This report examines the digital economy value chain and how it influences the adoption of new technology in manufacturing industries. New advances have created opportunities for a wide range of new services in a variety of end markets, which has implications for any number of countries. This report focuses its analysis on digital transformations associated with industrial equipment, examining how one country—Korea—can best position itself for economic gains.

The first contribution of the report is to provide a framework and definition for evaluating the digital economy and how it is influences industrial equipment. It identifies several key trends with particular relevance for the digital transformation associated with capital equipment, including the following:
          ·The rise of services creates new industries and stages in the GVC and alters the distribution of value within existing GVCs. Manufacturing-related services, particularly those previously considered “after-sales” are becoming just as important as sources of revenue, if not more so, than the manufacturing operations themselves. More firms earn a larger share of revenue by performing services than by selling physical goods.
          ·The digital economy has significantly different skills requirements, with changes to traditional job roles and a greater emphasis on digital skills. Such skills will increasingly be applied in agile business organizations that are constantly seeking to innovate and adapt for competitive advantage.
          ·In the data-driven global economy, companies are expanding their value creation through collaborative ecosystems. Collaboration is a key driver of success in a connected, Industry 4.0 world. It is the convergence of multiple technologies rather than a single technology that, in combination, enable firms to adopt new ways of doing business.

The report then shifts its analysis to how Korea aligns with global-level trends. It uses detailed, data-driven evidence from market reports and company cases to show how activity in the country is different from other countries and firms. Among the key findings are the following:
          ·Korea has limited participation in the global digital economy. There is one Korean firm on the UNCTAD top 100 digital MNEs list and only one of the 21 IT software and service companies on the ICT list. Existing firms tend to be small (based on sales and employment) and domestically focused. Korea has an immediate opportunity to leverage its existing industrial base in several key areas to develop new digital services for these sectors.
          ·Korean firms are often captive or closely tied to Korean MNEs, with few independent companies. Many of the sizeable digital firms in Korea have software and IT-related subsidiaries, but these are focused on development for the domestic market or their foreign locations and sales mimic the parent company’s global footprint. Even if the firm is independent from an ownership perspective, they are still highly dependent on their parent company for sales.
          ·Korean firms’ strategy is focused on internal development; however, R&D spending may still be insufficient and misaligned to achieve global growth. Korea has been deemed the world’s most R&D-intensive country, investing 4.3% of GDP in R&D in 2014, and it ranked first in business R&D in the OECD economy survey. Services, however, accounted for only 8% of Korea’s business R&D in 2013, well below the OECD average of 38%. While all companies profiled in this report have a department or subsidiary focused on R&D, the Korean companies’ locations are all in Korea. Global digital firms, by comparison, have innovation centers at home and abroad; however, none of the firms examined appear to have significant activities in Korea. The lack of global interaction and exposure undermines the country’s potential to tap into global trends.
          ·Acquisitions and Venture Capital (VC) investments are uncommon in Korea. In the United States (US), a global leader, acquisition activity in the digital sectors is significant, allowing them to tap into simple, nimble innovative firms. IBM, Microsoft and Google have acquired at least 165 companies each over the course of the last 15 years. The Korean firms, on the other hand, have acquired at most 15 firms each, with most activity occurring in the last five years. Start-ups have advantages over larger industrial peers; they can be very specific, focusing on single industries with direct and tangible applications. They can also respond more quickly to changing technology as they do not have decades of legacy equipment or organizational norms to confirm to.
          ·Korean firms have few partnerships and collaborations. Strategic partnerships between digital firms, manufacturers and retailers in different sectors and regions are key tools driving digital transformation and expansion into new areas. Korean firms’ partnerships are more limited and are primarily with other domestic firms.

The report also uses detailed company and country case studies to highlight how other actors have successfully entered and upgraded in the digital economy GVC. Aggregated, these individual factors inform recommendations for Korea’s path forward in the industry. The most appropriate strategy is for Korea to pursue a proactive, international approach to grow the digital economy in the country. Collaboration with, investment in, and recruitment of foreign firms can all be important components.

While this approach is different from Korea’s historical domestic driven development path, there are no successful examples of firms in the global digital economy that have not done these things. While Korea’s development strategy leveraging domestic firms rather than FDI-led globalization has been successful, in the absence of a large domestic economy, this strategy has a low likelihood of success in the digital world. The new digital economy relies on interoperability and increasingly connecting previously unrelated people, places and things.