An Eclectic Approach to Enhancing the Competitive Advantage of Nations: Analyzing the Success Factors of East Asian Economies with a Focus on the Development of South Korea

Abstract

The classical economic theories focus on inherited advantages and their effective utilization when explaining economic development. However, countries that possess advantage show wide discrepancies in their levels of development

some have grown rich but others have stayed poor. In order to promote economic and social advancement of less developed countries (LDCs), developed countries and international organizations launched various development activities and programs. Despite these aids, however, their performances vary. This research is dedicated to find the critical factors that caused such different outcomes by mainly focusing on the case of Korea. This dissertation consists of three main parts. In Part I, important economic and business literature on the elements of economic development and success are reviewed, followed by the limitations of the earlier studies. This naturally leads to the need of a new approach for explaining economic development. In Part II, a new approach called the ABCD framework by Hwy-Chang Moon (2012), is presented and a rigorous theoretical support is provided. Later, the validity of this new approach is tested statistically. In Part III, the economic developments of Koreas automobile and film industries are analyzed by using the newly proposed approach, with a special attention to government intervention and industrial policies. Lastly, a summary of the new approach, discussion on the results, and important implications derived from this research are presented. International trade theories, which have the foundations from the work by Adam Smith, assume that a nation has an advantage and should focus on an intensive use of advantageous factors. However, these theories cannot explain two problems

first, the different level of economic development of countries with similar natural endowments and second, the development initiatives of a country that does not possess any advantage in factors of production. Productivity theorists emphasized the importance of upgraded labor through education, training, capital investment, and technology progress derived from the best-practice. However, productivity theories cannot fully explain the economic development of LDCs, since good universities, research institutes, or accumulated capitals for upgrading labor, or best-practices are not usually found in LDCs. As commonly known, during the 1960s and 1970s when the newly industrialized countries in Asia, such as Korea, took-off, they did not have these conditions. Another popular approach is on culture. Scholars such as Hofstede (1997), Schein (1998), and Trompenaars (1998) treated culture as a national characteristic which does not easily change. This means the cultural approach cannot explain the difference between ex-ante and ex-post of economic development. Porterian scholars such as Porter (1990) and Moon, Rugman, and Verbeke (1995, 1998) cleverly integrated the important variables determining a nations competitiveness into one model and most other theories represent subsets of Porters comprehensive model. While Porterian approach based on the diamond model brilliantly and systematically classified significant factors of economic development, it cannot explain the underlying force that strengthens or weakens each determinant of the diamond. Based on the empirical studies, Moon (2012) proposed a new framework which explains the fundamental factors that enhance the determinants of economic development. This is called the ABCD framework and consists of four factors: Agility, Benchmarking, Convergence, and Dedication. Agility refers to how fast and accurately a process of business is done and has two sub-factors which are speed and precision. Benchmarking is defined as the search for an industrys best practices that will lead to superior performance. Under this perspective, benchmarking is categorized into two components—imitation and global standard. Convergence is a good mixture of resources and capabilities, and is classified into mixing and synergy-creation. Lastly, dedication means that people work hard and have extra commitment and loyalty for the work. This can is divided into diligence and goal-orientation. In order to prove statistically, this dissertation chooses relevant proxies that can represent each sub-factor and conducts an empirical test with statistical data. Each sub-factor of the ABCD is measured by two criteria, and the values of Cronbachs Alpha for the eight sub-factors are mostly larger than 0.7 except for diligence. This implies that the criteria measure well for each sub-factor, and the consistency is high among other criteria. This study employs two statistical methods: ANOVA and regression. First, ANOVA is utilized to compare the difference between developed and developing countries in terms of four factors of ABCD. Then by using regression, the influences of these factors to economic development are analyzed. All of the four factors show significant difference between developing and developed countries. The dependent variable is GDP per capita, and the independent variables are the ABCD and control variables. The result of the test implies that each ABCD variable explains the difference in GDP per capita among countries. The ABCD frameworks applicability is also demonstrated to explain the development and evolution of two Korean industries: The automobile industry, one of the most important manufacturing industries, and the film industries, a resurging industry as part of the Korean Wave which has been attracting much attention from all over the world to Korea. In 1955, Koreas automobile industry started with a car called Sibal, built on the basis of an abandoned Willys Jeep and other spare parts from the U.S. military. A short time later, Korea started to assemble cars with imported CKD (completely knock-down) kit and to form partnerships with foreign companies. As time passed by, the whole industry changed its function from a simple assembler to automobile developer and the first Korean-developed automobile, Hyundai Pony was produced in 1976. Although Koreas automobile industry faced turmoil during the Asian financial crisis in 1997, Koreas automobile companies were recovered quickly, increased production and exports. According to the International Organization of Motor Vehicle Manufacturers, Korea is the fifth-largest in the world measured by automobile unit production and Hyundai, with its affiliate Kia Motors, is the worlds fifth-biggest auto maker by sales in 2013. Unlike other developing countries, Korean government encouraged to have its own national model car within relatively short time from the beginning of industrialization, despite the nations lack of skills and technology. Under this government effort, partnerships with foreign companies were promoted, although the government prohibited direct investment by foreign companies into Korea. Through CKD kits and partnerships with foreign companies, Korea could learn manufacturing skills and accumulate important technologies. Government aimed to have horizontal integration among manufacturers and auto-parts producers, and these companies formed vertical integration which accelerated car producing capability more effectively. Since Korea did not have enough capital needed for economic development to start with, Korea was motivated with a strong desire for developing its own cars and exporting them to earn foreign hard currency. Unlike the automobile industry that has prospered until today, the Korean film industry enjoyed a golden age between the late 1950s and mid-1960s. In the following two decades, there was a dark age due to interventions by the governments market-distorting policy. As a result, the market share of Korean films decreased unprecedentedly. Especially, their market share in 1993 recorded 15.9%, the lowest ever in the history, after Hollywood production companies began to distribute their films directly into Korea. From the late 1990s, Korea opened its market and changed its view on the film industry from cultural to commercial sector. In competition against foreign films, Korean films resurged and started to be recognized internationally. Particularly, along with dramas, the film industry was one of the strong drivers for Hallyu, the Korean wave, which implies the popular trend of Koreas entertainment industry. There are two booms in the history of Koreas film industry: One, from the late 1950s to the mid-1960s and the other, after late 1990s until now. The agility, benchmarking, convergence, and dedication are useful to explain the success of this industry during these resurgent periods. A number of Korea filmmakers quickly learned American technology in the early phase. This allowed them to accumulate producing technology. With this technology, Korean film producers added Korean features to attract domestic audience. To achieve success from the early stage, the government employed various measures, aiming to make the industry self-sustainable by reinvesting profits gained from exportation. From the late 1990s until now, the ABCD framework can explain the success of Korean film industry more evidently. Around this time, private companies and government worked together for the success of industry within fairly short time span by investing huge amount of money in the infrastructure and production. Having been influenced immensely by American films and Hollywood companies, Koreas film industry imitated the storyline of American films and their distribution channel. However, Korean films and companies did not just imitate Hollywood films and business strategies, but also added more Korean-ness. Behind all the measures, there is a high dedication to foster the industry and to achieve success. It is noteworthy that the industrial policy of Korea was always export-oriented to overcome and improve beyond the industrys current status. Possessing abundant population, natural resources, and technology does not guarantee economic success. These concepts are included in the diamond model of Porter who emphasized the importance of competitive advantage of nations. However, this approach is limited to explain the initial development of East Asian countries as well as that of other advanced countries. The ABCD framework explains more comprehensively the economic achievement of these countries. Through rigorous theoretical review, statistical analysis, and case studies, these strategic variables are proven to be useful in enhancing industrial, corporate and national competitiveness. These findings can also give important implications for the economic planning of other countries.