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Thorfinnsson on Taiwan vs. South Korea
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This all rings true enough.

I have always been skeptical about taking the mania for S&M business development too far – there are limits to the scope of the projects that they can take on, and on the extent that they can technologically upgrade entire sectors of the economy. Interestingly, this is also the position of Khodorkovsky, as he revealed in an Facebook post last November: “I am for big business. S&M business – these are jobs, comfort, innovation. But economic efficiency, labor productivity, large scale adoption of new technologies – that is big business…

The most successful countries having a surfeit of large, globally competitive, technologically advanced firms also seems to be a correct observation. I think it is handily explained by the lion’s share of the rewards in the global economy going to the most successful teams in the O-Ring sector (the parts of the economy that involve long series of rather complex tasks). They then pull up the rest of their citizens up with them. O-Ring Theory is by far the simplest and most elegant explanation of this phenomenon I have encountered.

I have mentioned the problem of foreign ownership in Eastern Europe before (Eastern Europe and Its German 1%). This is gradually being resolved, but Thorfinnsson certainly has a point there. In this sense, Russia may have a long-term advantage in that foreign capital plays a much more limited role in its economy (even as its wages are lower than they would have been had it integrated more deeply with the EU).

***

The roots of this might lie in earlier policy decisions.

Taiwan made the decision to provide substantial support to SMEs early in its development. For a time, this was quite successful. During the 1970s for instance Taiwan clocked 13% annual growth rates. The first recognizable forms of “outsourcing” were ideally suited to this industrial structure. IBM outsourced wire harnesses to Taiwan already in the late 1960s for instance.

South Korea instead has its chaebols–gigantic conglomerates. The South Korean government chose to partner with the chaebols and emphasize their development. Large firms typically have much more capital invested per worker and spend more on R&D and marketing.

See data from this delightful web 1.0 page I found: http://econc10.bu.edu/economic_systems/Country_comparisons/Taiwan_South_Korea.htm

The major differences in South Korea’s and Taiwan’s economic conditions is how South Korea is a big business economy and Taiwan is a small-medium enterprise economy. There are three indicators in determining this conclusion:

1) the production totals of large-scale firms (over 500 employees) as a percentage of national production was 45.3% for South Korea and only 26.8% in Taiwan in 1993.

2) The total sales of corporations in the top 5, 10, and 50 listings as a percentage of GNP was 47.6%, 58.8% and 79.9%(1991) for the South Korean economy, while the numbers were much lower at 17.8%, 23.2% and 36.4% (1990) in Taiwan’s case.

3) Exports of small and medium enterprises as a percentage of total exports, was 37.7% for South Korea and 67.1% for Taiwan in 1987.[9]

These figures are from long before South Korean firms were global leaders (outside of shipbuilding and steel anyway), and this was also before South Korea diverged from Taiwan. In fact, Taiwan was wealthier than South Korea in the late 20th century. Perhaps because its SME-focused development did a better job of mobilizing peasants into the formal sector in the early phase of industrialization:

In 2000, GDP per head in USD in Taiwan is $13,900 and $9,670 in South Korea.[16]

In the early takeoff phase for both countries, the distinction probably did not make a great difference. Both were rapidly industrializing. But as both exhausted catchup industrialization and needed to push the bleeding edge of the technological frontier, South Korea’s huge conglomerates were much better positioned to do so.

State support programs differed early on.

Taiwan’s government focused on providing low cost inputs to SMEs. From memory there was a government program to provide low cost electrical steel and magnetic wire to transformer manufacturers for instance. Transformer manufacturing is low technology and low productivity and always disrupted by new low cost producers.

South Korea instead formed Pohang Iron & Steel Corporation (the application for a World Bank Loan was rejected, which led to Japan quietly financing and providing the technology for the project) and launched its Heavy Chemical Industry drive with the goal of completing a modern, high tech heavy industrial base to provided advanced, low cost intermediate industrial products throughout the economy.

The countries even pursued some similar technology policies in the 1980s. In 1980 the South Korean government ordered Samsung to enter the semiconductor manufacturing industry. In the same year Taiwan established Hsinchu Science Park on the model of Silicon Valley, which ultimately led to TSMC and UMC.

But while today Samsung is the world’s largest semiconductor manufacturer and has substantial microprocessor design expertise which has surpassed Japan, the Taiwanese firms are mere foundries which are completely dependent on foreign designs.

In general one is hard pressed to think of truly rich countries which do not have large, globally competitive firms possessing the most advanced technology (and this also applies to services, not just manufacturing). The big exception here would be Australia, which is easily explained by its large amount of natural resources per head and the vast amounts of foreign capital invested over the past 150 years. This is good to remember whenever people start endlessly praising the supposed glories of small business.

Incidentally, I am somewhat skeptical about the economies of Eastern Europe for this reason. Visegrad and the Baltic States etc. are mere appendages of Western European capital. I don’t see a path for them to fully converge with Western Europe barring Western Europe’s Afro-Islamization dragging their average down (admittedly a depressingly probable outcome).

 
• Category: Economics • Tags: Development, Economic History, Korea, Taiwan 
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  1. The problem with big companies is that they tend to be bureaucracies. It seems to be a law of nature that bureaucracy is dysfunctional. The bigger the bureaucracy, the more dysfunctional it is. Smaller companies are more nimble and less bureaucratic and, thus, can innovation and work faster than larger organizations despite having less financial resources. We are all familiar with the story of Apple vs. IBM as example.

    • Replies: @Vishnugupta
  2. Twinkie says:

    Very good analysis, except this one:

    South Korea instead formed Pohang Iron & Steel Corporation (the application for a World Bank Loan was rejected, which led to Japan quietly financing and providing the technology for the project)

    That “financing” wasn’t so quiet. General/President Park Chung-Hee, then the dictator of South Korea, normalized relations with Japan against enormous and cantankerous domestic opposition and secured compensation, which he then directed toward industrialization, rather than to individual victims of colonization.

    Sometimes dictatorships have advantages.

  3. Taiwan has always been richer than south Korea (still is) [Pseudoerasmus made some tweets on this back when he was still active there], and they grew at pretty much the same rate between the early 1950s and today. Here’s the GDP/capita (PPP) graph from my script (the PRK numbers are rough guesses by me; the Maddison/World Bank PRK series is garbage):

    Taiwan’s system may not be especially prone to groundbreaking technological innovation, but it works well for it. South Korea, despite (or maybe because of)? its big business-focused approach has quite low productivity in the SME service sector, which remains very weak by first-world standards in terms of output per worker.

    In fact, labor productivity in Korea’s service industry is only half as much as that of Korea’s manufacturing industry. This ends up dragging down the whole of Korea’s labor productivity per worker, because over 70 percent of Korean workers work in the service industry.

    http://askakorean.blogspot.com/2014/10/koreas-labor-productivity-and-how-to.html

    • Agree: Anatoly Karlin
    • Replies: @Twinkie
  4. Chuck says:

    Big companies in small or medium sized countries means those companies must seek business elsewhere. Subjecting their home countries to greater leverage from outside.

  5. @Abelard Lindsey

    It depends on what sector of the economy you are dealing with silicon valley start-ups aren’t going to build jet engines,you need big conglomerates like GE or United Technologies(Pratt and Whitney) to do that.

    Apple’s usp is the user interface and marketing most of the core tech is invented owned by others including the competition. Samsung otoh owns the production Tech and ip for the processor(exynos variant),ram,oled display,battery and camera sensor of its phones..all this required massive investments and long term commitments not possible in Apple and have built formidable long term competitive advantage for Samsung..apple is the next blackberry and a good example of the limitations of silicon valley and the stock valuation based approach to long term capital investment..

    • Replies: @Abelard Lindsey
  6. Twinkie says:
    @E. Harding

    its big business-focused approach has quite low productivity in the SME service sector, which remains very weak by first-world standards in terms of output per worker.

    Both Japan and South Korea have relatively low output per worker in the service industry, but the quality of that service as experienced by consumers is outstanding, perhaps even astounding to Western consumers.

    If your TV breaks in America, you either negotiate through a labyrinthine call center via phone and try to obtain some resolution (repair or replacement) and good luck with that or you pitch it and buy a new one. If a TV breaks in South Korea and you call LG, it sends you a repair technician the next day and fixes it for free under warranty or for a nominal sum if out of warranty. Japanese and South Koreans do not put up with poor, impersonal customer service. That may be “inefficient” and “low output per worker,” but it certainly makes life more pleasant for the ordinary people there. That goes for the government services as well – there are well-staffed government offices everywhere in South Korea, which might seem terribly wasteful to us Americans, but the level of service their bureaucrats provide is very high quality and rapid. “Bureaucrat” is not a slur in that country.

    They obviously decided to optimize toward quality service rather than economic efficiency.

    • Agree: Anatoly Karlin
    • Replies: @Twinkie
    , @Vishnugupta
  7. Twinkie says:
    @Twinkie

    By the way, restaurant delivery service in South Korea is insane. Just about every type of restaurant – from fast food to gourmet – will deliver, usually free of delivery fee or tip, to just about everywhere. And bizarrely, cooked meals are much less expensive than in the West (but grocery prices are much higher comparatively). It’s totally out of wack for a Westerner.

    That’s terribly inefficient economically (and it must wreak havoc with restaurant profitability), but again, it’s nice for the consumer. And since that is the prevailing culture, producers can’t simply decline to participate unless they want to lose customers and fail.

    • Replies: @Anatoly Karlin
  8. @Twinkie

    And bizarrely, cooked meals are much less expensive than in the West (but grocery prices are much higher comparatively). It’s totally out of wack for a Westerner.

    Along with great Internet, it sounds like a NEET paradise.

    • Replies: @Twinkie
  9. @Vishnugupta

    Yes, there are certain products that require economies of scale. Jet Engines, jet airliners, and semiconductor chips come to mind. However, even some of these activities can be improved by somewhat smaller, private entities. For example, Space X, which employs far fewer people than NASA and any of its contractors has successfully accomplished the development of reusable rockets, a feat that NASA and its contractors failed to accomplish in the past 40 years.

    3-D printing and “printable” semiconductors ought to give the current industry structure a run for its money in the coming decades.

  10. Twinkie says:
    @Anatoly Karlin

    I had to look up “NEET.” 70% of people have college degrees in South Korea.

    What kills the quality of living there are 1) high density (read crowds), 2) pollution, often from China, and 3) high cost of housing (which is not an issue for foreign mil/gov/corporate expatriates with subsidized housing). And obviously education is hyper-competitive for the locals.

    Balanced against those factors are cleanliness, great/high-tech services and entertainment, safety (forget violent crimes, you can leave laptops and iPhones at coffee shops and leave for an hour, and things left at taxis will be returned to you via police), convenience, and probably the best (and low cost) subway system in the world in Seoul. And the foodie culture is outstanding.

    By the way, the Japanese export strategy often makes Westerners scratch their heads. For example, Seiko exports lots of low-priced watches made in Malaysia to the rest of the world. It also exports select super-luxurious ones (Grand Seiko) to a tiny segment of elites in the West. But it reserves high quality, moderate-cost Japanese-made watches (JDM or Japan domestic market) to the Japanese market alone. It’s like their corporate policy isn’t designed to squeeze out every dollar out of consumers so much as to provide employment and a high quality of life at reasonable costs to their own people. What a crazy country.

    • Agree: Anatoly Karlin
    • Replies: @Anatoly Karlin
  11. @Twinkie

    NEETs are merely people not currently in education, employment, or training. Many or most may well have degrees but mooch off their parents, gf, etc.

    Obviously, the stereotype of them are that they are rather lazy and Internet-addicted. Hence low cost, reliable, fast Internet + low cost of eateries relative to groceries would be great for them. High density, pollution – not such a concern. Though high housing prices are, if they don’t own their own pad.

    But it reserves high quality, moderate-cost Japanese-made watches (JDM or Japan domestic market) to the Japanese market alone. It’s like their corporate policy isn’t designed to squeeze out every dollar out of consumers so much as to provide employment and a high quality of life at reasonable costs to their own people.

    Why would refusing to export medium-range watches be bad for Japanese consumers?

    • Replies: @Twinkie
  12. Twinkie says:
    @Anatoly Karlin

    Why would refusing to export medium-range watches be bad for Japanese consumers?

    It’s not. It’s great for them. My point was that the profitability for Seiko of the JDM watches is probably much lower than their Malaysian-assembled exports. Nor does the mid-range watches bring any prestige that the high-end Grand Seikos do. Yet it still makes and markets – only domestically – those mid-range watches in Japan. I suspect it does so, because 1) the defect-rates in the Japanese factories are still probably lower than those in their Malaysian factories, 2) it likes to provide jobs for their own people, and 3) it wants to provide quality products at a reasonable price for their own people (it probably does not sell them overseas, because it makes little money from them).

    It’s an irrational behavior through the prism of the American corporate perspective, which is all about profits, profits, profits and hitting the next quarter numbers, which translates to offshore, high volume production, high defect rate, and close to nonexistent customer service. But it is quite a rational behavior if the company is patriotic and wants to benefit its own citizens.

    The Allure of JDM Seikos: http://www.gmtminusfive.com/the-allure-of-jdm-seiko/

    • Replies: @Dmitry
  13. Dmitry says:
    @Twinkie

    It’s funny you are having the discussion about buying watches in Japan.

    You are saying to buy watches in Japan is guarantee of better quality?

    My father has bought an eco drive watch in the top floor of Yodobashi Camera in Tokyo and it was broken (somehow the face of watch has twisted around) in very soon after – maybe a year or two later the whole face has twisted around. The impression was that Japanese watches are the most unreliable of Japan’s products. Actually, I even remember how that Japanese watch was thrown in the garbage.

    Of all things you can buy in Japan, I think the watch is the only unreliable one. Although the shop assistants in the watch shop are the most friendly.

    • Replies: @Twinkie
  14. @Twinkie

    I believe another reason for the apparently low output per worker in the service industry in Japan would be its no tipping culture.Tips which make up a very large part of the salary of service workers in a lot of industries in the US and most western countries are not captured in official statistics therefore the US service industry worker appears to be far more productive than his Japanese counterpart than would be the case if we compare his effective take home pay after including tips.

    • Replies: @Twinkie
  15. Twinkie says:
    @Dmitry

    You are saying to buy watches in Japan is guarantee of better quality?

    There are no guarantees in life, even in Japan.

    And your father’s experience is a sample of one.

  16. Twinkie says:
    @Vishnugupta

    While what you say is possible, I don’t think it accounts for the main reason why the output per worker in the service industry is low in Japan and South Korea. In my view, it has mostly to do with the local cultural practices where service has to be extremely high quality (compared to that in the West), local, and low cost. That is not a formula for “economic efficiency” or profitability.

    Look at restaurants, for example. They are – where successful – highly profitable small businesses in the West. In contrast, restaurants are present in FAR GREATER numbers per person in, say, Seoul and Tokyo, compared to Western cities, and are much more likely to be mom-and-pop operations with low capital investments. They generate considerably lower profits for their proprietors in Japan and Korea, but serve certain communal roles and often provide high quality (for an extreme example, see the Netflix special “Jiro Dreams of Sushi” where a Michelin star restaurant is a small family affair in a subway station).

    Even the language reflects this. In South Korea, for example, the English term “service” actually means gratis – something provided for free in addition to what is being purchased. It is perhaps a leftover from the days of price-control when businesses could not compete on price due to government regulations, so had to compete on superior customer care and even small gifts to consumers.

    In contrast, we have a different consumer culture in the United States. People routinely select inferior products/services if the prices are tiny bit lower.

    • Agree: AaronB
    • Replies: @AaronB
  17. AaronB says:
    @Twinkie

    One of the nice and interesting things about Asia is the sheer number and density of small restaurants, stalls, hole in the wall eateries, and food carts. And the sheer variety of food available. Zoning laws seem very different than America.

    It makes for a very colorful street life. Its also communal. It seems that life in Asia revolves around food, much more so than even in Western foodie cultures like Italy and France.

    Life in Asia seems less about ideology and more about the simple, basic, physical pleasures of life. Food, sex, fashion, communal life, comfort, politeness. Its very human, even if it never reaches the grandiosities of Western civilization.

    The West can learn something about what makes life pleasurable – it can be very basic, simple, and earthy.

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