South Korea As Number 1?



Bloomberg Business recently caused a bit of a stir when it released its “2016 Innovation Index” which ranked South Korea number one, with an aggregate score of 91.3, well ahead of Germany (85.3), Sweden (85.2), Japan (85.0), and Switzerland (84.7). The United States placed eighth (82.6). North Korea was nowhere to be found.

The index is made up of seven constituent parts:

  • R&D as a share of GDP;
  • manufacturing value-added;
  • productivity (GDP per employed person age 15+ and three-year improvement);
  • high tech density (the number of domestically-domiciled high-tech public companies – such as aerospace and defense, biotechnology, hardware, software, semiconductors, Internet software and services, and renewable energy companies – as a percentage of domestic publicly listed companies and as a share of world's total high-tech companies);
  • tertiary efficiency (total enrollment in tertiary education, regardless of age, as a percentage of the post-secondary cohort; percentage of labor force with tertiary degrees; annual new science and engineering graduates as a percentage of total tertiary graduates and as a percentage of the labor force);
  • researcher concentration (professionals, including postgraduate Ph.D. students, engaged in R&D per 1 million population); and
  • patent activity (resident patent filings per million population and per billion PPP-adjusted GDP; patent grants as a share of world total).

The aggregate index is derived by averaging the seven component parts; in the case of components with multiple subcomponents, individual indices were weighted equally but in some cases were “rescaled for countries void of some but not all data points.”

As with all such exercises, one can quibble. It is not clear, for example, why manufacturing value-added should be included when today much innovative activity actually occurs in the service sector. (South Korea ranks number one on this particular metric, the only one for which it took the top spot.) That said, the rankings are not implausible on their face.

The release of the 2016 Innovation Index generated predictable press coverage across the globe. And South Koreans were happy, at least for a day. Reviewing the results what struck me was the disconnect between the message of “South Korea is number 1” and the sense of anxiety one finds in South Korea.  Partly it is due to the secularly slowing growth rate (the country’s trend growth rate is below the global average for the first time in more than 50 years), the growing inequality that Steph Haggard has emphasized in recent blog posts (here and here) and the country’s position between relatively low-wage China and high-tech Japan, which creates an imperative to continually improve productivity. But even within the innovative sector, there is a sense of dissatisfaction. My former employer the Korea Development Institute, for example, recently released a working paper, the abstract of which gives a flavor of this malaise:

“Despite the world-highest expenditure in R&D as a percentage of GDP, there is a rising concern that Korean researchers in universities and government-funded research institutes (GRIs) are contributing neither to creating new opportunities for the economy nor to solving big societal challenges. Based on the international comparison of academic papers, patents and technology transfers, this paper shows Korea’s poor performance in high-risk high-payoff research. We also point out that the root cause of such low performance in high-risk high-payoff research is a heavy-handed control over research communities by bureaucrats in ministries. This paper suggests several reform agendas for removing excessive bureaucratic controls and strengthening the autonomy of the funding and project agencies, GRIs, and research universities.”

The good news is that there are voices in South Korea addressing these challenges and advocating solutions, which ultimately will require labor and capital market reforms, in addition to industrial policy tweaks. As I observe in Michelle Jamrisko’s article, “Emphasis on wages being determined by tenure and seniority, together with a lack of pension mobility, means that there's not that much inter-firm or inter-sectoral movement of people," he said. "It's thought within South Korea that that hurts them, especially in this innovative area — there's less churn.” South Korea has compensated by the relative lack of start-up activity, and the difficulty of growing a start-up by incubating innovative activity within large firms such as Samsung Electronics. Whether this adaptation will continue to be effective is an open question.

Finally, I cannot help but observe that North Korea was not the only economy missing in action. Probably the economy most similar to South Korea is Taiwan. Admittedly, because of its unusual political status, data on Taiwan is often not published in the usual cross-national sources. But the government in Taipei publishes a wide-range of data on equivalent bases to facilitate comparison. I would be curious to know whether South Korea really would be number one if Taiwan were included in the rankings.

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