USAID(Directorate for Policy. Center for Development Information and Evaluation)

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A.I.D. EVALUATION HIGHLIGHTS NO. 14EXPORT PROMOTION ASSISTANCE IN KOREA:A REVIEW OF A.I.D. EXPERIENCEJune 1993PN-ABG-010SUMMARYThe Korean Government’s export promotion agencies played only a marginal role inKorea’s success as a world-class exporter. Between 1961 and 1973, Korea conducted anaggressive public sector campaign to boost exports with substantial help from the Agency forInternational Development (A.I.D.). Evidence suggests that government assistance made only amarginal contribution to export growth. Korea created a number of government agencies tobolster its export drive, but their impact on exports was marginal, and they all outlived theirusefulness. These facts should cause A.I.D. to closely examine subsidizing public sector exportinstitutions in other countries. These findings are reflected in a recent desk study commissionedby A.I.D.’s Center for Development Information and Evaluation. The study relies on extensiveliterature review and numerous interviews with key officials from Korea’s public and privatesectors, as well as a number of U.S. exporters to Korea.When Korea shifted its focus in the early 1960s away from import-substitutionindustrialization, exporters suddenly had to adapt to an environment full of new and unfamiliartasks. Had private markets for export services not developed quickly, public export aid mighthave been called for to help new exporters with these challenges. However, the private sectorturned out to be a more potent force for providing the services firms needed for export expansionthan either the Korean Government or A.I.D. had anticipated.BACKGROUNDKorea’s trade policy history can be roughly divided into four phases: (1) animport-substitution phase prior to 1961; (2) an export-oriented take-off phase that began in 1961and lasted through 1973; (3) a sectoral development strategy promoting heavy and chemicalindustries between 1973 and 1979; and (4) a post-1979 liberalization phase. Macroeconomicstabilization, devaluation, and a unique administrative system of promoting exports were allpolicies fundamental to the take-off during phase 2 (see Figures 1 and 2).The take-off phase of South Korea’s export-led industrialization program began withpublic outrage over illicit accumulation of wealth, which swept the Rhee Government from officein 1961. The military’s seizure of power was accompanied by a ban on political parties,restrictions on the press, and a disbanding of unions. The Government also increased taxes onthe private sector, which led to unprecedented control over the allocation of credit. Thisconsolidation of power gave President Park, who replaced Rhee, a unique opportunity to reformthe bureaucracy and change the relationship between government and business. A firm believerin rapid economic development, Park instituted reforms that put the reins of economic powersquarely in the hands of the Korean Government, which set the stage for Korea’sgovernment-directed transition to export-led industrialization.The Korean Government had experimented with several export promotion approachesduring the late 1950s and early 1960s, and by 1965 key aspects of Korea’s comprehensive exportsystem were in place. By that point, the Government had begun maintaining macroeconomicstability and a competitive exchange rate; setting quantitative export targets by firm, industry, andgeographic market; and monitoring performance relative to targets, rewarding firms that met orexceeded targets with heavily subsidized credit.At the same time, the Korean Government created a high-level Export DevelopmentCommittee (EDC) to provide production and marketing assistance to exporters. It established twopublic-sector institutions that set industrial standards, promoted quality control, and providedinspection and testing of exports. The Korean Trade Promotion Agency (KOTRA), created in1962 to market Korean exports, carried out market research, engaged in public relations, andsearched for buyers. The Government formed the Korean Institute for Science and Technology(KIST) in 1966 to overcome its concern about private sector dependence on imported technology.KIST’s job was to develop an indigenous capacity to generate new industrial technologies. TheGovernment also created a large number of public-private commodity-specific task forces toresolve production and marketing problems.A.I.D.’S APPROACHA.I.D. played a powerful role in reshaping Korean macroeconomic policy during thetake-off phase. Even though decision-making authority was centralized by the Park Government,centralization alone did not make for a coherent strategy. U.S. assistance to Korea was somassive that A.I.D. was able to exert great influence on Korean policymakers. During the early1960s, A.I.D. financed nearly 50 percent of Korea’s imports. A.I.D.’s primary concerns weremacroeconomic stabilization and stagnating exports. When A.I.D. threatened to suspend aiddisbursements over macroeconomic policy disagreements, the Government negotiated astabilization program.The joint Korean/American Economic Cooperation Council (ECC) created the ExportPromotion Subcommittee (EPSC) to deal with production, administrative, and marketing problemsfacing exporters. Both the Government and A.I.D. representatives on EPSC assumed that Korea’sexport potential was severely handicapped in those areas and believed they must prime the pumpif exporters were to succeed. They decided on a commodity-by-commodity assistance strategy.A.I.D. financed numerous, highly targeted consultants to work with individual firms and2industries; for example, assistance went to producers of human hair wigs, ceramics, silk cloth,furniture, canned goods, antiques, men’s garments, footwear, paper, cement, shrimp, andembroidered handkerchiefs.A.I.D.’s strategy was also to assist Korea’s newly created public sector institutions, suchas KIST, the National Industrial Research Institute (NIRI), and KOTRA.KIST’s mission, to develop an indigenous capacity to generate new industrial technologiesto meet the needs of private industry, was a massive task, well beyond the capacity of the Koreanscientific community. The Korean Government and A.I.D. turned to the Battelle MemorialInstitute for help. Battelle helped KIST develop links to the international science community,recruit trained senior staff, and identify research projects.KOTRA’s job was to provide information for Korea’s new export manufacturers and toconduct market research. It identified Korea’s competitors and the price and quality of theirgoods, explored foreign demand for Korean goods, promoted exports through public relations,and found buyers. A.I.D. provided a range of assistance to KOTRA, including a survey andassessment of the organization. It also arranged for the president of KOTRA to visit the headsof large U.S. buying chains in the United States.The Korean Government created NIRI to carry out export inspections and testing. A.I.D.supported NIRI by providing two full-time specialists and numerous short-term experts. It alsofinanced a review of Korea’s quality inspection system for exports and brought in a full-timequality control adviser to assist in establishing a quality control association. A.I.D. organizedseveral trips abroad for Korean technicians to study quality control methods used in Hong Kong,Japan, and Taiwan. A.I.D. support also helped to establish private sector inspection laboratoriesin Taegu and Pusan. At A.I.D.’s urging, NIRI built, equipped, and trained individuals for sixnongovernmental inspection and testing institutes.Government-directed export promotion combined with distrust of the private sector andmisunderstanding of its capabilities led to an assistance strategy heavily reliant on public sectorservice providers. Although A.I.D.’s technical assistance advisers occasionally nudged servicesprovision in a private sector direction, neither A.I.D. nor the Government gave much thought tothe role Korean entrepreneurs or the international private sector might play in expanding exports.This tendency limited the effectiveness of the Government’s export promotion drive.FINDINGSSome private sector industries already had significant indigenous marketing andproduction capabilities, even though the governmental export drive was meant to compensate forshortcomings in the private sector. Some Korean entrepreneurs had strong ties with private sectorfirms in several developed countries, most notably Japan.3For centuries Korea lived in extreme international isolation, which ended abruptly whenKorea opened its ports in 1876. By 1910, Korea had been exposed to substantial modern industry.During the Japanese occupation from 1910 to 1945, Korea industrialized further. During thisperiod, factory output grew at a compound annual rate of 10 percent and total production tripled.Exports reached 30 percent of national income. Much of this growth was in textiles, a leadingexport industry during the first decade of the post-1960 expansion (see Table 1).Significantly, the period of 1910 to 1945 spawned an indigenous financial, commercial,and industrial elite. Though small, this elite evolved into the leaders of Korea’s industrialconglomerates, or post-1960 chaebol, which came to dominate the Korean economy. The periodfrom 1910 to 1945 also saw the emergence of smaller independent entrepreneurs who becameactive exporters in the 1960s. In sum, the Korean entrepreneurial class possessed considerableskill and experience. Japanese language skills, education in Japanese universities and factories,and technical assistance from many European and Asian machinery suppliers combined to forma private export sector with the means to "fill the gap" in export services.Most of Korea’s post-1961 industrial expansion resulted from an increase in firm sizerather than a rise in the number of firms. Korean entrepreneurs clearly knew how to exportmanufactures and were in touch with customer preference in developed-country markets. Oncethe post-1961 incentive system removed the bias against exports, they were well-positioned toexploit new opportunities. This readiness probably explains why the supply response of Korea’sentrepreneurs was so quick and substantial, suggesting that countries without such anentrepreneurial class might experience a lower supply response.Studies conducted in the mid-1970s, as well as interviews by the Center for DevelopmentInformation and Evaluation (CDIE) with key public and private sector actors involved in earlyexport expansion, provide insight into the role of government in assisting exporters. Koreanentrepreneurs reported that they went overwhelmingly to the firm’s chief executive and/or otheremployees for assistance in conceiving new projects or markets, acquiring new technology, andfinding relevant training. They sometimes turned to the Korean Government for financing (22.5percent of the time), for conceptualization (6.5 percent of the time), but almost never fortechnology acquisition or technical training.Korean firms ranked importers as their most important marketing source (see Table 2).When asked about their first contact with buyers in new export markets, exporters rankedKOTRA near the bottom in importance. Some Korean industries relied on KOTRA’s activitiesand overseas offices to find buyers, but most found that the complexity of styling and designissues for ready-made garments was beyond KOTRA’s capabilities. Also, KOTRA had a limitedunderstanding of the complexity of marketing channels. Japanese trading companies could bringenormous marketing experience to bear, although they may have charged high margins. Thesecompanies tended to know buyers’ reputations, could easily get letters of credit, and helped settlequality complaints. KOTRA’s role of finding buyers was also limited by the fact that plenty ofbuyers, especially big buyers, came to Korea on their own.4This does not mean that KOTRA did not play a role in early export expansion. Virtuallyeveryone interviewed stated that KOTRA’s overseas offices were havens for Koreanmanufacturing visitors in the early days. They provided a "home abroad," arranging contacts andproviding access to cheaper international telephones and telexes.Korea relied heavily on foreign loans to finance the import of foreign capital goodscontaining new technology. Multinational corporations did not fill the technology gap becausedirect foreign investment in Korea was relatively small, as was their contribution of technicalassistance and licensing. In a survey of 112 exporting firms, foreign sources provided 68 percentof basic process and product innovation technology. The Japanese had given productionassistance to virtually every firm interviewed, demonstrating once again the crucial role of theJapanese private sector in Korea’s export drive. Even now, Korea relies heavily on importedtechnology, as evidenced by the continued dependence on exports that use foreign-buyerspecifications.Firms turned to KIST for new technology less than 10 percent of the time. KIST’s rolein technology transfer and development was limited, especially in the early years of exportexpansion. The Government only established KIST after export expansion was well underway,and its research effort focused mainly on import substitution. Few of KIST’s technologydevelopment projects were successfully commercialized.Korea also invested heavily in education and training, and encouraged labor mobilityamong firms, contributing to extensive local know-how in basic production technology. TheGovernment complemented this investment in human capital with the 1961 Foreign CapitalInducement Act (FCIA). The FCIA controlled and monitored foreign investment in Koreanindustry; for instance, all foreign investors had to, or were encouraged to, enter into a jointventure with a Korean firm. Under the joint-venture agreement, the foreign partner was requiredto train the Korean partner’s personnel. After they learned the basic technology, the Governmentclosed the sector to additional foreign investment.Overall, these findings suggest that public sector aid to exporters had a minimal impacton export expansion in Korea. It is possible that some successful exporters interviewed werebiased about their own role in export expansion, but the preponderance of evidence suggestsotherwise.IMPLICATIONSThe CDIE evaluation of Korea’s export services assistance program in the early 1960shas several important implications for A.I.D.• Be careful in identifying the rationale for intervention in export markets. Test thatrationale against reality before intervening. The Korean Government and A.I.D.seriously underestimated the capacity of Korean entrepreneurs and their foreign5associates to meet the needs of exporters of manufactures. Distrust of the privatesector led the Government to assume market failure in the export services markets.This assumption proved wrong. Both the Government and A.I.D. underestimated theindustrial and export experience of the Koreans during the period of Japanesecolonialism. In addition, substantial technical assistance in production, especially intextiles prior to 1961, was all but ignored. The Government and A.I.D. should haveundertaken a serious assessment of the private sector’s capacity, including the foreignprivate sector, to meet the production and marketing needs of new exporters beforeproviding public sector support.• Focus on helping nascent exporters develop long-term collaborative relationships withdeveloped-country buyers, manufacturers and foreign machinery suppliers. Rememberthat the international private sector can provide highly valuable services to exporters.Korean exporters relied heavily on marketing assistance from Japanese tradingcompanies and importers/buyers; many continue to do so. They turned to foreignmachinery suppliers for production innovation assistance. International sources alsoprovided help with quality control. All these services had a significant impact onexport expansion.• Avoid creating public sector export institutions, or subject them to sunset provisions.None of the institutions created by the Government have found a raison d’être or aproductive role to play. KOTRA has continually been forced to create new roles foritself—with only limited success—as the Korean private sector’s overseas marketingexperience increased. Sustainability problems have also confronted KIST, which hashad difficulty funding itself through private sector contract research. The six privatesector export inspection and testing institutes established by the Government have metsimilar fates. It is difficult to reform or close an institution after it has been created,so the decision to adopt a strategy of public provision of export services should notbe taken lightly.This Evaluation Highlights summarizes the findings of the report entitled Can ExportServices Assistance Make a Difference: The Korean Experience, by Michael T. Rock, TechnicalReport No. 7, April 1993 (PN-AAX-264). The report can be ordered from the DISC,1611 North Kent Street, Suite 200, Arlington, VA 22209-2111, telephone (703) 351-4006, fax(703) 351-4039.6

Export promotion assistance in Korea

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Export promotion assistance in Korea

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