0.4 (0) 1,109 (100) 1,001 (100)

212 Newly Industrialising Economies and International Competitiveness

or invest, in semiconductor plants in the UK. Originally, in the mid1990s, the LG group had intended to invest £1.7 billion in Wales, while Hyundai Electronics planned to set up its main European semiconductor plant in Scotland. Following the merger between LG Semicon and Hyundai Electronics, Kim, Young-Hwan, president of Hyundai Electronics, revealed that Hyundai Electronics’ Scottish factory and the Welsh plant, formerly LG Semicon, might be sold (Financial Times, 15 October 1999). According to one HEI executive, before then, it was even reported that Hyundai Electronics were considering selling LG’s half-built semiconductor plant to Samsung Electronics because Samsung did not have a semiconductor manufacturing facility in Europe (Korea Times, 18 January 1999). Following the acquisition of the former subsidiary (LG Semicon) of LG Group, Hyundai Electronics has increased its world market share of DRAM, mostly available for computers, to 21 per cent, exceeding Samsung’s 20 per cent (Table 6.15). Similar to the Japanese electronics MNCs, Korean electronics firms’ European investment may be attributed mainly to anti-dumping measures. Given that one would not count technological supremacy as the key enabling factor in the practice of the globalisation of the Korean electronics industry (Tatalay, 2000), trade regulations enforced by the EU or the US have compelled the Korean firms to accelerate technological capability. Especially in semiconductors Korean MNCs have succeeded in catching up with the developed countries in a short period of time. The emergence of Korean electronics MNCs is significantly related to the success story of semiconductors as they have come to achieve world-class competitive advantage compared to their first-tier advanced counterparts such as the US and Japan, not to mention the European champions. Table 6.15 Semiconductors: the newly merged company vs. Samsung Electronics

Amount of sales Number of employees Profit Annual production Market share in world DRAM market

Hyundai Electronics and LG Merger Company

Samsung Electronics

4.4 trillion won 18,500 personnel 750 billion won 16M: 520 million pieces 64M: 184 million pieces 20.8% (12.4% + 8.4%)

6.4 trillion won 14,100 personnel 1,086 billion won 16M: 204 million pieces 64M: 196 million pieces 20.1%

Source: Samsung Economic Research Institute (1999).

EU Trade Policies, Korean FDI and Korean Multinationals 213 Table 6.16 Pattern of outward FDI in the EU: Korea vs. Taiwan (%) 1978

Asia Europe North America Other regions

1995 (1997/1999)

1995

Korea (%)

Taiwan (%)

Korea (%)

Taiwan (%)

52.5 2.8 18.7 27.0

70.8 0.3 16.5 12.4

44.7 (47/45.4) 15.1 (15/17) 30.8 (29/29.7) 9.4 (9/8.9)

61.1 3.5 17.4 18.0

Notes: 1. Korean (1978) and Taiwanese (1978 & 1995) data compiled from Hoesel (1998). 2. Korean data (1995, 1997 and 1999): Bank of Korea (1996), Korea Federation of Banks (1998) and Export-Import Bank of Korea (2000), respectively. Sources: Bank of Korea (1996), Korea Federation of Banks (1998), Export-Import Bank of Korea (2000).

In contrast to Korean electronics firms, protectionist measures taken by the EU appear to pose no threat to Taiwanese firms, since ACER and First International Computer (FIC) have mainly focused on the highly competitive computer industry. As Hoesel (1999: 121) suggests, ‘the importance of European competitors is too limited to justify a protectionist policy by the EU authorities’. Similar to Asian Third World MNCs, notwithstanding the large number of local ventures, over the last two decades Taiwanese operations in Europe have remained relatively small scale compared to Korean chaebol (Table 6.16). In comparison with the Korean case, it is important to reveal why antidumping measures undertaken by the EU did not motivate Taiwanese electronics companies to respond by way of ‘internationalisation’ strategy. Important variations exist in the degree of the internationalisation in the electronics industry representing the two countries respectively. On the one hand, the nature of major sub-sectoral products in the electronics industry relates to a significant determinant to invest abroad. Thus it is assumed that in terms of main target markets, Taiwanese leading MNCs have been characterised by a less internationalising tendency than their Korean counterparts. As Hoesel (1999: 219) has suggested: Although the consumer electronics and PC industries are both part of the electronics industry    sub-sectoral characteristics have also influenced the way in which these companies have internationalised. A major difference relates to the fact that Korean CE companies were hit on a large scale by protectionist measures in major target

214 Newly Industrialising Economies and International Competitiveness

markets (namely USA, EU) – forcing them to shift production to these countries – whereas Taiwan’s PC products have not faced such trade hurdles. On the other hand, as addressed in previous chapters, the size of companies needs to be seen as an enabling factor for overseas investment. Based on the Korean government’s industrial policy with a focus on conglomerates, the relatively high level of the chaebol’s financial credits on the international financial market from the mid-1980s to the mid-1990s had allowed Korean electronics chaebol more privileged access to budgets in order to build up strong market positions in the advanced markets (Jung, 2000; Kim and Kim, 2006), compared to Taiwanese small- and medium-sized corporations. This peculiarity encouraged the Korean MNCs to follow the Japanese experiences in preparing for a globalising market and overseas operations in the US and the EU.

EU Trade policies and Korean response: globalisation of Korean chaebol In considering anti-dumping measures, Korean business has sought to provide small- and medium-sized corporations with financial assistance. In order for Korean small firms to take appropriate legal action when confronted with the investigations associated with anti-dumping measures, the Korean Association of Trade and Commerce (KATC) has prepared itself to offer financial support up to 20 million won (approximately US$17 000). It should also be noted that a relative lack of professional experts dealing with anti-dumping duties may discourage these firms from reacting to anti-dumping cases. Korean chaebol have some difficulty in meeting anti-dumping measures collaboratively because they are reluctant to divulge their private material such as dumping-related information, marketing information and product cost to outsiders, especially their rivals, as well as the Korean government. In this regard, each major Korean chaebol has tended to resolve its own dumping case independently and clandestinely.25 More generally, there may not exist any so-called trade team dealing with trade restriction or anti-dumping proceeding within most of Korea’s chaebol organisations except for Samsung, LG, Daewoo and POSCO (formerly, Pohang Steel Company).26 Korea’s FDI in the EU is characterised by an enormous concentration on the consumer electronics sector, in marked contrast to the insignificant proportion of semiconductors (Kim and Kim, 2006). By

EU Trade Policies, Korean FDI and Korean Multinationals 215

contrast, Japanese semiconductors have a long history of FDI in the EU, given the adoption of a rule of origin against semiconductors, which requires the major production process, wafer diffusion, to be carried out in the EU. That is, the semiconductors produced in the EU were regarded as European as long as the wafer cutting process was performed in the EU. Japanese chip-makers had no choice but to ‘either lose European export opportunities or move to Europe’ (Lee et al., 1991: 284–5). In some respects, we suggest that both the EU market and its trade regulations have significantly motivated Korean electronics firms to become more ‘globalised’ than ever before. Apparently, trade regulations in the EU constitute a paradigmatic shift for the raison d’être of the Korean electronics chaebol in the advanced market. In other words, in terms of adopting its new market-creating strategy, Korean electronics firms were forced to accelerate the shift in transition from ‘export-led market expansion’ to ‘FDI-led market expansion’ (Y. S. Kim, 1997a), thereby resulting in the internationalisation of the Korean indigenous electronics firms. This implies that Korean electronics firms may no longer enjoy the advantage of a ‘governed’ market. Following not only from the gradual demise of the domestic governed market, but also the relative lack of a substitute for a comparable market, mainly attributable to the developed countries’ anti-dumping policies, trade regulations by the EU compelled the Korean chaebol on their own to confront a turning point in their perception of the market-making activities conventionally orchestrated or protected by the Korean government over the past decades. Specifically, relative to the US market, generally dominated by Japanese electronics MNCs in terms of technological innovation, or brand recognition, the EU market allowed for new opportunities for Korean chaebol for competitive advantage in particular areas of electronics. In the case of MWO, Samsung Electronics was beginning to develop greater competitive advantage, in terms of brand recognition as well as technological edge, than the EU local competitors such as Moulinex or Whirlpool. Ironically, instead of a low-cost strategy being undertaken by Korean MNCs, the EU local firms have challenged Korean rivals by way of a low-pricing strategy under OEM brand.27 First of all, we suggest that over time oligopolistic rivalry among Korean chaebol targeting domestic and international markets (Perrin, 2001b) has influenced a shift towards the restructuring of international production networks, prominently in the electronics industry. Korean ‘globalising’ firms have had to compete aggressively against major ‘established’ Triad

216 Newly Industrialising Economies and International Competitiveness

rivals so as to create market power in accordance with the globalisation of the electronics industry. As Dent and Randerson (1996: 536) put it: Those capital-intensive sectors where Korean firms either currently have, or are endeavouring to develop, a competitive advantage have become particularly globalized sectors concerned with automobiles, consumer electronics and semiconductors. To become central players in their respective industries, the chaebol have therefore had to compete globally    The recent surge of Korean FDI into Europe also demonstrates a willingness to compete head-on against established Triadic competition. Second, the significance of Korean electronics FDI in the EU is related to what we might term the ‘single market effect’ (Nicolas, 1995) and ‘EU enlargement advantage’, which may contribute to the expansion of the emerging market potential and possibility of relocating activities into this new geographic arena. This is a strong indication that these developments envision the creation of a broader European-based Korean plant as well as Pan-European market size since the EU may be expected to extend over the current borders to include Central and Eastern Europe (Kim and Kim, 2006). Along with this, Korean investors see another potential in Europe, in that the CEE plays a role quite similar to that of Southeast Asia vis-à-vis Korea in terms of ‘cost competitiveness’ as well as ‘market proximity’ resulting from the possible EU enlargement to twenty-eight member states taking place (Kimura, 1994; Jung, 1999b) (Table 6.17). According to Jung (1999b), compared to the Japanese, it is noticeable that Korean electronics MNCs strategically or opportunistically have relocated production at a regional level, in other words, ‘reverse Table 6.17 The single market effect and enlargement potential (as of 2000) Unit

EU (15)

EU (28)

US

Japan

Population (%)

Million

Size GDP (%)

1000 km2 $100 m

GDP per capita

$

380 (6.2%) 3,230 85,000 (25%) 22,370

550 (9.2%) 5,100 93,000 (27%) 16,900

280 (4.6%) 9,370 98,000 (29%) 35,000

126 (2.1%) 380 45,000 (13%) 35,700

Source: Samsung Electronics Report (2001).

EU Trade Policies, Korean FDI and Korean Multinationals 217

inter-regionally’: from the EU to Southeast Asia, from the EU to the CEE, or occasionally ‘reverse’ relocation in the former cases. On occasions, Korean electronics firms have tended to enter, and then relocate production elsewhere, and re-enter the EU on the basis of the existence – imposition or withdrawal – of anti-dumping rules. The Korean firms’ organisational strategy of ‘floating investment’ adjusted for antidumping measures has incrementally contributed to the internationalisation of Korean electronics firms. As Jung (1999b: 160–1) argues: The first is a case of MWO production.    When an investigation opened in 1986, Samsung invested in the UK in mid-1987, and Daewoo invested in France in 1988. As soon as the EU decided to cancel anti-dumping regulations on Korean MWO as a result of low dumping margins of less than 5 per cent, Samsung withdrew the MWO production line from the UK at the end of 1987. However, in 1995 definitive duties on MWO were re-imposed.    Samsung re-invested and LG invested in the UK in 1995    [Samsung] relocated a CTV plant from the UK to Hungary due to the weakened cost-competitiveness    in 1995, [LG] relocated a CTV plant from Germany to the UK because of the lower wage in the UK. Subsequently, the CTV plant in the UK was relocated to Poland in 1999 for the same reason.    In 1997 LG relocated its production from Germany to one of the Southeast Asian countries because the EU cancelled anti-dumping duties on VCRs. The reason for the cancellation was that there were no European producers of VCRs within the EU, because the main European producers had already relocated to South Asian countries. Given the above accumulated experience, it is presumed that frequent or widespread inter-regional relocation of production helped Korean electronics firms to organise and consolidate international production networks (IPNs), mainly centring on manufacturing subsidiaries rather than sales affiliates, specifically in Southeast Asia and Eastern Europe and recently in China (Y. S. Kim, 1997a). In particular, since the early 1990s, Samsung has invested actively in China with a concentration on production subsidiaries. Interestingly, in contrast to Samsung’s strong preference for wholly-owned equity in Europe (see Table 6.8), joint ventures, majority-owned, or 50 per cent equal-equity are most strongly represented in China (Y. S. Kim, 1997b). Moreover, Y. S. Kim (1997b: 100) stresses that China-based affiliates are more ‘advanced’ in design

218 Newly Industrialising Economies and International Competitiveness

and development activities compared to Samsung Electronics’ Southeast Asian production subsidiaries. Taken together, drawing on market share as well as defensive investment opportunities, Korean electronics chaebol as latecomers benefited to some extent from the trade restrictions that initial anti-dumping measures taken by the EU caused for Japanese corporations. Strategically, in parallel with the Japanese, since the mid-1980s the sequential anti-dumping actions originated by the EU have allowed Korean electronics firms to shift production inter-regionally or globally, leading to the deepening and widening of internationalising networks of production: as a defensive act, initially becoming insiders in the EU; eventually extending to Central and Eastern Europe; then moving beyond ‘Fortress Europe’ to the Asian region, primarily Southeast Asia, and more advantageously China. Alongside the globalisation of Korean electronics MNCs, it is no exaggeration to argue that this phenomenon also reflects an increase in international competitiveness, spectacularly represented by the competitive advantage of Korean semiconductors.

Conclusion The significance of this chapter lies in showing how trade regulations undertaken by the advanced countries have resulted in the emergence or growth of NIEs’ electronics multinationals, and exploring the shift in relations between government and industry in latecomers, given the eventual expansion of corporate power over time. While we have provided details of Korean FDI in the EU, this chapter has examined not only a determining factor behind Korean European FDI, but also a subsequent effect of Korean investments in the EU that led to the globalisation of Korean electronics MNCs. In sum, we have argued that anti-dumping policies initiated by the EU, rather than the US, have had a more far-reaching impact on the growth of Korean MNCs, as they did on the globalisation of Japanese electronics firms, although admittedly, the emergence of Korean (as well as Japanese) electronics MNCs is partly due to the preliminary experiences of earlier investments in the US market. Even if most recently trade regime-motivated factors have partly or eventually given way to other proactive or pulling factors (Y. C. Kim, 2002) – internationalisation strategy, technology sourcing, and emerging market potential – it is important to point out that the cumulative experiences of the first- and second-wave investment by Korean electronics firms resulting from EU trade policy virtually laid the foundation for the internationalisation of Korean electronics chaebol.

EU Trade Policies, Korean FDI and Korean Multinationals 219

As a consequence, as with the domestic governed market, the existence of anti-dumping measures has offered Korean chaebol greater incentives to regain market power more independently than ever before, and resulted in the gradual withdrawal – though not the demise – of the Korean state’s intervention into the private sector, depending upon the privatisation of anti-dumping regulations. In this regard, the implication of this chapter also constitutes a tentative or heuristic perspective for an analysis of how trade policies designed by the advanced countries – in other words, the paradoxically exogenous factor rather than the endogenous factor – have had an influence on the growth of the NIEs’ private sector that has been argued to be considerably subject to state power.

7 Conclusion and Policy Implications

The new source of the ‘wealth of nations’ Our research provides an account of the questions of how, and to what extent, international trade regimes, especially EU trade policies, have had an impact on the market power of Korean electronics MNCs alongside the emergence of new technology involving knowledge-intensive technology. To explore this issue, we have utilised the notion of ‘big business’ as ‘market-maker’ rather than ‘market-taker’ to capture the empirical reality of Korea’s electronics MNCs, given the compelling significance of international competitiveness in recent years. While the nature of industry or industrialisation has changed, individual business organisation as exemplified by Samsung Electronics has tended to replace, or refashion, part of the market mechanism in the making of a meso-market. When it comes to an understanding of the wealth of nations, this paradigmatic shift exposed a theoretical deficiency in the dichotomised concept of the ‘market vs. the state’ that has been conventionally employed in academic disciplines such as global economy and comparative political economy. The main conclusions of our research can contribute to a heuristic analysis of how trade policies enacted by the advanced economies tend to have an influence on the growth of a particular NIE’s private sector. As a corollary, this proposition directly relates to exploring the shift in relations between government and industry – or state power and corporate power – in latecomer economies. Moreover, for Asian NIEs (apart from the advanced industrialisers), by implication, such preliminary analysis provides a tentative clue as to how an exogenous factor such as the international trade regime directed towards NIEs has meaningfully – and in 220

Conclusion and Policy Implications 221

a sense, paradoxically – affected the involvement of industrial capitalists as social forces at the national level. Given the compelling importance of international competitiveness featuring ‘comparative competitiveness’ or ‘competitive advantage’, the nature of industry, as illustrated by the emergence of knowledge-driven technology or IT, has been characterised as being subject to rapid transformation. This has given an impetus to the interpretation of ‘international competitiveness’ that can be seen as intrinsically bound up with international trade. It should be understood that the emergence of a knowledge-intensive industry results in a change in the character of international competitiveness. Conclusively, the nature of industry or industrialisation has transformed the nature of the market. In particular, in NIEs, such phenomena have contributed enormously to the reidentification or reinterpretation of the role of business organisations that has been recognised to be mostly subject to a dichotomous logic – ‘market rationality’ (as economic orthodoxy suggests) or ‘plan rationality’ (as the developmental statists argue). Moreover, the advent of the international trade regime since the early 1980s, specifically the EU trade policies accompanying the formation of the single market, have forced Asian ‘export-driven’ latecomers to reconsider conventional responses to meet the urgent needs – indeed the very survival – of their nations. As for the Korean electronics industry, under these circumstances, our research has argued that the anti-dumping policies initiated by the EU rather than the US have had a far-reaching impact on the deepening of the globalisation of Korean electronics chaebol, even though the growth or the globalisation of Korean electronics companies can be perceived as partly deriving from earlier experiences of their previous FDI in the US. Along with the appearance of knowledge-driven products, empirical evidence drawn from this research acknowledges that we need to pay more careful attention to individual MNCs – such as Samsung Electronics Company – as ‘market-makers’, in parallel with the significance of dealing more generally with MNCs ‘as a whole’ in terms of international competitiveness. Theoretically, as we have suggested, the neo-Schumpeterian model of large firms that we have chosen to follow serves to go beyond the market–state dichotomy, understood as a dominant concept in the social sciences. This model also contributes to a preliminary theorising of ‘big business’ – or individual MNCs – as a ‘market-coordinator’ or ‘market-shaper’ in meso-markets on the international dimension. Furthermore, the implications of the key concepts – market power, meso-market, international competitiveness – paved

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the way for paradigmatic implications that allowed us to investigate conventional politico-economic theories more critically. Firstly, when examining corporate power in relation to state power, the concept of ‘market power’ is very useful in answering the question of what has caused a shift in government–industry relations, that is, relationships between ‘state power’ and ‘corporate power’ over time. Here we are referring to corporate power as a property of individual firms rather than as a property of associations or sectoral organisations as often proposed in the neo-corporatist literature following Schmitter and Lehmbruch’s (1979) contribution. By contrast with the micro-corporatist – as defined by Cawson – explanations of the crucial roles of European large firms in the context of the EU-level decision-making process surrounding major EU public policies on R&D projects, neo-corporatism generally assumes that state power is critically central to tripartite corporatist conflictresolution, on the assumption that government is well equipped to mediate in differences between participating parties – state, organised interests and labour – intrinsically recognised as political actors. However, our explanation in terms of market power identifies the political not as a distinct institutional actor, but as an intrinsic part of the construction of the concept of the market. This has allowed us to identify more accurately the source of the shift in government– industry relations. When faced with the international trade regime, sometimes signalling market imperfection or market failure, while the government-as-marketplace-player in latecomers no longer has leverage in a ‘governed market’, individual lead MNCs in Asian NIEs alone have emerged to significantly affect the market positions of foreign competitors in world markets. It follows that the neo-Schumpeterian market-maker model takes account of implications for political power and economic power in relation to state power. In that context, the market-maker model offers an explanation for the changing character of state–corporate power relationships. Empirically, when applied to Korean electronics MNCs based on chaebol governance, this understanding of market power contributes to an analysis of how the Korean state–corporate power relationship has shifted considerably in favour of Korean chaebol. This does not mean, however, that Korean MNCs have achieved autonomy from the state. Given that the state continues to be a pivotal institution, however, we still emphasise that the state’s capacities for leverage vis-à-vis corporate governance of ‘big business’ have changed and in many respects have declined remarkably. As a result, our research explains why we should characterise ‘big business’ in terms of political power interrelated with the workings of market

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mechanisms and market institutions, rather than mere market agents. Simultaneously, where some markets are guided by the visible hand of firms, it can be argued that the ‘visible hand’ increasingly tends to be at odds with the invisible hand of markets. In addition, providing this kind of theoretical analysis seems to carry particular connotations amongst scholars concerned with industrial competitiveness in the context of the ‘market vs. state’ debate. Dichotomised market–state models of the developmental path have tended to represent the highly subtle process of national industrial development simply by concentrating on a single dominant factor – ‘state’ or ‘market’ – without specifying the complex mechanism of ‘government–industry’ relations, or government interaction with big business. Government’s role has been controversial, but there are still unresolved issues in the arguments on international competitiveness. When it comes to exploring international competitiveness, we need to reformulate the historical evolving interaction of state, market and big firms by focusing on the newly emerging governance of big business in the process of globalisation. International competitiveness cannot be explained in terms of price-relevant competitiveness even if a firm expands its market share by reducing prices. With the increased significance of international trade barriers in the advanced markets since the early 1980s, it seems likely that a government concerned with strategic trade policy has not appropriately resolved the problem of international competitiveness. Against such a background, in considering market–statist arguments or government–industry debates, some interpretations of these topics have neglected to deal with the impact of the external factors following the phenomenon of globalisation, especially the consequent characteristics related to the international trade regime. For the Asian NIEs underlining the developmental state, recently, the importance of international competitiveness and the market coordination process has been less articulated by interventionist governments than the market-shaping behaviour of their international firms. As suggested by Best (1990), the emergence of ‘new competition’ depending upon business organisation has contributed greatly to conditioning a new logic of market coordination in world markets, and led to a new conceptualisation of international competitiveness which ultimately relates to technology and innovation subsequently undertaken by big business. Moreover, in considering the international dimension in terms of international competitiveness, the concept of a ‘national innovation system’ (NIS) gives way to an insufficient understanding of how globalisation has

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reshaped and surpassed the geographical scope of the innovation system originally dealt with within the national boundary. In this regard, innovative international firms have played a more geographically important role compared to the spatially limited roles of national governments. In terms of space and time, linked with the accelerated pace of global change and growing uncertainty resulting from globalisation, leading multinational companies have emerged to play a central role in coping with the competitive vulnerability of national innovation systems by way of relocating production as well as entry into global production networks. With regard to latecomers – such as Korea – largely reliant on exportor trade-driven industrialisation, the growing significance of international competitiveness has tended to provide an impetus for a shift in government–industry relations. By contrast with the neo-classical onedimensional view of technology, a change in the nature of industry determines the innovative initiatives of big corporations in changing conditions of global market situations over time. The globalisation of technology has paved the way for the emergence of a new international structure for technology. The electronics industry typically incorporated the global technology which has prompted the electronics firms to become more easily multinationalised than the ‘asset-based’ or ‘general purpose’ technology-based firms across country-specific borders at low costs. For the electronics industry, ‘knowledge-intensive development’, accompanied by the rapid advancements in highly competitive digital products in consumer electronics as well as the extensive marketability of semiconductors, has triggered a significant transformation of the old mode of industrialisation. Importantly, redefining a knowledgeintensive industry such as semiconductors involves an epistemological jump to achieve an understanding of the wealth of nations more commonly perceived as originating from the market-as-mechanism or the state-as-institution. Thus, recognising that the state and markets coexist in symbiosis with the private sector, the state–market dichotomy explanation is seen as counter-intuitive in exploring a ‘private market process’. With regard to Korea, for a considerable period of time, state power was due to mainly ‘strategic financing’ often considered unorthodox by Anglo-American standards in relation to big business. Compared to the Japanese government, especially relationships between MITI and industry, Korean state control seems to be time-limited, and heavily finance-reliant. Historically, what concerns us is that Japanese government–industry relations should be distinguished from those of

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Korea (Y. C. Kim, 2002: 276). Regardless of how and to what extent the Japanese industry has achieved market power in terms of international competitiveness, Japanese government–industry relations have been ‘indistinguishable’ as in the ‘MITI paradox’.1 By contrast, in the recent period, Korean state–corporate power relationships that at one time had been inseparably interconnected began to undergo a noticeable shift. Moreover, Korean corporate power has become more autonomous than ever before to the extent that even individual Korean MNCs, in terms of international competitiveness, may eclipse Korean state power at times, due in the main to their position in world markets. In that context, it is wrong to conclude that since the Asian financial crisis in 1997, the Korean state’s involvement with economic or corporate restructuring at the domestic level has revived Korean state power previously devoted to the pursuit of the developmental state. Thus when it comes to a discussion of the state–corporate power relationship encompassing the developmental state, it can be argued that Korean chaebol governance should be reinterpreted or respecified in terms of the neoSchumpeterian perspectives of newly emergent big business as ‘marketmaker’, given the raison d’être of big business with regard to the wealth of nations. In contrast to the classical and neo-classical view of business behaviour as ‘passive’ in terms of market structure, and somewhat contrary to the well-known paradigm of structure–conduct–performance (SCP) presupposing that the market structure of an industry determines the conduct of the firm, our research argues that business behaviour has significantly come to condition the market structure – and the market power – of an industry in accordance with the nature of industry, as shown in the case of knowledge-driven industry. With regard to the behaviour of large firms in a highly competitive industrial market on the international dimension, it is necessary to put much more emphasis on the ‘organisational logic’ pertaining to big business organisations. It should be emphasised that Smithian economic thinkers somewhat surprisingly overlooked the rise of big corporations by emphasising the ‘price-taking’ behaviour of a large number of small firms. Neo-classical theories also gave birth to a neglect of international investment as well as trade originating from technology – or knowledge – differences displayed by big business. In this sense, ‘new’ technology theories have reinforced the notion of international trade flows. It is implied that competitive advantage initiated by individual firms through major breakthroughs in innovativeness has allowed the innovative big corporations to become global players as ‘the key economic actors and commercial actors’ in world markets.

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In the academic literature, as Sally (1994) suggested, in the realm of international economy, or contemporary political economy, the individual multinationals have been disproportionately overlooked in terms of economic development, shaping the world economy, and the making of public policy choices largely due to dominant ‘state-centric’ perspectives crucially focusing on the existence of ‘state power’ and the presence of an MNC-related ‘international regime’ viewed as significantly constraining the global strategies of individual MNCs. Clearly, however, we need to pay close attention to the MNC itself as the key actor that behaves independently of, or goes well beyond the influence of, government or the international regime, depending on its innovative superiority and organisational innovativeness. It also reflects the growing rate of intra-firm trade that encompasses one-third of world trade in international markets as a consequence of the emergence of global workshops under the auspices of MNCs. This kind of view can be supplemented by evidence provided by the strategy and enhancement of sustainable competitive advantage performed by NIE firms, particularly Korean chaebol in the electronics sector. At the same time, it is important to acknowledge the implications of the Asian latecomer achievements in the electronics industry to the extent that these achievements are not confined to East Asian countries, but extend to any country seeking to catch up in any area of advanced, knowledge-intensive technology, especially semiconductors. To this end, in marked contrast with the significance of the organisational management factor conventionally stressed by some corporate theorists, especially in the ‘business strategy’ literature, we have suggested that the neo-Schumpeterian perspective is in part intellectually supported by the Chandlerian perspective in terms of the role of large firms as knowledge-creators. The 1990s have witnessed ‘new style’ big business which even in latecomers in East Asia might have successfully emerged as the ‘marketmaker’ in world electronics markets, significantly reducing the share of the world market initially held by the advanced countries. For the electronics industry, especially semiconductors, as our research has shown, the catch-up companies in newly industrialising countries, especially the Asian Tigers, have emerged as world-class competitors, and on occasion remained more competitive than innovative start-ups in the advanced countries such as the US, Japan and the EU. As opposed to the ‘flying geese model’, concepts derived from the literature of organisational economics, such as ‘organisational learning within firms’ (Mathews and Cho, 2000) and ‘combinative capability’ (Luo, 2000) have underpinned

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successful cases of catching-up strategies manipulated and organised by big business in its own right from latecomers in terms of international competitiveness (Kim and Kim, 2006). Supported by the compelling significance of knowledge-intensive technology, we argue that ‘knowledge-derivative dynamics’ typically characteristic of catching-up companies in latecomer countries should be of no less significance than, or in a sense more efficient than, ‘knowledge-creative performances’ associated with innovative technology leaders in the advanced countries. In other words, we assume that a ‘technology-driven network of production’ geared towards global markets is related to the convergence and interaction between a ‘new institutional, or organisational logic’ and a ‘new technological paradigm’. Consequently, this has contributed to a ‘highly interactive process of innovation’ and the ‘interpretation of market and organisation’. The ‘organisational logic’ occurring at the global level – rather than the domestic level – invariably stemming from networks of firms is assumed to mediate and condition, to some extent, the abstract ‘market logic’.2 That is, innovative MNCs require ‘innovative technology’ and ‘innovative organisation’. Related to previous analysis, it is understood that Porter’s (1990) notion of ‘competitive advantage’ fails to reflect the changes in the world system outside the nation-state with its exclusive emphasis on internal factors, dealing mainly with some variables at the firm, industry and national levels. On the basis of network enterprises, the ‘marketmaker model’ dynamically attaches much importance to MNCs’ organisational innovativeness in the making of a meso-market in industrial markets at the international level following the advent of the international trade regime. As mentioned above, even though in some sense globalisation addresses strongly the need for national innovation systems, it is assumed that the neo-Schumpeterian model can move beyond the domain of ‘national systems of innovation’. Internationalisation of knowledge-intensive technology generated by national MNCs gives rise to a reconsideration of national systems of innovation, because the latter cannot encompass the spill-overs of competitiveness arising from big business with global production networks (GPN) aimed at international markets by keeping the focus on innovative activities at the domestic level. In a broader sense, we have characterised the importance of this model as being almost wholly dictated by ‘inter-penetration’ of market – even at the international level – and business organisation which subsequently gives rise to a network enterprise, especially the ‘technology-driven network of production’ more recently witnessed in the East Asian region. A network enterprise needs to be distinguished

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from a so-called international production network (IPN) which might be identified as market leader-centred, or advanced country-biased. By contrast, though related to IPN, the notion of network enterprises focuses upon the behaviour of NIEs’ electronics MNCs identified as marketor production-driven coordinators in conjunction with an innovative organisational coordination behind the business organisational logic recreated by NIEs’ firms in the global operation of economic activities. In that sense, one should not underestimate the outcome of market coordination derived from the Korean conglomerates alone, be it the whole chaebol, or individual ones. When we consider the term ‘chaebol governance’ – a conventional categorisation of the economy, such as macro (‘the economy’), meso (‘the industry’), and micro (‘the firm’) – it may not apply to the Korean industrial system. Instead, unlike the European national champions, we argue that even individual Korean chaebol within the electronics industry can be analysed at the meso-level rather than at the micro-level in terms of its proportion and weight within the overall Korean economy partly by virtue of its enhanced market power deriving not only from its technological capability, but also from rapidly changing market conditions, be they domestic or international. At the national level, chaebol governance is composed of two kinds of power: one is market power (economic actor) and the other political power (political actor), and both kinds of power are mutually reinforcing. In practical terms, market power as such, especially in the advanced markets, tends to strengthen a firm’s bargaining power in dealing with political power in relation to state power. For example, it seems more than likely that Samsung’s political power has increased remarkably due to its success story in semiconductors in highly competitive international industrial markets, as a result of which Samsung can be assumed to have achieved a more powerful position in relation to the Korean government. With regard to anti-dumping measures, in operational terms the differences between the US and EU anti-dumping systems show that the EU anti-dumping system has given foreign firms greater incentives to rely on a relocation of production, that is FDI, rather than export-driven strategies. Compared to the US anti-dumping measures, and their similar trade regulations, features mainly peculiar to the EU trade regulations, and partly to ‘Europeanness’ itself, have had far-reaching effects upon Japanese and Korean electronics firms, encouraging them to choose FDI. In terms of transparency, discretion and range of liberal application, compared to the US, the EU procedure has been more restrictive, ambiguous, relatively unpredictable and on some occasions politically

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motivated by member states. This uncertainty has rendered reliance on conventional export-dependent strategy more ‘risky’ when faced with EU anti-dumping duties (Y. C. Kim, 2002). Unlike a response to the US anti-dumping action, as far as FDI by Asian MNCs is concerned, it can well be argued that an EU anti-dumping action against Japanese and Korean firms is more likely to cause Japanese and Korean MNCs to invest outward FDI, or to become insiders in the EU. In contrast with other NIEs’ multinationals, the leading Asian MNCs’ (Japan and Korea, and possibly Taiwan) ‘globalising’ tendency has been strongly related to evoking trade regulation measures initiated by the EU leading companies, as the European MNCs have been mainly concerned with regionalisation of outward FDI directed towards the European region. Arguably, when it comes to globalisation of big business, the practices of Asian MNCs from Korea and Japan should have a different character from most of the Asian NIEs’ firms, particularly those of Singapore and Hong Kong. By contrast with Japan and Korea, the latter have tended to remain ‘regional’ in that they have tended to place a high priority on the regional consumer market rather than advanced markets such as the US and the EU. The same can be said of European large firms (except in the UK) which cling to Europe in terms of outward FDI. The European MNCs intrinsically have paid overwhelmingly more attention to regionalising in the context of the growing market size for the potential single European market. In this regard, the European ‘regionalising’ MNCs continue to be mostly European firms with international operations, rather than international firms with European operations. Trade regulations deriving from the conflicting dynamism, trade friction between Asian ‘globalising’ MNCs (Japanese keiretsu and Korean chaebol) and European ‘regionalising’ MNCs (national champions, or European champions) have motivated Korean electronics corporations to become more globalised than ever before. It is too early to prove, however, that Asian globalising MNCs have become more globalised than their two major counterparts – the US and the EU – as far as the electronics industry is concerned. Moreover, relative to the US market, traditionally significantly dominated by Japanese electronics companies in terms of technological innovation, or brand recognition, in terms of marketability the Europe-wide single market allowed Korean MNCs to exploit many more of the options available for competitive advantage in particular sectors of the electronics industry. Consequently, Korean ‘globalising’ corporations had proactively to seek to compete against

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major established Triadic rivals to create market power in accordance with the globalisation of the electronics industry. In particular, trade regulations initiated by the EU provided the Korean electronics chaebol with a paradigm shift towards foreign markets, and showed that Korean electronics firms may no longer enjoy the advantage of a ‘governed market’. Given the gradual demise of the domestic governed market as well as the relative lack of a substitute for a comparable market, largely attributable to the developed countries’ antidumping policies, the Korean electronics MNCs faced a turning-point in their perception of the market-making which had been orchestrated or protected by the Korean government in the past. Admittedly, these circumstances compelled Korean electronics firms to accelerate the shift in transition from export-led trade to FDI-led market expansion in terms of new market-creating strategy that was expected to be intensified by the ‘single market effect’ and ‘EU enlargement’. There seemed to be the prospect that Central and Eastern Europe would play a similar role to that of Southeast Asia vis-à-vis Korea, when considering emerging market potential in the overall European market considered as a global production network. Compared to innovative technology start-ups in the advanced countries, it is explicitly presumed that innovative organisational coordination based on interpenetration of the organisation and market has manifested itself in the Korean electronics FDI towards international markets. Depending on the presence – imposition or withdrawal – of anti-dumping measures as well as scale economies, Korean electronics companies frequently or strategically experienced production relocations at a regional level, or on occasion ‘reverse inter-regionally’: from the EU to Southeast Asia, from the EU to Central and East Europe, and reverse relocation to the EU. Systemic agglomeration derived from frequent or widespread inter-regional relocation of production helped Korean electronics MNCs to organise a market-driven ‘network enterprise’ that involved the capacity of firms for the ‘coordination of the production process’, extending to Southeast Asia, Eastern Europe and recently China in the context of Korean multinationals-led inter-firm and intra-firm linkages connected to production as well as trade. Lastly, in terms of ‘non-zero-sum competitiveness’ considerations, Krugman has underestimated persistently the ownership of MNCs in pursuit of our wealth of nations by concentrating exclusively on the importance of the number of US workers employed by foreign MNCs, given that the trade to GDP ratio is low for the US. International competitiveness should be interpreted as an important issue between

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countries, in that the wealth of nations relies significantly on international performance achieved at the international level such as in world markets rather than the domestic domain. Certainly, the market phenomenon should not be confined to the exchange market. Based on the transforming nature of industry, as manifest in knowledge-driven products, in order to reassert the source of the wealth of nations more precisely, or scrutinise international competitiveness along various dimensions, the nature of markets needs to be divided into sub-categories: sub-markets, or meso-markets such as the production market, industrial markets that somewhat surpass, in qualitative terms, the importance of exchange markets as a whole generally contrived at the macro-level. Specifically, for MNCs, intra-firm and inter-firm transactions have been more often observed in world markets when incorporating the emerging potential of intra-industry trade, as gradually illustrated in the electronics industry. When extended to Asian electronics MNCs, we maintain that in terms of net profit, Korea’s national champion, Samsung Electronics, impressively competed on its own against the European champion, Philips. Whereas Philips achieved a record net profit of $2.77 billion for 1997, Samsung Electronics’ net earmings amounted to $2.8 billion for 1999 of which semiconductors alone accounted for 45–50 per cent of total revenue compared to 90 per cent for 1995. For Korea, depending on semiconductors shown from top ranking export goods by weight (see Chapter 6), qualitatively, analyses of competitiveness in industrial markets, or production markets at the meso (industry or sectoral)-level, provide a better interpretation of the source of the wealth of nations. As suggested by Reich (1990), ‘ownership matters’ for NIEs as well as for the advanced countries. Neo-Schumpeterian logic and the marketmaker model suggest a reason why the wealth of our nations is significantly attributable to NIEs’ corporate ownership, especially individual MNCs’ activities in world markets reliant on the nation-state. The neoSchumpeterian market-maker model is regarded as supplementing a theoretical deficiency or weakness in the conventional dichotomy.

Policy implications Although the purpose of our research is explanatory rather than normative, it is worth reflecting briefly on some policy implications arising from it. First, with regard to Korea’s business conglomerates, we have to pay much more attention to the particular industrial sector of individual chaebol rather than the chaebol as a collective of big business when it

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comes to international competitiveness alongside knowledge-intensive technology. According to the performance resulting from the merger of Hyundai Electronics and LG Semicon in semiconductors, forced by the Korean government following the Asian financial crisis, Korean economic restructuring, and in a narrower sense, corporate restructuring, should be reviewed or examined more seriously in terms of international competitiveness. This implies that corporate restructuring, especially, inter-chaebol M&A, must be based on the extent to which the industry or industrial sector is competitive in international markets. From an industry organisation perspective, it is likely that non-marketdriven M&A may negatively affect the destiny of particular industrial sectors, at worst leading to the surrender of the highly competitive position that the industry has achieved so far in the advanced markets. As for world markets, a careful understanding of the notion of industrial market is vital to the market power of Korean electronics MNCs significantly dedicated to the wealth of nations. Second, in practical terms, when faced with the advent of an international trade regime, combined with the rise of the single market, particularly since the Asian financial crisis, we emphasise that the Korean government should distinguish between ‘the state as the marketplace player’ and ‘the state as macro-organisational actor’ (Kim and Kim, 2006). For policy-makers taking responsibility for economic restructuring, given that the Korean government’s role has substantially shifted in favour of Korean corporate power, the Korean government tended to function as a naïve political actor at the macro-organisational level rather than taking a governmental role of a conventional kind at the macro-economic level which in a crisis, it may be argued – implicitly or intentionally – is required for a short period of time. As excess deregulation may give rise to reregulation effects, inappropriate restructuring of Korean chaebol based on politically prejudiced aspects rather than on internationally competitive dimensions accurately measured by Anglo-American standards should be eliminated, on the grounds that the Korean industrial system has encountered a unique and serious crisis. Third, for Asian NIEs, we need to examine or clarify a reality of the economic liberal agenda, mainly stressed by international institutions such as the IMF and the World Bank, more carefully in terms of international competitiveness. Apparently, it is a possibility that since the Asian financial crisis, the reckless importation of the liberal international perspective unwillingly signalled by Korean government when totally subject to international finance will undermine the achievements of Korean innovative MNCs over the last decades. Following the

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overall economic reform originating from the IMF, corporate restructuring targeting Korean chaebol at the national level should be reconsidered by a reinterpretation of the causes of the ‘wealth of nations’. Thus it is necessary to emphasise the growing significance of the presence of big business as market-maker in terms of the survival of Asian NIEs. It can be assumed that a drastic dissolution of the Korean industrial system, unilaterally centring around Korean chaebol, should not be the only way, or the first and last alternative, to becoming more competitive internationally, when we consider the importance of severe competition among big firms addressed by Porter (1990). For the electronics industry, as the contrasting European and Korean experience has shown, in terms of net profit, Korean electronics MNCs, exemplified by Samsung Electronics, LG Electronics, the former Daewoo Electronics and the former Hyundai Electronics, have been comparable to, and on occasion surpassed, their European counterparts. According to Smithian economic orthodoxy, for whatever reason, it must be an ‘exception’ to prove that few big corporations in even one small country – Korea – might have emerged to counter or tackle challenges from a similar number of or even slightly more companies in a Europe-wide region until recently. As a matter of fact, it should not be forgotten that this kind of historical experience is rare. When we think of Asian NIEs’ catching-up strategies, the Gerschenkronian perspective may still be of much value, but it needs to be modified in a narrower sense, as a way of paying more attention to individual enterprises rather than the industrial system at national level, significantly affecting the overall industrial system in terms of the nature of ‘new’ technology. Fourth, the more significant policy option is related to the question of how far this neo-Schumpeterian model can be applicable in the long run or extended to other cases in the context of a sustainable development strategy. Depending on the reidentification of international competitiveness, this paradigm helps us to acknowledge that industrial capitalists in latecomer economies are increasingly likely to play a critical role in the creation of the wealth of nations compared to interventionist governments. Thus this has contributed to a shift in relations between state and corporate power in favour of the latter. This outcome has derived from the industrial system peculiar to the Korean economy, partly at the expense of immobility and control in the labour market compared to the typically flexible or highly mobile character of its Anglo-American counterparts. Given the non-existence in Korea of flexible capital markets more generally available in Western countries, the ‘high-debt model’, driven by a very high level of domestic savings,

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has allowed the Korean chaebol to enjoy significant financial advantages originally contrived by the Korean government. For the future, despite the recent gradual reduction in the proportion of Korean chaebol debt/equity, what concerns us is that Korean electronics MNCs seem to have become much more vulnerable to international finance markets mainly due to the weaker domestic capital market. This will make Korean electronics MNCs much more vulnerable financially, in the sense that rapid capital flows are beyond their capacity. Ironically, the financial improvement in Korean big business in terms of debt/equity will render them almost wholly exposed to financial flows that are intrinsically uncontrollable. The seemingly financial instability that has followed the emergence of Korean big organisations as market-makers might be expected to demand institutional devices in connection with government, be they at firm level or at national level to contend or constrain spill-over effects accompanied by the advent of the liberal international regime. Finally, as Porter (1990) and Pavitt (1990) suggested, the number of firms competing within an economy is more important to international corporate success than the size of individual firms as in chaebol. The chaebol have been characterised as having simultaneously tended to invest in the same or similar industries – such as the electronics industry – even though the Korean government has strategically tried to persuade them to avoid duplication and overcapacity. Paradoxically, we assume that this phenomenon has given rise to internationally competitive electronics MNEs, especially in semiconductors. Under the Kim Dae-Jung administration, particularly, it appeared that the advantages drawn from Porter and Pavitt’s contention might no longer be applied to the Korean economy, because the current economic policy options that the Korean government has proposed to undertake tended to overlook this hypothesis associated with the importance of the number of firms. The global economy at the beginning of the twenty-first century can seem like a man caught halfway up a cliff – he cannot go up, he cannot go back, but if he stays where he is he will die (Turner and Kim, 2004: 1). Like a person at the cliff face, most chaebol have been muddling through under the new global era. By contrast, Samsung Electronics has survived in the global market following forced corporate restructuring since the Asian economic crisis. Moreover, we argue that not only chaebol but also governments have to realise what both sides have to do in the near future. The neo-liberal framework imposed by the IMF, and particularly the corporate restructuring of the chaebol, should have been re-examined. The Roh Moo-Hyun administration has been

Conclusion and Policy Implications 235

called a participatory government in terms of its reforms and unity. Roh’s anti-chaebol policy agenda has motivated the chaebol to withdraw their support for his economic initiatives linked to social democratic reforms. When Korea’s global competitiveness is concerned, dissolution of the Korean industrial system, centred around the chaebol, should not be seen as the only solution. When we consider the importance of knowledgeintensive technology in terms of our nations, a discussion of the ownership of Korean big business should be dealt with more carefully in the face of hostile M&A strategically contrived by proactive foreign investors since the Asian crisis. Following Reich’s (1990) stance, especially for a small country, ownership matters!

Notes 1. Introduction 1. According to Eden (1993: 5), political scientists traditionally use the term MNC, while economists prefer to use MNE, reflecting that ‘all multinationals are enterprises’, but not all are incorporated. 2. According to Ernst (1999), as an organisational response in face of globalisation, corporations are ‘forced to integrate their erstwhile stand-alone operations in individual host countries into global production networks’, thus leading to a shift from partial to systemic integration. 3. Academically, in industrial organisations or industrial economics, it is understood that the terms ‘firm’, ‘organisation’ and ‘enterprise’ are interchangeably used in similar connotations. This also applies here (Jacobson and Andreosso-O’Callaghan, 1996). 4. Dunning (1998) compares hierarchical capitalism with alliance capitalism that is a new trajectory of market capitalism. According to Dunning (1998: 34), alliance capitalism portrays ‘the organisation of production and transaction as involving both co-operation and competition between the leading wealth creating agents’. 5. When measured on the basis of employment levels, or number of affiliates, Germany exhibits a much more prominent position, though still behind the UK (Thomsen and Woolcock, 1993: 64). 6. In this regard, Krugman maintains that exports account for only 10 per cent of the American economy compared to 90 per cent being attributable to domestic factors.

3. International Competitiveness and the Shifting Contours between State and Corporate Power 1. The state is an institutional entity of political power. To look upon the state as a part of society does not necessarily mean that the state is simply a reflection of society. Despite its conceptual ambiguity, this study will use the term ‘government’ or ‘state’ alternately. The term ‘government’ is often regarded as synonymous with the ‘administration’ or ‘the executive’. In some respects, the ‘state’ is the government administrative bureaucracy and political executive (Zysman and Doherty, 1995; Lee, 1997: 8). 2. Note that Woo-Cumings and Woo are the same author.

4. The Political Economy of Technology in Global Markets and Transforming Governance of Korean Chaebol 1. Importantly, according to Ernst and Guerrieri (1998: 202), Japan’s trade pattern has changed remarkably since 1992. Japan’s import of electronics

236

Notes 237

2. 3.

4. 5.

6.

7.

8.

9.

10. 11. 12.

13.

products from Asia has risen from less than 31 per cent in 1988 to more than 48 per cent in 1993. With respect to the term ‘the chaebol’, we prefer to deal with it as plural rather than singular throughout the research. According to Cawson (1997: 186), market power as the political role of firms stems from ‘power relations within market transactions’ involving ‘market relationship toward socialisation of impersonal relationships, and a tendency towards closure’ such as cartels, etc. Porter takes many examples including Japan, Korea, Singapore, France and the UK (1990: 619). According to KITA, in 1987, the R&D expenditure ratio was more concentrated in the top five chaebol. It amounted to 34.7 per cent compared with 30.1 per cent in 1993. For the top ten chaebol, the share was 42.7 per cent in comparison with 39.1 per cent in 1993. It has been diversified since the Asian financial crisis. In particular, the big three chaebol, Samsung, Hyundai and LG, have continually built up human resources through institutionalisation of in-house training courses and programmes at the firm level, leading to maintenance of high quality in their workers in consumer electronics, semiconductors and telecommunications. Textile firms such as Seoul Trading, Daewoo, Sunkyung, Wonjin and Samdo showed a deep interest in semiconductors. Other firms from different business sectors also intended to join this industry, especially, Lotte, Hankookhwayak, Ssangyong, Donga Construction, Dongkook Steel and Kookje. In the end, some of them cancelled their plans just after investigating the possibility of entering. Other firms actually invested, and later, either dropped out in the early stage, or merged with existing firms. For example, Wonjin was merged with Samsung. Following government organisational reform in December 1994, the MTI was weakened owing to a change in the jurisdiction of the information industry to the newly organised Ministry of Information and Communication. By 1979, investment in the electronics industry amounted to only $412 million, far below the originally planned $1.19 billion. Moreover, most firms preferred to concentrate on consumer electronics (L. Kim, 1997b: 152). During a period of five years (1986–90), a total of nineteen anti-dumping measures were applied to Korea, out of a total of 173. Some scholars point out that the year 1983 constituted a turning point in the development of semiconductors (S. R. Kim, 1996, 1998; Choi, 1994). It is acknowledged that the Hyundai group felt the need to meet demands related to semiconductors from Hyundai-related subsidiaries such as automobiles, shipbuilding and heavy machinery businesses in order to reinforce their competitiveness in these industries. Historically, it happened in 1996–7 in Samsung’s motor industry project, which was merged with Renault after the IMF crisis. According to Dataquest released in September and November 1997, memory chips accounted for 26.4 per cent, and non-memory, 73.6 per cent, respectively.

238 Notes 14. In 1998, Samsung with 14.6 per cent was followed by NEC (10.3 per cent), Hitachi (9.3 per cent), Toshiba (6.6 per cent) and Hyundai (5.9 per cent). The ranking order of the top five was the same in 1995. 15. Especially since the 1980s, as part of stronger US trade policies, Democrats and some Republicans in Congress sought to push for greater use of US trade law remedies, including stronger Section 301 unfair trade practice enforcement. In 1988, a ‘Super 301’ was enacted, amounting to a reporting requirement for foreign trade barriers. 16. Interview with Senior Manager, Corporate Strategy Group, Management Planning Office, Samsung Electronics, 4 March 1999. According to one Samsung executive, ‘in the digital age, only number one company will survive, while number two, or number three is of no significance’. 17. In 1995, LGE acquired Zenith Electronics Corporation, an American company manufacturing consumer goods, resulting from a twenty-year OEM partnership. LGE’s decision came from its corporate strategy to focus upon Zenith’s US outlet network and the Zenith brand name in the form of OBM (Hobday, 1997b). 18. Interview with Senior Manager, Information & Home Appliance Business Digital Product Team, Overseas Sales & Marketing, 17 March 1999. According to this interviewee, in Europe, Philips has not succeeded in developing DVDP. At this moment, Philips depends on Toshiba OEM. Thomson manufactures DVDP by means of Panasonic OEM. 19. As a matter of fact, Korea’s share of DRAM may be beyond the amount revealed. One of the big three chaebol’s managers argues that the three Korean chaebol account for 45 per cent in world market. He adds that the Korean companies are unwilling to reveal the exact amount of DRAM because they are reluctant to be a target of any other global competitors. Interview with Manager, Memory Sales Strategy Group, Memory Chips & Marketing Division, Samsung Electronics, 17 March 1999. 20. Interview with Manager, Memory Sales Strategy Group, Memory Chips & Marketing Division, Samsung Electronics, 17 March 1999. 21. TFT-LCDs (the thin film transistor liquid crystal display) aim to replace the cathode ray tube (CRT). The availability of TFT-LCD is widespread: video projectors, virtual reality helmets, digital cameras and camcorders, and airplane seat TVs. 22. According to Display Research (2002), the two Korean producers in 2001 have accounted for 40.6 per cent of world markets, compared to 36.6 per cent for Japanese companies. 23. Most governments – including many in East Asia – tended to adopt the European standard GSM, which is now used in about 65 per cent of the world’s mobile networks, while Korea chose to opt for a rival format called CDMA technology, which is used in around 15 per cent of the world’s mobile networks. 24. Interview with Manager, Memory Sales Strategy Group, Memory Chips & Marketing Division, 17 March 1999. 25. As L. Kim argues, Hyundai Motors is a case in point. 26. Ironically, Japanese conglomerates, for example Sony, provided Korean suppliers with more support than Korean chaebol ever did.

Notes 239 27. The evaluations conducted by Forbes Global depend on net profits, return on invested capital and growth in turnover. 28. Also see http://www.samsungelectronics.com. 29. Interview with Executive Director, Strategy & Marketing, Visual Media Division, Information & Home Application Business, Samsung Electronics, 5 March 1999. 30. Interview with Senior Manager, Sales & Marketing Video Products, Samsung Electronics, 5 March 1999. 31. Interview with Senior Manager, Strategic Marketing Team, Living Appliance Division, Samsung Electronics, 5 March 1999. 32. Ibid. 33. Interview with Assistant Manager, Cooking Appliance Export Team, LG Electronics, 28 January 1999. 34. Interview with Manager, TV Export, Europe Team, LG Electronics, 5 February 1999. 35. Interviews with Senior Manager, Signal Processing Lab. Corporate Technical Operation, Samsung Electronics, 23 March 1998; Product Manager, AV Goods, Samsung Europe Headquarters, 9 December 1997. 36. Risk-taking investment during recession was, especially, illustrated by HEI. When the price of DRAMs sharply declined in 1985, Hyundai continued to make investments, and consequently, by 1993 it was ranked tenth in the world market. By contrast, Daewoo began to scale down its investments, thus leaving it far behind in semiconductors when the market recovered (He, 1996). 37. Interviews with Senior Manager and Manager, Trade Affairs Team, Samsung Electronics, 13 February 1999, and Senior Manager, Signal Processing Lab. Corporate Technical Operation, Samsung Electronics, 23 March 1998. 38. Interview with Manager, DTV Program Management Office, LG Electronics, 3 March 1999. 39. World Semiconductor Trade Statistics (WSTS) observes that worldwide semiconductor sales for 2002 are expected to reach $143.5 billion, a slight increase over 2001, when sales of $139.2 billion are predicted. 40. Despite China’s WTO membership, an international agreement still prohibits US, European and Japanese companies from supplying China with the most sophisticated manufacturing equipment due to their concern that China may be able to use it for military purposes. 41. Interview with Manager, Memory Sales Strategy Group, Memory Chips & Marketing Division, Samsung Electronics, 17 March 1999. 42. Interview with Senior Manager, Corporate Strategy Group, Management Planning Office, Samsung Electronics, 4 March 1999. 43. Interview with Senior Manager, Information & Home Appliance Business Digital Product Team, Overseas Sales & Marketing, Samsung Electronics, 17 March 1999. 44. Interview with Senior Manager, Corporate Strategy Group, Management Planning Office, Samsung Electronics, 4 March 1999. 45. According to Williamson (1975), organisations are considered superior to markets in managing complex and uncertain economic transactions, in that they reduce ‘transaction costs’.

240 Notes

5. European Integration, National Champions and the Politics of EU Industrial Policy 1. In the early twentieth century, opposing Adam Smith, Joseph Schumpeter argued that wealth is created in terms of the intelligent application of new technology rather than residing simply in objects such as gold, silver, etc. In this context, the term, ‘new wealth of nations’ has new implications. For further details, see Forester (1993: 2–3), Grupp (1998) and Chapter 2, this volume. 2. Note that Zysman and Borrus (1994) did not indicate page numbers in this article. 3. In part, such argument emanates from the end of the Cold War. The demise of the Soviet power has allowed for the enhancement of the importance of innovation in ‘civilian technologies’. Western governments have increasingly shifted their attention from military security to ‘economic security’ by focusing on the competitiveness of their national firms (Peterson and Sharp, 1998: Introduction). 4. Originally emphasised by Peterson and Sharp (1998). 5. As some scholars indicated, TNC or MNC have recently already tended to supersede the market mechanisms internationally as well as nationally. See Chandler (1977) and Galbraith (1973). 6. For semiconductors, as an R&D intensive- and capital-intensive industry, according to Lucchini, its cost of entry has risen to a tremendous degree from $30 million in the mid-1970s to about $1 billion around this time because such investments reflect the promising evolution of this industry. 7. As one estimate shows, ‘by the year 2000, more than 80% of all economic activities of the world is to depend on microelectronics’, in an interview conducted with J. P. Dauvin (SGS-Thomson’s economist), cited in Lucchini (1998: 21, note 11). 8. According to Cram (1997: 140–1), in the ICT (Information and Communications Technology) sector at the EU level, ICT firms act as ‘the most influential actors’ in the EU decision-making process. 9. Philips acquired Grundig; Thomson merged with Telefunken, Nordmende and Ferguson; Nokia took control of Oceanic and the German subsidiary of ITT. 10. The European PAL format is applied in most European countries in several versions. The French SECAM system was adopted by communist regimes partly for the ideological reason of preventing their citizens from receiving broadcasts from Western countries. 11. Two requisites existed. First, licensed firms should restrict their export of PAL-compatible CTVs to the European market. Second, within the Community such firms were not allowed to sell small and medium-sized CTVs larger than 20 inches and manufactured outside the EU. 12. According to Cawson et al. (1990), in 1983, in the UK market, Philips and Sony accounted for 8 per cent and 22 per cent, respectively, a slightly different estimate compared with Dai’s (1996) survey. 13. It was estimated that the Japanese VCR production combined to amount to 94 per cent of total world production by 1982 (Cawson et al., 1990: 255).

Notes 241 14. Further details of FDI and EU-related trade regulations are presented in the following chapters. 15. Total import from Korea slightly more than doubled between 1986 and 1987, to exactly 205 per cent. 16. The European system is based on the MAC standard for broadcasts by satellite which has been adopted by major producers and broadcast organisations, also backed by a directive from the EC. 17. It should be noted that some support came from outside the EU. 18. Furthermore, more than 30 per cent of European consumption is characterised by offerings from foreign firms producing in Europe. 19. Also, smaller companies are allowed to join SEMATECH on the condition that the entrance fee of around $2 million is paid. 20. In contrast to semiconductors, following the success of the civil aircraft industry, the US government has decided to spend more on national champions (Busch, 1999: 87–8). 21. Siemens joined alliance with IBM, Toshiba and Motorola to build a 1 billion-bit memory chip project and planned to cooperate with Motorola in setting up a chip plant in the US (Martin, 1996). 22. EU Commission (1994), Panorama of EU Industry 94, Luxembourg: Office of Official Publications of the EC, chapter 10, p. 12 cited in Martin, 1996: 732–3. 23. Contrary to this, Hobday (1995b) indicates that there was no significant acquisition of European semiconductor firms by the US or Japanese firms. 24. Here we need to differentiate between R&D (research and development), R&TD (research and technological development) and RTD&D (research, technology, development and design). R&D is not distinguishable from the other two terms. According to Eilon (1992), however, R&TD is the term favoured by the Commission of the EC. RTD&D places its emphasis on the important function of design. 25. According to Peterson (1997), the appearance of Japan’s programme is described as ‘undreamt of’ by European producers. 26. Initially, EUREKA brought together twenty member states, the (then) EC12, the 6 EFTA (European Free Trade Area) – Austria, Finland, Norway, Sweden, Switzerland and Iceland (joined in 1986) – plus Turkey and the European Commission. Besides these, Hungary, Slovenia, the Czech Republic, Poland, Russian and Romania were admitted later. 27. JESSI was founded by fourteen companies and research institutes from UK, France, Italy, the Netherlands and Germany, scheduled to run during 1989–96. By the mid-1990s, it had expanded to include Austria, Belgium, Denmark, the UK, Finland, France, Germany, Ireland, Italy, Liechtenstein, the Netherlands, Portugal, Sweden and Switzerland. Together, it totalled more than 150 firms, universities and R&D institutes.

6. EU Trade Policies, Korean FDI in the EU and the Emergence of Korean Electronics Multinationals 1. Generally, the concepts of TNC (transnational corporation) and MNC (multinational corporation) can be used interchangeably when applied to academic research in the context of international economy, whereas Hirst

242 Notes

2.

3.

4. 5.

6. 7.

8.

9.

10.

11.

12. 13.

and Thompson (1999) seek to make a distinction between TNCs and MNCs. An MNC can be regarded as a company based on one ‘predominant national location’ while a TNC is closely related to ‘genuine footloose capital, without specific national identification’ beyond the control of particular nation-states (1999: 11). In this book, we do not intend to follow Hirst and Thompson’s typology. Interestingly, at that time the EU subsidised its domestic industries considerably. Fearful that non-EU countries might take retaliatory actions against EU exports, the EU often had difficulty applying the countervailing duties, while essentially, the US government is reluctant to subsidise its domestic industries. As for textile products, in the early 1970s, this process made progress until its complexity gave rise to a multilateral negotiation between the exporters and importers of textile goods, the Multi-Fibre Agreement (MFA), on a global basis. The MFA was renewed periodically throughout the 1970s, 1980s and 1990s. As a result of the Uruguay Round of the GATT, the MFA was renamed the Agreement on Textiles and Clothing and specified a ten-year transition period during which the ATC is expected to be eliminated. Interview with Manager, International Affairs, Co-operation Group, Semiconductor Administration Sector, 23 March 1999. Concerning anti-dumping law users, since 1980 the EU’s Official Journal has provided clear details of the names of the major complaining firms. This information also can provide a picture of parent companies directly involved in some anti-dumping cases or subsidiaries virtually leading anti-dumping complaints in other cases (Hindley and Messerlin, 1996). Interview with Senior Desk Officer, European Trade Team, Ministry of Foreign Affairs and Trade, Korea, 29 January 1999. According to Dicken and Yeung (1999), except for leading Asian MNCs such as those in Japan and Korea (or Taiwan), most Asian MNCs are Asian firms with international operations, rather than international firms with Asian operations. Compared to Japanese and Korean MNCs, they have been neither multinationalised nor globalised to a comparable extent. Market-seeking FDI means that firms produce abroad to gain more effective access to the national or regional market. Resource-seeking includes access to raw materials and technology, etc. For example, ownership advantage also indicates ‘product or process technology, organisation and marketing skills, economies of scale or joint production’ (Micossi and Viesti, 1994: 210). In the US, since the 1988 US Omnibus Trade and Competitiveness Act, third country exports can automatically be included if the value added in the third country is not significant (Belderbos, 1997a). Belderbos applies the trade barrier hypothesis to the Korean case in Europe. In his personal correspondence with the author, Belderbos suggests that ‘it is interesting to see the parallel between Japanese and Korean MNCs’ FDI pattern’. Interview with Senior General Manager, International Trade & Tax Team, 20 January 1999. The respondents include the following: Samsung (8), LG (4), Daewoo (2), Saehan Media (1). Samsung includes Senior Manager, Trade Affairs Team

Notes 243

14.

15.

16.

17.

18. 19. 20.

21.

(1999), Manager, Trade Affairs Team (1999), Deputy Managing Director, Samsung Electronics Manufacturing, UK (1997), Manager, International Affairs, Cooperation Group, Semiconductor Administration Sector (1999), Senior Manager, International Affairs Cooperation Group, Administration Team, Semiconductor Business (2001), Senior Manager, Samsung Electronics Research Institute, UK (2001), Director, EHQ Marketing, Samsung Electronics Europe (2001), Executive Vice President & CFO, Samsung Electronics Europe (2001). In the case of LG, the Senior General Manager, International Trade & Tax Team (1999), Company Secretary, LG Electronics, North of England Ltd. (1997), Senior Producer Manager, LG Electronics UK Ltd (2001), Assistant Manager, Project Sales Group (2001). In the case of Daewoo, the General Manager, Daewoo Electronics Ltd. (2001) and Marketing Director, Daewoo Electronics Sales Ltd. UK (2001). Of these interviewees, only one related Saehan’s investment in the EU to the expected anti-dumping rather than actual anti-dumping cases. It is significant that Saehan Media is indirectly connected to the Samsung Group, as Saehan belongs to the son of its late founder, Lee Byung Cheol. At first, the team manager of Saehan Media was not convincingly able to identify the motivation for the company’s decision to invest in the EU. As a result of his personal re-examination of the decision (made at the request of the researcher), he concluded that the protectionist hypothesis applied to Saehan’s investment in Ireland. Interestingly, Young et al. (1991: 9) proved that Saehan’s investment in Ireland was the result of protectionist fear, according to a survey of interviewees with Saehan Media undertaken in the late 1980s. The team manager of Saehan also added that corporate strategy often demonstrating internationalisation can be more generally used to conceal the principal motivation for investment. There is a distinction between a latecomer firm and a late entrant. Whereas the former has no advantages in terms of brand, expertise and market access, the latter is a well-established and well-equipped firm that can make a strategic decision to enter a new industry, as exemplified by IBM’s strategy in the PC market with its broader range of knowledge, resources and existing brand strategies (Mathews, 1999: 7). In July 1997, Korea filed a complaint against the US at the WTO alleging that it had failed to curtail unfair anti-dumping duties on Korean CTVs. As a result, on 2 October 1998, almost two months earlier than the decision by the EU, the US made a decision to terminate anti-dumping duties imposed on Korean-made CTVs. According to an interview with Senior Product Manager, LG Electronics UK, the anti-dumping duties at that time were basically targeted against the imports originating in Turkey rather than Korean exports. Interview with Samsung Electronics. Interview with Samsung Electronics. According to a manager of Samsung Electronics concerning this complaint, the result seems to be still debatable, because the problem relates to a matter of interpretation of a conclusion by the WTO. Ironically, the US press insisted that the decision undertaken by the WTO was a ‘US victory’. Interview with Senior Manager, Corporate Strategy Group, Management Planning Office, Samsung Electronics, 4 March 1999.

244 Notes 22. While Hynix can make 0.18-micron chips, Samsung, Micron and Infineon have achieved 0.15-micron technology. Business Week, 1 October 2001. 23. Interview with the Chief Manager, Central Bank Cooperation Group, International Relations Office, Bank of Korea, 22 January 1999. 24. Except for the manufacturing sector (52 per cent), the data indicate trade (23 per cent), mining (6 per cent), construction (2 per cent), transportation and storage (1 per cent) and other (16 per cent). 25. Interview with Director, Europe, Africa & Russian Division, Korea TradeInvestment Promotion Agency (KOTRA), 29 January 1999. 26. Interview with Manager, Trade Affairs Team, Samsung Electronics, 13 February 1999. 27. Interview with the Manager, Cooking Appliance Export Team, LG Electronics 28 January 1999.

7. Conclusion and Policy Implications 1. As Johnson (1992: 81) argued, ‘big business is not a separate interest group in Japan; it is the prime beneficiary and virtual raison d’être of the Japanese system    it is meaningless to speak of the role of big business in Japanese politics; the two are indistinguishable’ (cited in Dean, 1999: 91). 2. Such explorations are quite different from the neo-classical perception in which firms are basically thought of as a ‘black box’ or the activities inside the business organisation are viewed as ‘a mere production function’.

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245

246 Bibliography The Ministry of Foreign Affairs and Trade (1998a), ‘EU Terminates Anti-dumping Regulation on Korean-made CTVs’, Press Release, 98/551 (in Korean) The Ministry of Foreign Affairs and Trade (1998b), ‘Response to the EU’s Dumping Complaint against Korean-made DRAM’, Internal Documentation (in Korean) World Bank (1987), World Development Report, Oxford University Press

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Bibliography 247 Kim, D. K., Chief Researcher, World Economy Department, Samsung Economic Research Institute, 25 January 1999 Kim, H. B., Company Secretary, LG Electronics North of England Ltd., 27 November 1997 Kim, H. C., Marketing Director, Daewoo Electronics Sales UK Ltd., 15 December 2001 Kim, H. G., Assistant Manager, Cooking Appliance Overseas Business, American Export Team, LG Electronics Co. Ltd., 28 January 1999 Kim, J. H., Senior Manager, International Affairs Cooperation Group, Administration Team, Semiconductor Business, Samsung Electronics Co. Ltd., 8 November 2001 Kim, Y. H., Manager, Video Pal Team, Multimedia Overseas Sales Dept, LG Electronics Co. Ltd., 28 January 1999 Kim. Y. H., Director and Company Secretary, LG Electronics UK Ltd., 18 November 1997 Koo, J. H., Executive Vice President & CFO, Samsung Electronics Europe, 4 December 2001 Koo, K., Assistant Manager, Project Sales Gr., LG Electronics Inc., 4 December 2001 Kwak, D. Y., Assistant Manager, Cooking Appliance Export Team, LG Electronics Co. Ltd., 28 January 1999 Kwon, O. H., Deputy Manager, A/V Overseas Sales, Video NTSC Export Team, USA & Japan Part, LG Electronics Co. Ltd., 28 January 1999 Lee. H., Senior General Manager, International Trade & Tax Team, LG Electronics Co. Ltd., 20 January 1999 Lee, K. S., Senior Manager, Signal Processing Lab. Corporate Technical Operations, Samsung Electronics Co. Ltd., 23 March 1998 Moon, C., Manager, Trade Affairs Team, Samsung Electronics Co. Ltd., 13 February 1999 Oh, H. D., Senior Manager, Sales & Marketing Video Products, Samsung Electronics Co. Ltd., 5 March 1999 Paek, B. J., Executive Director, Strategy & Marketing, Visual Media Division, Information & Home Appliance Business, Samsung Electronics Co. Ltd., 5 March 1999 Park, C. S., Chief Manager, Central Bank Cooperation Group, International Relations Office, Bank of Korea, 22 January 1999 Park, H. J., Senior Manager, Strategic Marketing Team, Living Appliance Division, Samsung Electronics Co. Ltd., 5 March 1999 Park, Y. C., Product Manager, AV Goods, Samsung Europe Headquarters, 9 December 1997 Ryu, C. I., Senior Manager, Trade Affairs Team, Samsung Electronics Co. Ltd., 13 February 1999 Shim, H. J., Senior Manager, Information & Home Appliance Business Digital Product Team, Overseas Sales & Marketing, Samsung Electronics Co. Ltd., 7 March 1999 Sohn, D. H., Representative, London Representative Office, Bank of Korea, London, 21 December 1997 Song, D., Director EHQ Marketing, Samsung Electronics Europe, 28 November 2001

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Index NB: Page numbers in bold refer to figures and tables Abbott, J. 2, 14, 32, 162 ACER 121, 213 ADI 121 Advanced Institute of Technology (SAIT) 95 AEG 157, 171, 201 Africa 120, 211 Airbus 36 alliance capitalism 236n Alusuisse 171 American Chamber of Commerce (AmCham) 172 AMI 99 Amsden, A. 1, 57, 61, 69, 83, 189 Anam 100 Andreosso-O’Callaghan, B. 7, 17, 81, 89 Anglo-American economies 224, 233 anti-dumping 171, 177, 196–207 audio tapes 198, 204–7 car radios 199, 204–7, 207 CD players 198, 204–7 CTVs 193, 195, 197–200, 198, 206 as FDI incentive 173–6 MWOs 198, 201 protection 164–5, 171–3 semiconductors 201–4, 202 systems 228–9 USA and 168–70 VCRs 198, 200–1 video tapes 198, 204–7 Anti-dumping Agreement (WTO) 164 Anti-Trust and Fair Trade Law 70, 168 Appeal 111 Apple 125 Argentina 26, 36, 168 Ashgate, M. 173

Asia 12, 53, 58, 64, 70–1, 220–3, 231–3 EU trade policies and 178, 181, 201, 206, 210–13, 211, 213 single market 163, 174–6, 175 financial crisis 38, 51, 70, 204, 209, 232 global markets 87, 89–90, 106–7, 112, 122, 129 global markets and 84, 100, 119–20 model of industrialisation 52 national champions and 134, 146, 151, 159 tigers 40, 83, 226 see also East Asia; Southeast Asia ASIC 96–7 Association for Legal Audio-Radio Measures (Alarm) 205 AT&T 158 Athanassiou, N. 93 audio cassette tapes 195, 197, 198, 204–7 Auerbach, P. 7 Augier, M. 17 Australia 168 Austria 156, 210, 211 Bae, J. 83, 128 Balassa, B. 57, 83 Bang & Olufsen 142 Bank of Korea 70, 208–10, 213 Bark, T. 191 BASF 172 Basic Regulation 167, 170 Belderbos, R. 177, 183–6, 189, 194 single market and 163, 165, 169–70, 173–4, 176 Belgium 210

266

Index 267 Benito, G. 179 Bernard, M. 83, 127 Best, M. H. 2–3, 54, 128, 223 Bianchi, P. 166 big business 47–50 corporate governance and 56–68 dynamics 27–39 Big Five (chaebol) 89 Bloom, M. 102 Borensztein, E. 33 Borrus, M. 46, 76, 80 national champions and 130–1, 134, 138–9, 149 Bosch 147 Bourke, T. 177 Bowen, H. P. 138, 141–2, 144–5 Boyer, R. 26 brands, world class 125 Brazil 26, 36, 85, 165, 168 Brewer, T. 176 Britain 34, 38, 141, 154, 187 see also United Kingdom (UK) Brussels 136, 154, 172 Korea Mission in 173 Buigues, P. 181 Bull 157 Busch, M. L. 148, 150–1 Business Korea 90, 106 business strategy factors (TFT-LCD) 110 Business Week 107, 124, 126 CAE 96 Canada 168, 177, 192, 196 Candy 201 Canon 126 Cantwell, J. 32, 34, 36–7 Capitalism, Socialism and Democracy (Schumpeter) 17 car radios 195, 197, 199 Cardot, O. 147 Carmen Electronics 190, 207, 207 Castells, M. 41–4, 114 Castley, R. 53, 83–4, 127 cathode ray tubes (CRTs) 109, 117 Caves, R. E. 3, 179

Cawson, A. 3–4, 8–9, 18, 45, 62 EU trade policies and 171, 186, 222 global markets and 81, 84–5, 88 national champions and 135, 138, 140–3, 142, 146–7, 159 CCIR (Consultative Committee for International Radio) 147 CD players 186, 195, 197, 198, 204–7 CDs 102, 142–6 Central and Eastern Europe 216–17, 230 Cerny, P. 64 CGE/Alcatel 157 chaebol 3, 5, 221–2, 225–6, 228, 230–4 EU trade policies and 161–3, 176, 208–9, 211, 213, 219 globalisation of 214–18 trade protectionism 188, 191, 195–6, 204, 207 governance of 82–97 electronics R&D and S&T 94–7 in global competition 87–94 industry and firms 84–5 reciprocal subsidy 85–7 market makers and 22, 26, 36, 43, 45, 51 state and corporate power 52, 57–8, 60–2, 64–72, 75, 78 ‘Chaebol Republic’ 68 Chai, D. 64 Chan, S. 66, 208 Chandler Jr, A. D. 9, 17, 21–4, 27, 29, 38, 226 Chang, H. J. 47, 71–3, 86 Chang, K.-S. 68 Chataway, J. 77, 93 Chelsea Football Club 116 Cheong, Y. R. 70 Chesbrough, H. 29 China 47, 68, 84, 122, 124, 230, 239n EU trade policies and 197, 200, 206, 217–18 Cho, D. S. 9–10, 92, 125–6, 131, 226 market-makers and 21, 26, 35, 38–41, 50–1

268 Index Choi, D.-S. 99–100 Choi, Y. 86–7, 102, 120 Choung, J.-Y. 94 Chun, Doo-Whan 60, 68 Chung, H. S. 172 Chung, Ju-Young 68 Citizens’ National Bank 69 Clark, C. 66, 208 Clinton, President Bill 15 Coase, R. H. 81 Coca-Cola 15 code division multiple access (CDMA) 109, 111, 111, 123 Coen, D. 53, 171–2 Cohen, S. S. 15 colour television see CTVs Commerce (DoC), US Department of 169, 185, 202 ‘Commission intermediary’ 172 Committee of Microphonic Producers and Connected Technologies 204 ‘Community interest clause’ (EU) 167 Compact Committee 204 compact discs see CDs Compaq 105, 125, 126 Competition Directorate 147 competitive advantage 16–17 Competitive Advantage of Nations (Porter) 16 consumer electronics industry 98–9, 139–49, 140 adaptation to overseas markets 101–5 digital 105–12 export-driven 99–101 world class brands 125 coordinators, market 47–50 Corning Glass Works 117 corporate power see state and corporate power Costa Rica 15 countervailing duties 165–6 Cowles, M. G. 171–2 Cram, G. 105, 144 Cram, L. 138 ‘Creative Destruction’ 27 Cremer, J. 32

CTVs 170, 186, 217 anti-dumping and 193, 195, 197–200, 198, 206 global markets and 99–101, 113, 117–19 national champions and 140–2, 142, 146–7 trade protectionism and 190, 191, 193, 195, 204, 206

Daehan Electronics 99 Daehan Semiconductors 117 Daewoo Electro-Components 190, 194 Daewoo Electronics 114, 190, 194, 199, 233 Daewoo Group 68, 145, 146, 214, 217, 234 global markets and 90, 94, 96–7, 96, 100, 103, 114, 119 trade protectionism and 188–9, 191, 197, 198, 201, 206–7 Daewoo Orion 190, 194 Dahrendorf, R. 2, 11, 22 Dai, X. 84, 135–6, 143–4, 143, 148 Daimler-Chrysler 116 Davignon, E. 154, 156–7 Defense (DoD), US Department of 36, 151 Del, E. 133 Delapierre, M. 13 Dell 116, 126 DeMartino, G. 26–7 Denmark 156, 210 Dent, C. M. 189, 196, 209, 211, 216 Japanese FDI and 177, 179, 181, 182 DGD-Ates 152 Dicken, P. 44, 50, 162–3, 174–5, 175 digital consumer products 105–12 Digital TV 105–6, 122 Digital Video Express (Divx) 107 signal processing (DSP) 95 video broadcasting (DVB) 148 video disc player (DVDP) 106–7, 109, 124–5, 126, 190, 196

Index 269 Direct Remedy against Unfair Merchandise Committee (DRUM) 201 dot-com boom 109 Drache, D. 26 DRAMs 150, 190, 193, 196, 199, 202–3, 202, 212 global markets and 87, 94–6, 102, 103, 107, 123, 124 Dretske, F. 29 Du Pont 171 Dunn, D. 106 Dunning, J. 3, 11, 14, 39, 45–7, 182 Dutt, A. 2, 23 DVD players (DVDPs) 106–7, 109, 124–5, 190, 196 worldwide demand 126 DVDs 105–7 East Asia 1, 59, 84, 200, 226–7 miracle 14, 57 NIEs 33, 35, 39–46, 49, 62–3 semiconductor industries 125, 127 East Germany 117 Economic Planning Board (EPB) 60–1, 72 Economics for Investors 211 Economist 123–4, 158, 197 Eden, L. 2–4, 20, 26, 48, 131–2 Education, Ministry of 74 EECA 202, 203 Eight-Year Electronics Industry Development Plan (1969–76) 99 El Kahal, S. 16–17 Electronics Industries Association of Korea (EIAK) 96, 101, 109, 112, 121, 197 electronics industry 83–4, 85–7 consumer 98–9, 139–49 European Union and 154–9 global context 97–128 MNCs and Samsung 112–28 state–private sector 97–112 multinationals see under European Union (EU) trade policies pathway 39–47 market-driven ‘network enterprise’ 41–4 MNCs and 44–7

R&D and S&T 94–7 subsidy 85–7 Electronics Industry Export Cooperatives 101 Electronics Industry Promotion Law 99 Electronics and Telecommunications Research Institute (ETRI) 95, 100 Encarnation, D. 186 enterprises and responses 155–8 Ericsson 123, 125, 126 Erker, P. 153 Ernst, D. 5, 9, 17, 45–6, 55, 66, 77 global markets and 82, 84, 101 ESPRIT 136, 154–8 Esso 171 Euh, Y. 61 EUREKA 138, 155-8, 241n Europe 12, 15, 59, 176, 181, 211, 213, 231 in global context 81, 84, 113, 115–20, 126, 138–54 consumer electronics industry 139–49 semiconductors, governments and firms 149–54 integration see national champions market 6 -makers 21, 34–5, 39, 42, 46–7 single 47, 163–76: trade protectionism rationale 163–7; trade regime 168–76 mergers and acquisitions in semiconductors 150 European Association of Consumer Electronics Manufacturers (EACEM) 136, 173, 197, 200 European Coal and Steel Community 171 European Commission (EC) 102, 132, 136–8, 154–5, 173 European Committee of Manufacturers of Electrical Domestic Equipment 201 European Council of Chemical Manufacturers Federation (CEFIC) 205 European Council of Ministers 170

270 Index European Economic Community 166 European Research Coordinating Agency (EUREKA) 147 European Technology Assessment Network (ETAN) 155 European Union (EU) 2, 6, 12, 18, 59, 79, 140, 147 Commission 169–71, 176, 185–6, 197, 200–1, 203–6 global markets and 84, 88–9, 91, 108 industrial policy see national champions market-makers and 44–5, 49 technology policy 133–8 European Union (EU) and R&D 154–9 ESPRIT and EUREKA 155–8 JESSI and semiconductors 158–9 technological community 154–5 European Union (EU) trade policies 161–219, 220–30 passim electronics MNCs and Korean FDI 208–18, 216 Japanese electronics FDI and 177–88, 178 local content rule 194 single European market and 163–76, 167 trade protectionism and Korean FDI 188–207, 202 Evans, M. 2 Evans, P. B. 85 export -driven consumer electronics 99–101 goods 108 voluntary restraints (VERs) 166–7, 167 Export-Import Bank of Korea 209–10, 210, 213 Eymann, A. 169, 176, 177 Fairchild 98–9 Far Eastern Economic Review Farrel, M. 164 fax machines 195

90

FDI 11–13, 33, 69, 138–9, 144, 221, 228–30 anti-dumping incentives 173–6, 175 consumer electronics-led industry and 98–9 electronics MNCs and 208–18, 213 globalisation of chaebol 214–18 manufacturing investment 208–14, 210–13 global markets and 83–4, 97, 108, 113, 115, 117, 128–9 Japanese electronics and 177-88, 178 MNCs and globalisation 182–8 USA vs EU 179–82, 181 trade protectionism and 188–207, 190, 206–7 Federal Communications Commission (FCC) 140, 148 Federation of Korean Industries (FKI) 90 Ferranti Semiconductors 150 FGT 117 Field, K. 57, 62 finance 56–61, 69–77 Finance and Economics, Ministry of 72 Finance and Economy (MoFE), Ministry of 190, 194, 209 Financial Times 90, 105, 116, 203–4, 211–12 Finger, M. 168 Finland 171, 210 firms governance and 84–5 governments and 149–54 versus government 133–8 firms as key actor 23–39 knowledge-intensive technology 27–39 international 32–9 knowledge-creating 29–32 new technology and 27–9 state and market dichotomy 23–7 First International Computer (FIC) 213

Index 271 Fitzgerald, R. 45, 67, 189 global markets and 81, 83, 87, 103, 113, 128 Flamm, K. 149, 151 ‘flying geese model’ 83 Forbes Global 116, 123–5 Foreign Affairs and Trade, Ministry of 200, 203 Foreign Capital Inducement Law 99 foreign direct investment see FDI Foreign Exchange Bank 209 Forester, T. 130, 159 four Tiger economies 14 Framework Programme projects 136 France 167, 171, 190, 209–11, 210, 217 national champions and 135, 142, 147, 152–4, 156–8, 157 Fransman, M. 29–30, 74 Freeman, C. 14, 74 Fujita, M. 40 Fujutsu 103 Fukagawa, Y. 91 Funai 200–1 Gabel, H. L. 147 Gallant, N. 59 GE 126 GEC 150, 157 General Agreement on Tariffs and Trade (GATT) 151, 164, 166, 168–9, 171, 176, 185 General Motors 26, 90 Generalised System of Preference (GSP) 195 Germany 12, 34, 38, 117, 167, 171, 178 MNCs and FDI 209–11, 210, 217 national champions and 141–3, 154, 156, 157 trade protectionism and 190, 197, 201 Gerschenkron, A. 26, 127, 233 global contexts consumer electronics in 140 Europe in 138–54 markets see technology in global markets product managers (GPMs) 122

production networks (GPNs) 22, 227 system of mobile communications (GSM) 111, 111 globalisation 32–9, 114, 162–3, 175–6, 182–8, 223–4, 229 of chaebol 214–18 Gokarn, S. 70 Goldstar 100, 113, 117, 145 Goldstar Central Research Laboratory 97 Goldstar Electronics Co 100 Gomez, M. 187 governance of chaebol 82–97 corporate 56–68 power and 61–8 state and private sector 56–61 Government Supported Research Institutes (GSRIs) 94 governments firms and 149–54 industry relations with 52–6 Grahl, J. 154–5 Grande, E. 154 Grant, W. 48 Greece 210 Greenwood, J. 59, 171 Gripsrud, G. 179 ‘Growth, Competitiveness and Employment’ (EC White Paper) 132 Gruber, H. 6 Grundig 142, 144–5, 145, 200 Grupp, H. 18 Guerrieri, P. 46, 84 Haggard, S. 91 Hagström, P. 23–4, 27 Haitai 198, 204, 207 Haitai Electronics 190 Hanson, B. 44–5 Haque, U. I. 56 HD-MAC 136, 148 HDTV 138, 142, 146–9, 157, 159 global markets and 95, 97, 106, 118, 120 He, L. 98–9

272 Index Heavy and Chemical Industry (HCI) 67, 70, 86, 101, 120 Heckscher-Ohlin/Stolper-Samuelson model (H-O/S-S) 6 Heighes, T. 134, 149, 150 Held, D. 40–1, 43–4, 48 Henderson, J. 2, 61, 80 Hewlett Packard 125, 126, 158 hierarchical capitalism 236n Higgins, T. 156 Higgot, R. 76 High Definition Television see HDTV Highly Advanced National (HAN) project 95 Hikiko, T. 69 Hindley, B. 171–2 Hirst, P. 1, 6, 162, 178, 178 Hitachi 103, 103, 121, 124, 142, 151, 186 Hobday, M. 18, 134, 149, 150, 153 global markets and 83–5, 102, 117–18 Hodgson, G. 29 Hoechst 172 Hoesel, R. van 12, 189, 213 Holmes, P. 140, 142, 146–7, 167, 170, 184, 186 Honda-Rover 97 Hong Kong 12, 43, 50, 229 EU trade policies and 161, 174, 197, 205, 208 Hong, S. G. 87, 90–1, 99, 101, 103–4, 112 Hood, N. 3, 11 Hoogvelt, A. 69 ‘hostile brothers’ 135 Hundley, B. 164, 171 Hungary 217 Hveem, H. 175 Hynix 235 Hyundai 6, 68, 198, 203, 234 global markets and 90, 94, 101, 103, 103, 107, 114, 124 R&D laboratory 97 Hyundai Electronics 188, 190, 204, 211–12, 212, 232–3, 235 Hyundai Electronics America (HEA) 102

Hyundai Electronics Industries (HEI) 90, 97, 101–2, 107 Hyundai Motor 90 IBM 31, 121, 126, 153, 158–9 ICI 172 ICL 157 ICT 35 IDC 103 India 26, 168 Indonesia 26, 35, 206 industry -government relations 52–6 governance and 84–5 policy see national champions Infineon 124 Information and Communication (MIC), Ministry of 94, 119 information technology (IT) 154, 156–7, 157, 159, 221 Inkel 188, 190, 198, 204, 207, 207 Inmons 150 Inoue, K. 150–2 integrated circuits (ICs) 95, 103, 156 Intel 124, 126 Interbrand 125 international firms 32–9 internationalisation 114–22, 162 political economy (IPE) 2, 20, 24, 131–2 production networks (IPNs) 39, 41, 46, 84, 217, 228 trade regime see ‘market-makers’ International Monetary Fund (IMF) 47, 51, 70, 73, 232–3, 234 International Trade Commission (ITC) 169 International Trade and Industry (Japan), Ministry of 144 investment, manufacturing 208–14 Ireland 190, 210 Ishii, R. 40 Italy 190, 201, 210, 211 national champions and 143, 152, 154, 157, 158 Jacobson, D. 7, 17, 81, 89 Jacquemin, A. 181

Index 273 Japan 6, 12, 15, 181, 224–6, 229, 236n EU trade policies and 161–2, 177–9, 177–8, 211–12, 215, 216, 218 electronics FDI 177–88 single market 163, 165, 167, 170, 173–4, 176 trade protectionism 193–4, 197, 200, 203–6 global markets and 83–4, 96, 98, 102–9 passim, 108, 113–16 passim, 126–7 market-makers and 21, 35, 38–40, 43, 45–7 national champions and 138–47, 140, 143, 149–53, 155, 158 state and corporate power 59–60, 70–1, 73–5 see also ‘MITI paradox’ Japan Victor Company (JVC) 116, 142–4, 145, 186 JVC-Thomson 200 Jeon, Y.-D. 189, 191 JETRO 181 JETRO UK 178 Johnson, C. 1, 57, 59, 63, 83 Joint European Sub-Micron Silicon Initiative (JESSI) 138, 147, 149, 150, 152–3, 158–9, 241n Jun, Y. 80, 113, 163 Jung, S.-H. 108–9, 177, 189, 211, 214, 216–17 Kang, C. 45 keiretsu (Japan) 38, 43, 70, 75, 176, 179 Kempton, J. 164, 167, 170 Kennedy Round (GATT) 168 Kenny, M. 87, 100, 112, 114 Keumsan 198, 205 Ki, L. 101 Kia Motors 90 Kihung R&D Centre 96 Kikkawa, M. 75 Kim, D.-J. 47, 99, 114–15, 227, 232 EU trade policies and 196, 209, 216 state and corporate power 55, 60–1, 63, 70–1, 73, 78

Kim, D. J. 73, 90, 91, 214, 234 Kim, E. M. 62, 65, 68, 77 Kim, K. 2, 109, 172 Kim, L. 87, 93, 98, 104, 112–13 Kim, P. S. 211 Kim, S. R. 85, 87–8, 103 Kim, Woo-Chung 68, 114 Kim, Y.-C. 1–3, 12, 225, 227, 229, 232, 234 EU trade policies and 161, 163, 173, 189, 195–6 FDI 177–80, 181, 183, 187–8, 208–10, 214, 216 global markets and 81, 83, 87, 96–7, 99, 103, 113–15, 128 market-makers and 33, 36, 45, 47–8 state and corporate power 55, 60–1, 63, 67, 70–1, 73, 78 Kim, Young-Hwan 212 Kim, Y. S. 68, 71–2, 91, 117, 208, 215, 217 Kim, Y. T. 91 Kimura, Y. 184, 187, 211, 216 Kindleberger, C. P. 11 Kishi, M. 69 Knickerbocker, F. T. 11, 207 knowledge-intensive technology 4–10, 27–39 globalisation of 32–9 individual firms 27–9 literature review 29–32 Kohler-Koch, B. 149 Kolon 205 Komy 98–9 Koo, B.-Y. 208 Korea electronics industry 190 FDI 210–11 scientists 102 Korea Economic Weekly 200 Korea Electronics Co 100 Korea Federation of Banks 175, 209, 213 ‘Korea Inc’ model 83 Korea Industrial Bank 69

274 Index Korea Industrial Technology Association (KITA) 94, 190, 193 Korea Institute of Electronics Technology (KIET) 95, 100–1, 108 Korea Times 106, 119, 212 Korean Association of Trade and Commerce (KATC) 214 Korean Electronics Industry Cooperatives 101 Korean Exchange Management Regulations 209 Korean Industrial Bank Act (1961) 69 KOTRA (Korea Trade-Investment Promotion Agency) 210, 211 Krueger, J. 14 Krugman, P. 13–15, 55, 72 market-makers and 21, 27, 38, 41 Lall, S. 1, 15, 66, 83, 131, 208 market-makers and 22, 28, 35 Lane, C. 162–3 Langlois, R. N. 92–3 large-screen flat TVs 106 Latin America 63, 71, 122, 211 Lawton, T. C. 130–1, 133–4, 136–8, 154 Lazonick, W. 37, 44, 49, 51 Ledeboer, W. A. 157, 157 Lee, Byung-Chul 120 Lee, C. 54 Lee, D. H. 215 Lee, G. H. 122 Lee, H. 104, 127 Lee, Kun-Hee 68 Lee, S.-S. 65 Lee, Y. 60 Lehmbruch, G. 222 LG 6, 140, 146, 234 EU trade policies and 212, 214, 217 trade protectionism 188–9, 191, 193, 196–201, 198, 203, 205–7 global markets and 90, 94–106 passim, 96, 103, 113–14, 119, 120, 122 and Hitachi laboratory 97

LG Electronics (LGE) 190, 191, 194, 233 global markets and 96, 97, 107, 111, 116, 118, 119, 126 LG Group 212 LG Semicon 90, 97, 103, 107, 232, 235 EU trade policies and 190, 204, 211–12 LG-Philips 109, 121 Liberal Democratic Party (LDP) (Japan) 152 Lim, Y. 55, 95 Linden, G. 113, 134 Lippold, M. 64 liquid crystal display (LCD) 96, 116, 204 panel and design facilities 90 televisions 106, 170 Lo, D. 52 Lucchini, N. 135, 149, 159 Lundvall, B. 9, 21, 32–3, 35 Luo, Y. 9–10, 226 Luxembourg 210 Maastricht Treaty 154, 156 MAC standard 147, 241n McCraw, T. 22, 24 Macmillan, C. 43, 46 Magaziner, I. C. 102 Malaysia 35, 83, 197, 200, 206 Malerba, F. 137 Mansell, R. 35 manufacturing investment 208–14 Marion, M. F. 141, 143 market-makers 20–51 electronics pathway 39–47 firm as key actor 23–39 market coordinators 47–50 MNCs as 127–8 model 17–19 policy implications 50–1 markets 81 coordinators in 47–50 European 6, 163–76 imperfect 11–13, 127–8 market failure 128 ‘market vs state’ debate 1–4, 23–39, 52, 223

Index 275 ‘network enterprise’ and 41–4 overseas 101–5 players in 56–68 power and 4–10 shifting 122–7 see also technology in global markets Marshall, A. 55 Martin, S. 153 Mason, M. 139, 140, 142, 180, 186 Mathews, J. 9–10, 72, 92, 125–6, 131, 226 market-makers and 21, 26, 35, 38–41 Mathews, L. 50–1 Matsushita 99, 116, 121, 139, 141, 142, 186 Mattsson, L.-G. 9 Megaproject 150, 152 Merger Treaty (EU) 167 meso-market 4–10, 81 Messerlin, P. A. 164, 171–2, 171 meta-technologies 137 methodology 10–19 competitive advantage 16–17 market imperfection 11–13 neo-Schumpeterian perspectives 17–19 ‘non-zero-sum’ hypothesis 13–15 Mexico 26, 63, 168 Micossi, S. 182–3 Micron Technology 103, 124, 202, 202 microwave ovens (MWOs) 215, 217 anti-dumping and 198, 201 global markets and 102, 113, 117–19, 119, 122 trade protectionism and 190, 193, 195, 197, 198, 204 Middle East 120 Miranda, J. 168 ‘MITI paradox’ 60, 69–77, 152, 224–5 Mitsubishi 103, 119, 142 Mitsubishi Electric 186 MNCs electronics and 44–7 emergence see European Union (EU) trade policies

globalisation 182–8 major electronic 126 as market makers 127–8 regionalising 176, 229 Samsung and 112–28 mobile phones 111, 123, 190, 196 Modern Electronics Industry (MEI) 102 Mody, A. 100, 102, 127 Monnet, Jean 171 Monsanto 172 Moravcsik, A. 137 Morgan Stanley Dean Witter 124 Morikawa, H. 29, 38 Motorola 50, 151, 171, 171 global markets and 98–9, 123, 125, 126 Moulinex 118, 201, 215 Mowery, D. 33 multinational companies see MNCs multinational enterprises (MNEs) 25, 132, 172, 236n MUSE system 147 Mytelka, L. K. 13, 45 National Assembly 68 national champions 130–60 advantage to competitiveness 130–8 strategic industrial policy 133–8 technology and firms 130–3 Europe in global context 138–54 European Union and R&D 154–9 national innovation system (NIS) 55, 223 National Semiconductors 50 National Television System Committee (NTSC) 140 NEC 103, 121, 124, 151, 186, 201 Nelson, R. 9, 21, 26, 34–6 neo-Marxist classes 60 neo-Schumpeterian perspectives 17–19, 27–39 Netherlands 97, 171, 206, 209–11, 210 national champions 144, 152, 154, 157 ‘network enterprise’ 41–4

276 Index ‘New Competition’ 54 ‘New Firms’ 17, 27 ‘New Man’ 17, 27 new technology 27–9 New Trade Theory (NTT) 6 New Zealand 168 Nicolaides, P. 179, 185, 196 Nicolas, F. 179–82, 216 NICs 53 Nigh, D. 93 Nintendo 125 Nixdorf 157 Nokia 122, 123, 125–6, 139, 142, 171, 171, 200 ‘non-zero-sum’ hypothesis 13–15 Nonaka, I. 26, 29, 31, 40 Norsk Hydro 171 North America 59, 189, 192, 210–11, 211, 213 see also Canada; United States of America (USA) North American Free Trade Agreement (NAFTA) 44 Norway 177 Oceania 181, 211 OECD 69–70, 115, 176, 208 Official Journal (EU) 193, 195, 197, 199, 200–1, 205 oligopolistic market structure 11–13 Olivetti 157 original equipment manufacture (OEM) 102–3, 107, 117–19, 215 agreements 142–3 Orion 200–1 own-brand manufacture (OBM) 102, 106, 117, 119 own-design and manufacture (ODM) 102 Oxley, J. 33 Padoan, P. C. 2, 33, 64 PAL standards 141, 240n Palan, R. 2, 14, 32, 162 Paletto, R. 158 Panasonic 106–7, 126, 145, 186 Pantech 111 Park, Chung-Hee 57 Park, Jung-Hee 60

Patinkin, M. 102 Pavitt, K. 30–1, 37, 40, 134, 148, 234 Pecht, M. 95, 97, 105, 112, 117 Pempel, T. 75 Penrose, E. 62–3 Pentium 4 processors 124 Pepsi 15 Perrin, S. 12, 189, 192, 207, 215 personal computers (PCs) 109, 213 Peschke, A. 154 Peterson, J. 132–3, 135, 154–6, 158 Peterson, W. 20 Pfizer 116 Philippines 35, 83 Philips, N. V. 152–3 Philips 171, 197, 200–1, 205, 231 global markets and 105–6, 116, 125, 126 national champions and 134–9 passim, 142–9, 142, 145, 150, 157, 158–9 Phillips, N. 76 Phillips, R. 36, 43, 46, 48–9 Pierper, R. 105 Pioneer 106 Pisano, G. 37, 40 Pitelis, C. 13 Plaza Agreement 179 Plessey 150, 157 Plummer, M. 70 Pohang Steel Company 214 Poland 199, 217 policy implications 220–35 ‘wealth of nations’ 220–31 industrial see national champions market-makers 50–1 technology 154–9 see also European Union (EU) trade policies political economy see technology in global markets politics of EU industrial policy see national champions Pomfret, R. 166

Index 277 Porter, M. E. 9, 16–17, 21, 39, 179, 227, 233–4 global markets and 80, 84–5, 89, 104 national champions and 134, 148 Portugal 113, 190, 210 POSCO steelworks 67, 214 Poulantzas, N. 60 power see state and corporate power Presidential Emergency Decree (1972) 69 Prestowitz Jr, C. V. 14–15 private sector 56–61, 97–112 R&D and S&T 94–7 privatisation 171–3 Producers of European Television in Cooperation (POETIC) 200 product cycle hypothesis (Vernon) 174, 183 programme management officer (PMO) 122 projection-type TVs 106 protectionism see trade protectionism Quah, D. 5, 8 ‘quasi-state organisations’

68

R&D (Research and Development) 14, 72, 130, 147–8, 151, 187, 222 European Union and 154–9 global markets and 87, 92, 96, 100–2, 109, 122, 127 Institutes 96 Kihung Centre 96 market-makers and 21, 34, 36 S&T and 94–7 Randerson, C. 177, 179, 182, 216 Ravenhill, J. 61, 67, 83, 99, 127 RCA 118, 140 reciprocal subsidy 85–7 regionalising MNCs 176, 229 Reich, R. 14, 231, 235 Rhone-Poulenc 172 risk-taking 239n Robertson, P. L. 92–3 Rodrik, D. 37–8 Roh, Moo-Hyun 234, 235 Roh, Tae-Woo 60

Rosenberg, N. 18 Rowley, C. 83, 128 RTD Framework Programmes

155–8

S&T (Science and Technology) 94–7, 130, 155 Sachwald, F. 114, 196 Saehan 198 Saehan Media 188–9, 190, 192, 205, 243n Sally, R. 25, 49, 81, 226 Samsung Corning 117, 190, 194 Samsung Display Devices 190, 194 Samsung Economic Research Institute 107, 109, 111, 204, 212 Samsung Electro-Mechanical (SEM) 117, 190, 194 Samsung Electronics 3, 6, 145, 220–1, 231, 233, 234 EU trade policies and 169, 190, 204, 212, 212, 215, 218 global markets and 90–9 passim, 96, 105–6, 109, 111, 117, 119, 121, 129 internationalisation strategy 114–22 Micro R&D Centre 96 Report 216 Research Institute 96, 115 Samsung Group 68, 145, 146, 234 ‘convergence’ technology strategy 121 EU trade policies and 188–91, 193, 194, 196–204, 198, 206–17 passim global markets and 86–103 passim, 103, 106–7, 111–28, 115, 123–6 MNCs as market makers 127–8 shifting market situations and 122–7 Samsung News 116 Samsung Semiconductors 202 Samsung-Sanyo 117 Sandholtz, M. 138 Sang-Min Electronics 207, 207 Sanyo 99, 119, 121, 142, 186 Sato, Y. 100 Saudi Arabia 15

278 Index Scharping, R. 15 Schmitter, P. C. 222 Schoening, N. 94 Schuknecht, L. 165–6, 167, 169, 171, 176, 177 Schumpeter, Joseph 3, 10, 17–18, 20, 25–8, 131 policy and 225–7, 231, 233, 240n Science and Technology Agency 74 Science and Technology (MoST), Ministry of 94 Scotland 212 SDTV 120 SEC 117 Second World War 134 segyehwa (globalisation policy) 114, 208 SEMATECH 150–1, 158 Semiconductor Industry Association (SIA) 151 Semiconductor Leading Edge Technologies, Inc (SELETE) 152 Semiconductor Research Cooperative 151 Semiconductor Trade Agreements (STAs) 150–1 semiconductors 97–112, 122, 150, 190, 212 anti-dumping and 201–4, 202 governments and firms 149–54 JESSI and 158–9 Seoul 97 Sewon Telecom 111 SGS 150 SGS-Thomson 158–9 SGS-Thomson Microelectronics (STM) 152 Sharp, M. 132–5, 154–6 Sharp 118, 119, 121, 142, 145, 186 Shimada (head of JETRO) 178 Shin, H. 103 Shin, S. H. 177 Siaroff, A. 54 Siemens 103, 123, 171, 203 national champions and 134, 147, 150, 152–3, 157, 158–9 Siemens AG 123 Silicon Valley 102

Singapore 12, 47, 50, 92, 229 EU trade policies and 161, 174, 197, 200, 208 Singh, A. 2 Single European Act (SEA) 154, 182 single market 12 effect 216 European 47, 163–76 programme 172 Singnetics 99 SK 90 SKM 188, 190, 198, 205 Sleuwagen, L. 165, 184, 186 SMC 119 Smith, Adam 1, 22, 24, 225, 233, 240n Society for Coherent Anti-dumping Norms (SCAN) 197 Soh, C. 86, 104 Soh, S. 65–6 Sony 106, 116, 125, 126, 186 national champions and 139, 141–4, 142, 145 South Africa 168 South America 64, 181 South Korea 26 Southeast Asia 46–7, 204–5, 216–18, 230 global markets and 83, 89, 117 Spain 143, 177, 186, 190, 210 Spargue 50 ‘spill-overs’ 21 Sprint 122 Spulber, D. 2, 21, 37 SRAMs 96, 102, 123, 124, 153, 158, 193, 202, 202 Ssangyong 189 state and corporate power 52–79 government–industry relations 52–6 ‘market vs state’ debate 1–4, 23–39, 52, 223 marketplace players and governance 56–68 ‘MITI paradox’ 69–77 state–private sector 97–112 Stegemann, K. 165 STET 157 STG 92 Stigler, G. 2

Index 279 Stopford, J. 9, 17, 39, 132 Strange, S. 9, 17, 39, 132 Strategic Defence Initiative (SDI) 156 Strategic Planning Team (Saehan Media) 192 structure-conduct-performance (SCP) 225 Stubbs, R. 59 subsidies 85–7, 165–6 Sungnam 198, 205 ‘Super 301’ 104 Swedberg, R. 4, 7 Sweden 210, 211 Taehan Electric Wires 103 Taiwan 12–13, 59, 71–3, 139, 229 EU trade policies and 161, 174, 203, 213–14, 213 global markets and 84, 92, 94 market-makers and 35, 43, 46–7 Takeuchi, H. 26, 31, 40 Tantus 106 Tatalay, M. 212 Teague, P. 154–5 technology European Union and 154–5 in global markets 80–129 electronics industry 97–128 governance of chaebol 82–97 new 27–9 policy 154–9 transistor 137 see also knowledge-intensive technology Teece, D. 37, 40 Telefunken 142–3 television 106, 122, 170 see also CTVs; HDTV Test and Evaluation consortium (Japan) 152 Teubal, M. 66 Texas Instruments (TI) 124, 190 textile products 242n TFT-LCDs 97, 105–12, 120, 196, 238n market share 121 Thailand 35, 83, 200 Tharakan, P. K. M. 170

Third World 4 MNCs 161–3, 196, 213 Thompson, G. 1, 6, 162, 178, 178 Thomsen, S. 12, 179, 182–3, 185, 196, 209 Thomsen Electronics 187 Thomson 118, 171, 200–1 national champions and 134–43 passim, 142, 146–8, 150, 157, 159 Thomson-CSF 152 Thorn EMI 142–3 ‘386 generation’ 111 Thurow, L. C. 15 Tiger economies, four 14 ‘tiger technology’ 38 time division multiple access (TDMA) technology 111 Toko 99 Tokyo Round (GATT) 168 Toshiba 139, 145, 151–3, 159, 186 global markets and 103, 106–7, 118, 121, 124 Toshiba OEM 107 Trade and Industry (MTI), Ministry of 94–5, 98, 101 trade protectionism EU rationale 163–7 anti-dumping protection 164–5 ‘community interest’ clause 167 countervailing duties 165–6 voluntary export restraints (VERs) 166–7, 167 Korean FDI and 188–207 anti-dumping cases 196–207 literature review 188–96 trade regime European Union (EU) 168–76 anti-dumping as FDI incentive 173–6 anti-dumping protection privatisation 171–3 US anti-dumping 168–70 international see market-makers policies see European Union (EU) trade policies transistor technology 137 transnational corporations (TNCs) 131, 241–2n

280 Index Treaty of Rome 166 Triad countries 3, 230 Turkey 168, 200 Turner, J. A. 1–3, 33, 48, 83, 97, 234 EU trade policies and 177, 179, 195, 208–10 Tyson, L. 133 Underhill, G. 2, 4, 59, 77 Ungson, G. R. 114 Unification National Party 68 Unilever 116 United Kingdom (UK) 12, 94, 101, 113 EU trade policies and 178, 190, 209–11, 210, 217 national champions and 135, 142–3, 143, 156, 157 see also Britain United States of America (USA) 6, 12–15, 72, 115, 126 anti-dumping and 168–70 EU trade policies and 177–8, 179–88, 181, 212, 214, 216, 218 single European market 163–4, 166–9, 171, 172, 174, 176 trade protectionism 189, 191–2, 196, 202–4, 202 global markets and 83–4, 88–108 passim, 108, 111, 113, 117–24 passim market-makers and 21, 24, 34–7, 39, 42–7, 49–50 national champions and 139–43, 140, 143, 147–51, 153, 155–9 policy implications 221, 226, 228–30 trade policies 238n Uruguay Round of Trade Negotiations 69, 104, 164, 166–7 VCRs 136, 142–8, 143, 145, 165, 186 global markets and 102, 113, 117–18, 122, 125, 126 trade protectionism and 190, 193, 195, 217 anti-dumping 197, 198, 200–1, 204

Veneroso, F. 61, 70–1 Vernon, R. 174, 183 very large-scale integrated (VLSI) chips 102 production technology 103, 152 VHS standard 147 VHS system 142, 145 video cassette tapes (VCTs) 195, 197 anti-dumping and 198, 204–7 videocassette recorders see VCRs Viesti, G. 182–3 Vodafone 116 voluntary export restraints (VERs) 166–7, 167, 185 voluntary restraint agreement (VRA) 144 Wade, R. 1, 57, 61, 70–1, 75, 83 Wales 212 Wall Street Journal Europe 123, 196 ‘wealth of nations’ 220–31 see also market-makers Weber, M. 4 West Germany 113, 142, 152–3 Western countries 70–1, 143, 179 When, U. 35 Whirlpool 118, 119, 215 White, C. H. 7 Wield, D. 77, 93 Williamson, O. E. 29, 49 Winbond 92 Winters, L. A. 164 Woo, J.-E. 57, 83, 91 Woo-Cumings, M. 1, 56, 59, 66–8 Wood, S. 134 Woods, N. 54, 58 Woolcock, S. 12, 209 World Bank 57, 70, 83, 232 world class brands 125 World Trade Organisation (WTO) 47, 91–2, 104, 124 EU trade policies and 164, 166, 176, 191, 203 Wright, G. 35–6 Wyatt-Walter, A. 158 Xerox

31, 126

Yeung, H. W.-C. 174–5, 175

58, 82, 162–3,

Index 281 Yoo, S.-M. 65 Yoon, C.-H. 45, 103 Yoon, Jong-Young 115 Young, A. R. 184 Young, S. 3, 11, 176, 189

zaibatsu 38 Zanfiel, A. 93 Zenith 101, 106–7, 118, 120, 140 Ziegler, J. N. 153 Zilog 50