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 he Korean economy is extremely dynamic having expanded by more than 7 per annum since the 1960s. Korean manufacturing, which had been characterized by light industry and as labor-intensive, shifted focus toward the heavy, chemical and processing industries through steady increases in facility investment. Beginning with simple assembly, Korean industry expanded its scope as its expertise and knowledge base grew to include more sophisticated forms of assembly/processing such as shipbuilding, electrical home appliance and automobile manufacture. The architect of this development, selecting what companies should handle which sectors and directing the lending of banks, was the government.
As the industrial economy grew, income levels and the quality of life for the Korean people increased dramatically in the 1990s. However, the Asia-wide financial crisis at the end of 1997 shook the Korean economy to its foundations and served as a wake-up call that the existing paradigm of government policy-driven growth would no longer work.
Following the crisis, the IT industry emerged as the new focus of the national economy. In the short term, Korea is now faced with overcoming the current down-turn plus making a successful transformation to a knowledge-based economy in the long term. This presents the IT industry, which developed on the strengths of traditional manufacturing with both a challenge and an opportunity to achieve a greater level of international competitiveness.
The Korean IT industry can be divided into three sub-industries: telecommunications services, telecommunications devices and software. Overall, the industry has recorded a continuously high rate of growth with the exception of 2001 when production nose-dived worldwide. Output reached 189 trillion won ($157 billion) in 2002 and is projected to grow by 11 percent annually over the next five years to 323 trillion ($269 billion) by 2002.
REINVIGORATING THE ECONOMY
By area, the telecommunications devices area was the largest in size in 2002 with an output of 133 trillion won ($111 billion) that is expected to reach 233 trillion won by 2007. Meanwhile, the software area, the smallest in size, is expected to grow at the fastest rate.
Domestic IT demand has grown at 30 percent in recent years with the exceptions of 1998 and 2001 due to the financial crisis and the global industrial slump, respectively. Domestic demand is expected to increase by 10.6 percent per annum over the next four years to reach 279 trillion won by 2007.
In 1998, when production grew steadily despite sluggish domestic demand, the IT industry maintained its growth momentum through exports. In particular, semiconductors, the industry’s lead product, accounted for almost half of all IT exports. However, because of depressed world semicon market demand and prices, the semiconductor contribution to the national trade balance is on the decrease.
For the future, the IT industry is expected to reinvigorate the entire economy through its heavy reliance on international trade. Exports are projected to more than double from the $46 billion as of end-2002, to $98 billion by 2007.
Semiconductors accounted for 50 percent of all IT exports in 2002, still maintaining their position as the no.1 IT export item. However, the semicon portion has dropped to the 40-percent level while the contribution by mobile phone terminals has soared. Other major IT export items are monitors, liquid crystal displays (LCDs) and PCs.
The IT industry has firmly positioned itself as a growth engine for the Korean economy. The value added portion of IT output in national GDP stood at a mere 8.6 percent in 1997, but reached 15 percent in 2002 and is projected to reach 17 percent in 2007.
EXPORT DRIVEN
The importance of the IT industry in the national economy derives from the strength of its exports. The industry now contributes almost 30 percent to total exports, a level higher than its 15-percent contribution to GDP. When imports rose in 2002 because of the government’s short-term efforts to stimulate the economy following the 1997 financial crisis, the trade balance would have posted a deficit if it had not been for IT industry exports.
The IT industry ranks high internationally, compared to the size of the overall Korean economy, due to its recent outstanding growth. A 2002 report by Reed Electronics Research indicated that the industry ranked third after those of the United States and Japan in 2000. Despite the fact it was subsequently overtaken by China’s to become fourth, it still accounts for 6 percent of world IT production. Meanwhile, it has overtaken the Taiwanese and British IT industries to become fourth in terms of exports.
A 2002 study by the Korea Information Society Development Institute (KISDI) compared and evaluated the IT competitiveness in seven specific areas of 28 of the 30 OECD countries, including Korea. The study ranked Korea’s industry in seventh place overall.
Notably the industry placed second in terms of trade competitiveness and globalization on the strength of its exports, and it was also considered to have scored well on IT infrastructure and informatization, both of which have advanced at a remarkable pace. However, Korea was considered to be relatively weak in the areas of IT human resources & labor market, financial support, business start-up environment and IT-related policies, rules & regulations.
The study found the United States and Finland to have the highest IT competitiveness. The United States was revealed to have a high level of competitiveness in all areas by a similar degree. Finland also demonstrated high competitiveness in all areas with the exception of IT market size, while Korea competitive capability was somewhat uneven by comparison.
In positive terms, the results can be interpreted to mean that Korea’s IT industry has the potential to produce even more remarkable growth and achievements with strategic government support and foreign investor participation.
The facility based telecommunications sector can no longer expect to grow by attracting new subscribers as the dominant mobile phone market is close to saturation point. However, this sector is expected to experience slow but steady growth due to the sharp rise in demand for data communications facilitated by the expansion in cable and mobile Internet access.
The special telecommunications sector provides services relatively cheaper than its facility based counterpart. Because new services such as Internet phones will likely be in high demand, the sector is projected to grow annually from 2002 at a rate of 15.5 percent per annum to reach 2.94 trillion won ($2.54 billion) by 2007.
Value added telecommunications service revenues are expected to grow by 8.5 percent every year to 2007 due to the rapid spread of the Internet, the trend to on-line electronic commerce and the increase in the demand for high-speed network access. Meanwhile, broadcasting services are projected to expand by 9.2 percent per annum from 2002 to 2007 as services such as composite cable and satellite broadcasting become more widely available.
 Telecommunications Devices
The telecommunications device industry can be said to be at the heart of Korea’s IT industry since the country’s traditional competitiveness lies in manufacturing. This sub-industry includes production of communications devices (e.g., mobile phone terminals, network devices), information devices (e.g., PCs, PDAs, etc.) broadcasting devices (e.g., digital TVs) and parts (e.g., semiconductors, LCDs).
Production by the device industry dipped to 102 trillion ($85 billion) in 2001, the first downturn in its history as domestic demand and global IT demand declined sharply. The industry returned to its long-term growth path in 2002 on the strengths of greater domestic demand for network devices, the increase in demand for mobile phone terminals and monitors at home and abroad, and the recovery of semiconductor and LCD prices as domestic demand and exports slowly but steadily recovered.
Despite the overall sluggish export picture for telecommunications devices, overseas shipments of mobile phone terminals performed remarkably to gain the position of the country’s no. 2 export item. Production is expected to increase by 11.8 percent to 233 trillion won ($194 billion) while the trade balance in this category is projected to record a surplus of $35.8 billion in 2007. Chief factors at work are gauged to be a resurgence of the PC replacement cycle, an expansion of the post-PC market, the introduction of new telecom services such as IMT-2000 and an increase in exports and domestic demand for devices to support such services.
Software
Korea’s software industry is divided into four areas
 Package software
Computing services
Multimedia content development service and
Database creation services.
The domestic software market accounted only for 2.13 percent of the world’s IT market as of 2001. Even in the local IT market, the portion claimed by software is relatively low. However, at a time when the world software market is depressed, the domestic market for Korea’s software industry is undergoing solid growth.
Domestic software demand grew by a stellar 65 percent in 2000 and by 43 percent in 2001 to reach 15.3 trillion won ($12.7 billion). Due to the expansion of Internet use and the ASP market, the demand for various types of software continues to increase. Also, investment in informatization by the public sector and the expansion of IT-related outsourcing are also contributing factors to the growth in demand.
Meanwhile, this growth trend is showing signs of slacking as the highly market sensitive computing service area that accounts for a significant portion of all software business is negatively impacted by the economic downturn. The software industry is expected to achieve steady growth of 16.6 percent from 2003 to 2007 when is it expected to be worth 38 trillion won ($31 billion) annually.
Exports and imports of package software are buoyant while exports of computing services are slowing due to the slowdown of overseas demand.
A 2000 study by the Korea Software Industry Association revealed Korea had 5,418 software providers at the end of 2001, an increase of 46 percent compared to a year earlier. The capitalization of 2,693 of all software providers (49.7 percent) fell between 100 million won and 1 billion won. Some 2,660 providers, 49.1 percent of the total, had revenues of under 100 million won. The study indicated that many software providers are small and financially weak, generating low levels of sales.
References
Korea Information Strategy Development Institute (KISDI)
“IT Industry Outlook of Korea 2003” (in English)
“Mid-to-Long term Outlook for IT Industry Market (2002-2007),” Dec.
2002
“Industry Trends in the IT Industry” (Telecommunications Services Volume, Dec. 2002, Telecommunications Devices Volume, Oct. 2002 Software and Internet Contents Volume, Sept. 2002)
“Competitiveness Evaluation of Korea’s IT Industry and its Implications” by Gweon Nam-hoon, (presentation material for the Symposium for the Advancement of the IT industry, Nov. 2002)
Ministry of Information and Communication (MIC)
“Information and Communication White Paper,” 2002
“White Paper 2002” (English version of Information and Communication
White Paper)
“IT Korea 2002” (in English)
Korea National Statistical Office (KNSO)
“Korea in the World from the Viewpoint of Statistics,” Dec. 2002
Kim Sung-Hyun (sungkim@kisdi.re.kr)
IT Industry Division
Korea Information Strategy Development Institute
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