Suh J., Chen D.H.C. Korea as a knowledge economy: evolutionary process and lessons learned
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par and even exceeds performance compared to the average high-income country
for some variables, such as gross capital formation, low interest rate spread, and
low cost to enforce a contract. However, for a number of indicators, Korea still has
a lot of catching up to do relative to the G-7 and high-income countries, such as
soundness of banks, which was still weak because of transparency issues. Similarly,
Korea has a lot of ground to catch up in terms of exports of goods and services and
domestic credit to the private sector.
In summary, although it is widely recognized that these large-scale reforms con-
tributed to the Korean economy’s recovery from the 1997 crisis, Korea still faces a
number of challenges, which call for additional structural reforms, in maintaining
its high growth potential. Most important, the stagnation of domestic demand since
the end of 2002 and slowing inputs of capital and labor have raised concerns about
Korea’s growth prospects. Sustaining high growth rates in Korea increasingly
depends on productivity improvement, especially through technological innova-
tion. Therefore, upgrading the innovation system and transforming the economy
into a knowledge-based one is essential to promote faster productivity gains and
enhance its high growth momentum. In addition, the government should further
promote competition and entrepreneurship and deregulate the market to encour-
age the creativity of the private sector.
Designing a New Economic Framework 77
Figure 4.8 KAM Custom Scorecard—Economic and Institutional Regime
(most recent year)
Gross capital formation as % of GDP
Domestic credit to private sector
as % of GDP
Press freedom
Control of corruption
Political stability
Voice and accountability
Government effectiveness
Rule of law
Regulatory quality
Cost to enforce a contract
(% of debt)
Days to start a business
Cost to register a business
as % of GNI per capita
Intensity of local competition
Interest rate spread
Exports of goods and servic
e
as % of GDP
Soundness of banks
Intellectual property protectio
n
Tariff and nontariff barriers
Trade as % of GDP
Korea, Rep. of G-7 Hi
g
h income
10
0
5
Source: KAM, December 2006 (www.worldbank.org/wbi/kam).
5
Information and Communication Technologies for
a Knowledge-Based Economy
Dongpyo Hong, Sangwon Ko, and Alexey Volynets
This chapter examines the ICT pillar of the knowledge economy—or more specifi-
cally, the information infrastructure of the Republic of Korea and its evolution over
the past four decades. It details the policies that the government implemented to
develop the modern information infrastructure currently in place. The second part
of the chapter looks at the ICT production industry in Korea. Although the ICT pro-
duction industry is not part of the information infrastructure, it does provide a
unique example of how the various elements of the knowledge economy interacted
to produce a dynamic industry that substantively contributed to Korea’s economic
growth.
Overview
To a very substantial degree, the shift toward a KBE has been driven by ICTs. Gov-
ernments around the world are formulating policy frameworks for developing this
strategically important sector and using ICTs to promote economic growth.
Korea’s ICT-related polices have spanned three areas: building information
infrastructure; promoting industrial activities, including capacity building of the
ICT industry; and ensuring fair competition. The country has become the leader in
the development of broadband networks and succeeded in joining the ranks of
advanced countries in terms of overall informatization level. Korea also has seen
rapid increase in the use of ICTs, with ICT expenditures increasing from 6.4 percent
of GDP in 2001 to 6.9 percent in 2005. As seen in figure 5.1, Korea’s ICT expenditure
now ranks seventh among the OECD countries.
79
Korea’s ICT-related polices have spanned three areas: building information infrastruc-
ture; promoting ICT industrial activities, including capacity building of the ICT indus-
try; and ensuring fair competition.
The primary objectives of the Korean government were to provide a vision of
the future and increase awareness of the benefits and usage of ICTs while minimiz-
ing market intervention. For example, the e-government initiative, apart from
improving the efficiency of delivery of government services, encouraged Koreans
to use ICTs, thereby narrowing the digital divide.
On the supply side, the government took the initiative by providing the seed
money for infrastructure development and ardently adhered to the best global stan-
dards in privatization, market liberalization, and competition policy. In particular,
Korea’s vision of creating the virtuous cycle, initiated by facility-based competition,
had remarkable success. Availability of affordable and modern information infra-
structure promoted growth of the service sector, which, in turn, created more
demand for high-end equipment and terminals and promoted the manufacturing
sector. This virtuous cycle continued improving with the underlying, procompeti-
tion regulatory measures.
Korea’s ICT industrial policy has focused on three main areas: R&D, human
resource development, and ensuring the availability of venture capital. The public
sector finances less than 10 percent R&D expenditure in ICT, but it plays an impor-
tant role in coordinating private and public efforts in R&D, with emphasis on sup-
porting small and medium-size enterprises (SMEs) through its ICT promotion
funds.
80 Korea as a Knowledge Economy
Figure 5.1 ICT Expenditure (Share of GDP), Selected OECD Countries, 2005
9.8
8.8
7.6
7.5
7.5
7.4
6.9
6.9
6.6
6.5
6.4 6.4
6.3
6.1
6.1
5.9
5.9
5.6
5.3
4.6
4.5
4.4
4.3
3.7
0.0
2.0
4.0
6.0
8.0
10.0
New Zealand
United States
Japan
Switzerland
Sweden
United Kingdom
Korea, Rep. of
Finland
Netherlands
Australia
Korea, Rep. of (2001)
France
OECD average
Germany
Denmark
Belgium
Canada
Austria
Norway
Portugal
Ireland
Italy
Greece
Spain
% of GDP
Source: World Bank SIMA database.
Korea’s ICT industrial policy has focused on three main areas: R&D, human resource
development, and ensuring the availability of venture capital.
With the accelerating employment growth in the ICT industries from 1997 to
2000, Korea’s human resource development policies focused mainly on expanding
the number of potential entrants to the labor market who were equipped with ICT
skills. After undergoing the decline of ICT sector employment in 2001, however, the
emphasis of the policies shifted from quantitative expansion to qualitative
improvement of ICT workers. Fostering ICT professionals who meet the industry’s
rapidly changing skill requirements became the top policy priority.
The Korean government has also been an important player in domestic ven-
ture capital fund-raising. In the short run, government efforts help to stabilize the
amount of funds raised for the venture capital industry, which is heavily focused
on the ICT sector. In the long run, however, it might displace private efforts for
fundraising and impede the development of the industry. Because of this effect,
the Korean government has been moving the policy focus from government fund-
raising to promoting the venture capital industry.
This chapter examines ICT policies and lessons learned in informatization pro-
motion, R&D, human resource development, promotion of SMEs in ICT, venture
businesses development, and deregulation. It also reviews the development of the
Korean ICT industry in terms of output, export, and employment.
Developing an Advanced Information Infrastructure
Modern information infrastructure is a key foundation of a KBE. Korea has built one
of the most sophisticated information superhighways in the world. One reason for
Korea’s success was a comprehensive policy approach that strived to create a virtu-
ous cycle, where a modern information infrastructure enables advanced applications
and content sharing—which, in turn, creates even more demand for infrastructure.
Korea took a methodical path of developing its telecommunications market by
means of privatization, liberalization, and encouragement of competition. The prin-
cipal objective was to expand and improve the infrastructure and provide quality
services at lower rates, hence increasing consumer and social welfare. This founda-
tion turned out to be the essential market and regulatory element for building a
thriving telecommunications market in Korea.
The Early Stages: Separation of Business and Policy Functions
During the 1970s, the Korean telecommunications sector struggled to keep pace
with the rapid economic growth, which revolved around industrial sectors. The
Information and Communication Technologies for a Knowledge-Based Economy 81
Korea’s approach to developing information infrastructure includes the creation a vir-
tuous cycle, where a modern information infrastructure enables advanced applications
and content sharing—which leads to even more demand for infrastructure.
To increase efficiency in the information infrastructure sector, Korea introduced compe-
tition by deregulating and liberalizing the sector and privatizing government-owned
telecom operators.
existing telecommunications infrastructure and capacity were well short of meet-
ing the increasing demand for subscriber lines and call traffic. The result was seri-
ous congestion in voice telephony services. Teledensity in 1980 was at only 7.3
percent (figure 5.2). Users had to wait for months for connection, and the tariffs
were very high. The government set new policy objectives that included develop-
ing and expanding telecommunications infrastructure and capacity to relieve the
congestion, improving the efficiency of telecommunications services, and accu-
mulating technology for equipment and terminal manufacturing.
Telecommunications service is a natural monopoly that exhibits economies of
scale. Another noneconomic consideration, safeguarding national security, was
also a factor. As such, it was natural that the government provided telecommu-
nications services directly to the public. However, as with many government
operations, it was inefficient, and so the government established the govern-
ment-owned Korea Telecommunication Authority (KTA) in December 1981 to
separate the policy and operational functions. The establishment of the KTA
marks the beginning of moving the market environment toward liberalization
and increased competition. Before this, the Ministry of Post and Telecommuni-
cation carried out the integrated functions. The separation aimed at improving
the efficiency of the services provided by allowing flexibility in business deci-
sions and by reducing red tape. It allowed more freedom in the compilation and
execution of the budget and in human resource management. The government,
however, concentrated on the role of regulating the monopoly operator and
began implementing promotion policies.
82 Korea as a Knowledge Economy
Figure 5.2 Teledensity in Korea, 1975–2005
0
200
400
600
800
1,000
1,200
1,400
1975 1980 1985 1990 1995 2000 2005
per 1,000 persons
fixed-line and mobile phone subscribers
telephone mainlines
mobile phone subscribers
Source: World Bank SIMA database.
Privatization of Telecom Operators
Korea was one of the early movers to fully privatize an incumbent monopoly oper-
ator. Before 1990, three monopoly firms served each telecom subsector: Korea Tele-
com (KT) for fixed-line services, Korea Data Communication Corporation (Dacom)
for data services, and Korea Mobile Telecom (KMT) for wireless services. In 1990,
the government’s share of KT was reduced to 49 percent; KT became a fully private
company in 2002. Dacom and KMT (which became SK Telecom), were fully priva-
tized in 1993 and 1997, respectively.
Privatization provides profit incentive for stockholders and management,
which, in turn, increases productive efficiency. Privatization also makes the regula-
tory process more transparent and unbiased because the regulatory body becomes
independent from the operators.
Liberalization of Telecommunication Services
Korea took a sequential but rapid path to liberalization of the ICT services sector.
During the Basic Telecom Negotiation of the Uruguay Round WTO negotiations in
1994, Korea committed to the full liberalization of the resale-based sector and par-
tially committed to the schedule of step-by-step reduction of the limit of foreign
ownership of facility-based operators. In addition, the Reference Paper of the WTO
Basic Telecommunication Agreement was also adopted by the Korean government.
The paper guided governments in the implementation of various regulatory meas-
ures concerned with competitive safeguards, and ensured interconnection, alloca-
tion of scarce resources, provision of universal services, and transparent licensing.
Korea’s policies and regulatory framework were notable in their pursuit of this
textbook method of the global standard. The well-designed liberalization policies
resulted in the transfer of technology and innovation and investment funding from
foreign operators, resulting in faster growth of the market and providing proper
incubation of competitive domestic operators.
Introduction of Market Competition
The government’s next task in the telecommunications sector was to improve effi-
ciency by introducing competition and market mechanisms. World trends sug-
gested this course. In the United States, American Telephone and Telegraph
Company (AT&T) had been structurally separated. In the United Kingdom and
Japan, British Telecom (BT) and Nippon Telegraph and Telephone Corporation
(NTT) had been privatized. In a number of countries, competition was being intro-
duced and markets were being liberalized.
Step-by-step entry of new telecommunications operators and gradual foment-
ing of a more competitive market environment constituted the basic framework of
Korea’s competition policy (table 5.1). Another objective was the diversification of
services, which included fixed-line voice telephony, data communication, and
mobile communication.
The first phase of the market structure reform began in 1990. Dacom’s entry into
the international call market in 1990 was the first form of competition in telecom-
munications services. Shinsegi Telecom’s entry into the mobile market in 1994 and
Information and Communication Technologies for a Knowledge-Based Economy 83
Dacom’s entry into the long-distance market in 1995 opened those markets for com-
petition. Multiple licenses were granted for trunked radio and paging services.
After this first phase, except for local telephony, every subsector of telecommunica-
tions services had at least a duopoly market structure. The second phase in induc-
ing competition began in 1996, when 27 new licenses in seven subsectors were
granted, including three personal communication services licenses. In 1997, the
entry of Hanaro Telecom finally provided competition in the local telephony mar-
ket. In the same year, resale-based operation in the fixed-line voice market was
allowed.
The government also implemented institutional measures. The Korea Commu-
nication Commission (KCC) was established in 1992 to oversee the market and
monitor any anticompetitive practices. The KCC’s other regulatory functions
included resolution of disputes among operators, consumer protection, and inter-
connection. To achieve a healthy competitive environment in telecommunications,
an interconnection scheme must be fair and transparent. In particular, switching
the tariff scheme from a rate-of-return method to a cost-based method was a signif-
icant step. Unbundling network components in the interconnection contract was
another measure to ensure fair competition.
The efforts of the Korean government in developing the telecommunications
sector and making it more efficient resulted in a significant decrease in the cost of
telephone calls. In particular, the cost of a three-minute phone call to the United
Sates dropped by 84 percent, from US$4.88 in 1996 to US$0.76 in 2004 (figure 5.3).
Facility-Based Competition for the Information Age
The key feature that distinguishes Korea’s deregulation and competition policy in
the telecommunications services sector from other countries was its reliance on
84 Korea as a Knowledge Economy
Step-by-step entry of new telecommunications operators and gradual fomenting of a
more competitive market environment constituted the basic framework of Korea’s com-
petition policy.
Table 5.1 Developing Competition in Telecommunications Services
1981 Establishment of KTA
1990 Competition introduced in value added services
Entry of Dacom into international market
1992 Competition introduced in paging services (10 new operators)
1994 Second cellular license issued (Shinsegi Telecom)
1995 Competition introduced in long-distance market (Dacom)
1996 26 new licenses granted: 3 personal communication services; 6 trunked radio
systems; 11 second-generation cordless telephone; 2 dedicated line; 1 paging,
third international operator (Onse); and 3 wireless data transmission
1997 10 new licenses granted: 1 local operator (Hanaro), 1 long-distance (Onse), 6
trunked radio systems, 1 paging
Resale-based competition introduced
Source: Authors.
facility-based competition. Facility-based competition between telecom service
providers results when new entrants into the sector build their own facilities to pro-
vide services, as opposed to service-based competition, where the entrant uses the
facilities of the incumbent. In contrast to Korea, the United States and Europe used
service-based competition efforts to encourage competition and were successful
only in the long-distance and international markets, but not local markets.
Korea is one of the few countries that use multiple operators in all markets of the
telecom services sector. For local telephony networks, there are KT and Hanaro. In
mobile services, five network-based operators were licensed, of which three remain
in competition: SK Telecom, Korea Telecom Freetel (KTF), and LGTelecom. The
astonishing success in the broadband Internet service market was also credited to
facility-based competition, where KT’s and Hanaro’s xDSL and Thrunet’s cable
modem services provided fierce competition. The government’s laissez-faire
approach, with minimal regulation, also contributed to the sector’s growth.
Facility-based competition has proven to be viable even though there was a con-
cern that the large fixed costs of constructing multiple broadband networks would
incur high social cost and reduce profitability. The economic value created from the
competition far exceeds the cost of network construction when effective network
competition fosters successful competition in the content sector as well. Indeed,
facility-based competition has many advantages.
Information and Communication Technologies for a Knowledge-Based Economy 85
Figure 5.3 Average Cost of Telephone Call to the United States (US$ per three minutes)
$4.88
$1.93
$0.76
0
1
2
3
4
5
1996 2000 2004
US$
Source: World Bank SIMA database.
The key feature that distinguishes Korea’s deregulation and competition policy from
other countries is its reliance on facility-based competition.
First, regulations that encourage network competition are more effective in
inducing true competition, and network competition will accelerate network
enhancements for each end user’s full satisfaction in the delivery of the content and
applications.
Second, facility-based competition provides incentives for the profit-maximiz-
ing operators. It facilitates achievement of the optimal level of investment, because
each operator chooses its own optimal network size and appropriates the return
from the investment in the additional facilities.
Third, the network and service in telecommunications form a virtuous cycle in
which the network competition promotes the service and content industries, which
in return would attract more network subscribers. As a result, such industries as e-
commerce, online gaming, and Internet broadcasting have flourished in Korea.
This virtuous cycle becomes a key driver and the objective of telecom policy in the
information age.
In the absence of facility-based competition, the vertical structure would allow
the incumbent monopoly network operator to extract the downstream rent. It could
be prohibitive for content providers to have proper incentives in such an environ-
ment. Korea’s experience indicates that for effective competition in both the net-
work and content sectors to be realized, facility-based competition should be in
place, along with proper regulatory safeguards against market failure. Also, as the
source of economic value shifts from network to content and application, a com-
petitive environment in the content and application sectors becomes pivotal and
should attract more regulatory attention.
Development of Special-Purpose, High-Speed Networks
Korea’s investment in the advanced networks began with the first Korea Informa-
tion Infrastructure (KII) Plan of 1994 (see table 5.2), which has since been updated
several times. The KII Plan includes the completion of the Test-Bed Network, the
Korea Information Infrastructure–Government (KII-G), and the Korea Information
Infrastructure–Public (KII-P) Plans. KII-G is the backbone network predominantly
for government agencies; it was developed by telecommunications service
providers using public funds. KII-P is the advanced network for the public at large;
it was developed by telecom providers using private funds. The Korean govern-
ment also built the Test-Bed Network to encourage the development of state-of-the-
art network technologies and applications and accumulate premarket testing
experience in building, operating, and managing high-speed information net-
works.
For the three stages of the KII projects, the Korean government invested US$620
million, which amounted to 3.6 percent of the total investment for the whole KII
Plan from private and public investment. As a result, Korea could acquire a national
information infrastructure with state-of-the-art technology and supreme speed and
bandwidth on the local loop, not to mention on the national backbone.
The KII-G project initiated investments in the national information superhigh-
way. As of April 2004, a total of 31,632 governmental organizations, such as national
and local administrative offices, educational institutes, research institutes, and
medical institutions, use this network at a discounted price. The approach, called
86 Korea as a Knowledge Economy