The economic policies carried out by Korea over the past half century have transformed the country from a rural economy into an industrialized one. Gross Domestic Product (GDP) has quadrupled since the late 1990s alone, to US$1.4 trillion in 2016, making it the 11th largest economy in the world (WDI, 2017).1) In the process, Korea has become one of the world’s most important manufacturing hubs. Several of the country’s firms have risen to prominence in key global sectors including automotive, electronics and shipbuilding; today, Samsung, LG, and Hyundai are household names around the globe. This success has been built through rapid government-led industrialization and its support for a small number of large, globally competitive firms.

Korea’s rise as an industrial power has occurred during a period of major reorganization of global trade and industry around global value chains (GVC). Since the mid-1960s, global firms have been slicing up their supply chains in search of low-cost and capable suppliers offshore. This process of global outsourcing and offshoring initially focused on the simple assembly of parts supplied by US manufacturers, typified by the US production-sharing with Mexico, but the pace of offshore production soon accelerated dramatically (Dicken, 2011).2) In the 1970s and 1980s, retailers and brand-name companies joined manufacturers in the search for offshore suppliers of most categories of consumer goods. The geography of these chains expanded from regional production-sharing arrangements to full-fledged global supply chains, with a growing emphasis on East Asia (Gereffi, 1996).3) In the 1990s and 2000s, the industries and activities encompassed by global supply chains grew exponentially, covering not only finished goods but also components and subassemblies, and affecting a wide range of sectors, from automotive to electronics and household appliances to infrastructure and shipbuilding.

A central element of these changes has been the relocation of manufacturing sectors to a host of emerging countries, including China, Mexico and Vietnam. While this began with light manufacturing, it increasingly covers more high-tech sectors. This relocation continues to gather momentum with more and more developing economies entering GVCs. More recently, however, new disruptive technologies, such as automation, have emerged that could facilitate the return of many value chain activities to traditional centres in North America and Europe (Butollo, 2017).4) Thus, having built its economy on a strong manufacturing base, Korea must now redefine its growth drivers for the future. Its strong commitment to process and product improvement have seen steady gains in productivity and output in the past. However, as the country looks to its future, this may not be sufficient to maintain its competitiveness versus both the lower cost locations which are steadily upgrading, and those advanced industrialized countries which are rapidly innovating, defining brand-new industries, and ramping up new production technologies.

While leading manufacturing bases in the US, Europe and Japan are likewise grappling with how to best confront the changing global stage, Korea’s unique past development trajectory which shaped the way it engaged with GVCs now means it must chart a distinct course forward. Where leading firms from the US, Europe and Japan used their knowledge and coordination leadership to leverage the capabilities of strong international networks to become global players, successful firms from Korea have followed a somewhat different path. Well-known global giants, such as Samsung and Hyundai, supported by the national government, have rather relied on high degrees of vertical integration and networks of smaller, local suppliers to be competitive. In doing so, these strong lead firms have maintained control over their manufacturing capabilities and driven their competitiveness through in-house productivity, product and technology improvements. This has been facilitated by investment in research and development (R&D) that outranks the rest of the world. However, in doing so, the country has focused its innovative energies on just a small set of industries. Policymakers now face the question of how to orient these tremendous resources to competitively position Korea as a global economic leader of tomorrow.

As part of efforts to identify the best course forward, the Korea Institute for Industrial Economics & Trade (KIET) and Duke University Global Value Chains Center (Duke GVCC) collaborated for a global value chain study. The goal of this study is to analyze the country’s participation in specific global industries to identify broader lessons for Korea’s future ambitions for industrial transformation. To do so, we examine Korea’s participation in two major industrial sectors: electronics and shipbuilding. Together, these two industries comprise 30% of exports, account for over half a million semi- and skilled jobs and a substantial share of the country’s R&D spending. They provide two distinct perspectives for Korea’s participation in GVCs. On one hand, electronics products are targeted to the consumer market, technologies are rapidly changing and profits are derived from bulk production for mass consumer markets, and control over marketing and branding. Shipbuilding, on the other hand, is very capital-intensive, ships have long life cycles, and production is highly concentrated in three countries. In both industries Korea has established a global leadership position in a select number of final product categories and key component products by continually investing in process and product upgrading coupled with strong R&D investments.