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• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84S00553R000200140003-0
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• Document Page Count: 15
• Document Creation Date: January 12, 2017
• Document Release Date: June 21, 2011
• Sequence Number: 3
• Publication Date: June 1, 1983
• Content Type: REPORT

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South Korea: Moving u
the Technology Ladder
An Intelligence Assessment
EA 83-10109
June 1983 C
Copy 3 5 2
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Directorate of Confidential
Intelligence
South Korea: Moving up
the Technology Ladder
the National Intelligence Council
This paper was prepared b
Office of East Asian Analysis. It was coordinated with
Comments and queries are welcome and may be
directed to the Chief, Northeast Asia Division, OEA,
Confidential
EA 83-10109
June 1983
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South Korea: Moving up
the Technology LadderF---] 25X1
Key Judgments South Korea is embarking on an ambitious plan to restructure its industrial
Information available base in favor of skill- and knowledge-intensive industries. Seeking a second
as of 9 June 1983 economic takeoff, the Chun government is targeting microelectronics,
was used in this report.
computers, machine tools, and sophisticated shipbuilding for rapid growth.
Seoul is making this move armed with a broad set of policies aimed at en-
couraging manpower development, enhancing the country's research and
development (R&D) capabilities, and attracting advanced technology from
abroad.
Seoul is taking steps similar to the successful industrial policies it employed
during the country's first economic takeoff in the 1960s:
? Tax and credit favors to firms investing in designated industries.
? Sharply increased government spending on R&D and financial breaks to
firms that also increase such spending.
? Cooperation between the country's nine public research institutes and the
private sector.
? Liberalized regulations on foreign investment and the import of
technology.
? Expanded university enrollments, scholarships, and overseas training
programs.
South Korean industrialists-backed with technical licensing agreements
with multinational corporations-are following the government's lead and
gearing up for massive investments in specified industries. For example, the
largest South Korean conglomerate-Hyundai-will pour $450 million
into semiconductor facilities over the next five years with plans to produce
750,000 silicon wafer starts annually later in the decade.
South Korea has a number of factors working in its favor. It will graduate
thousands of highly qualified engineers and scientists over the next decade,
bolstering an already well-educated, adaptable, industrious work force.
South Korean workers will remain a bargain; engineers are paid one-fourth
to one-fifth the wages received in the United States and Japan. The size
and diversification of South Korea's conglomerates will enable them to
gamble on new products and commit large sums to developing new
products. South Korean firms have demonstrated a strong capability to
assimilate new technology. This, coupled with the Chun government's clear
commitment to help, will give South Korean industry a leg up on its East
Asian competitors among other newly industrialized countries (NICs).
Confidential
EA 83-10109
June 1983
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The speed and extent to which South Korea moves into these new lines of
production will depend heavily on its success in dealing with several
internal obstacles and on the rate of growth in the developed world. The
South Koreans will need to, strengthen their still relatively weak marketing
skills and improve the quality control for medium-technology products.
Seoul could face shortages of skilled labor despite its ambitious training
program. Perhaps of greatest importance, the government must continue
repairing the country's image among foreign investors if it is to attract
needed inflows of foreign technology through joint ventures. Although
many foreign companies have thrived in South Korea over the last several
years, a number have charged that the government's policies have been
arbitrary and unresponsive.
South Korean Government and industrial leaders are moving aggressively
to address these issues, and we believe they will make fairly rapid progress
moving up the technology ladder. Seoul is likely to establish solid market
niches in selected medium-technology products, particularly small comput-
ers, computer peripherals, and machine tools.
Success for South Korea's industrial restructuring effort will result in a
clear strategic gain for the United States by strengthening and enhancing
the self-reliance of a key ally. In strictly economic terms there will be both
costs and benefits for the United States. South Korean demand for
advanced production equipment from the United States will increase, as
will purchases of US consumer and agricultural products. US firms should
also find greater opportunities for direct investment and technical licensing
agreements. In addition, South Korean interests in trade and finance
matters in international forums should coincide more closely with those of
the United States)
On the cost side, South Korea will increasingly compete with the United
States in medium-technology products, creating the potential for consider-
able trade friction. South Korean officials are sensitive to the kind of
strains that have characterized trade between the United States and Japan,
and they clearly will seek to avoid similar problems. We doubt that South
Korea will do much to slow the growth of their own sales to the United
States, but we expect that Seoul will attempt to buy more from the United
States to keep trade in balance.
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South Korea: Moving u
the Technology Ladder
Early Success in Light Industry
Over the past two decades the South Korean economy
has emerged as one of the fastest growing in the
world, in the forefront in both GNP gains and export
expansion. Although growth stalled in 1980 and 1981,
the economy has largely recovered; between 1962 and
1982 South Korean real GNP increased more than
8 percent annually and per capita income more than
tripled in real terms.
Aggressive marketing of labor-intensive, light manu-
factured goods propelled the economy during the
1960s and early 1970s. Seoul's export-oriented devel-
opment strategy took advantage of the country's low-
cost, industrious labor force and strong consumer
demand in the United States and Japan. Paced by
textiles, footwear, plywood, and consumer electronics,
foreign sales of light manufactured goods increased
44 percent annually between 1964 and 1975.
The government pursued an interventionist policy to
push the economy in desired directions. It used a full
range of tax and financial incentives and, most impor-
tant, control over credit allocation to lead private
investment into designated industries. And where
private investors were unable or unwilling to invest,
the government stepped in to establish state-owned
entities.
The Push to Heavy Industry
By the mid-1970s, South Korean economic planners
recognized the increased competition in labor-
intensive industries posed by lower cost producers
such as China, India, and Malaysia. During the
1970s, South Korean wages rose almost 30 percent
per year. In addition, South Korea's labor-intensive
exports were being hit with a variety of import
restrictions in developed-country markets
In response, Seoul embarked on an ambitious pro-
gram to broaden the country's industrial base. Judg-
ing that it would gradually lose its comparative
advantage in labor-intensive light industries, the gov-
ernment vigorously pushed a shift to capital- and
technology-intensive heavy industries in its Fourth
Five-Year Plan (1977-81). These included machinery,
iron and steel, automobiles, shipbuilding, chemicals,
and more sophisticated electronics. The push to heavy
industry also complemented the country's plans to
develop an indigenous defense industry.
The private sector, responding to government finan-
cial incentives-especially subsidized credit-under- 25X1
took massive investments in targeted heavy industries.
Investment during 1977-79 increased 50 percent in
real terms with 80 percent of manufacturing invest-
ment going into heavy industry. Benefiting from its
relatively low labor costs, an ability to construct
facilities in record time, and the utilization of the
most modern equipment, South Korea quickly became
competitive in world markets in steel and shipbuild-
ing. Ship exports-consisting largely of bulk carriers
and container ships-increased fivefold between 1979 25X1
and 1982, and South Korea ranked second in the
world in production and exports by the early 1980s.
In several of the new industrial areas, however, South
Korean performance was below plan. In some cases-
notably petrochemicals, heavy machinery, and
autos-demand was well below expectations and the
industries were saddled with substantial excess capac- 25X1
ity. The second oil shock not only contributed to the
softness in demand but also weakened Korea's com-
petitiveness in sectors with high energy inputs. Seoul
was also well below target for the electronics industry,
largely because of a failure to upgrade technology.
In retrospect, Seoul clearly overinvested in heavy 25X1
industry while neglecting investment in light indus-
tries and technology upgrading. The misallocation of
investment resources, coupled with a rigid exchange 25X1
rate policy and overly stimulative fiscal and monetary
policies, eroded South Korea's export competitiveness.
As a result, real GNP growth slowed to 2 percent per
year during 1980-82.
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Table I
South Korea: Investment in
Manufacturing by Sector
Table 2
South Korea:
Commodity Composition of Exports
1977-81 1982-86
Actual Plan
100
100
30.3
32.9
Chemicals
21.6
20.9
Metals
19.9
9.2
Machinery (including electronics)
28.2
37.0
Focusing on Technology
Learning from its mistakes, South Korea is focusing
on upgrading technology in the Fifth Five-Year Plan
(1982-86). Emphasis is on investment in research and
development and manpower development rather than
in physical facilities for heavy industry. Skill- and
knowledge-intensive industries, as opposed to capital-
intensive industries, are being encouraged. The plan is
focusing on a fairly narrow range of technology-
intensive industries and light industries, in contrast to
the broad expansion of heavy industry pursued'in the
fourth plan (see table 1).
Seoul foresees extremely rapid growth in electronics
(semiconductors, computers, and communications
equipment), general machinery (machine tools and
parts and components), and shipbuilding. Industries
that use large amounts of energy- particularly steel,
nonferrous metals, and petrochemicals-will grow
slowly and output primarily will be to meet domestic
demand. Improving quality will be the watchword for
light manufacturing such as textiles, clothing, and
footwear, as these industries move into the higher-
value-added ends of product lines. The auto industry
has been targeted for fairly strong growth, although
the World Bank has advised Seoul to proceed cau-
' South Korea has generally followed World Bank policy recom-
mendations; it is required to do so to qualify for structural
1980
Actual
1986
Plan
Total
100
100
Primary industry
9.1
5.5
Light industry
47.6
39.5
Chemicals
4.5
2.7
Steel and metals
14.3
13.2
Machinery
19.7
32.6
Of which:
Electronics
11.0
13.0
Transport equipment
6.6
15.4
Other
4.8
6.5
The government is projecting rapid development in
the targeted skill-intensive industries. By the mid-
1980s Seoul intends to be producing large-scale inte-
grated circuits, microcomputers, and sophisticated
electronic switching systems. In shipbuilding, Korea
expects to build more advanced types of ships and
offshore equipment, including liquefied natural gas
carriers. Seoul expects these knowledge-intensive in-
dustries to account for much of the growth in the
country's exports in the 1980s (see table 2). According
to official projections, machinery and equipment ex-
ports-including general machinery, electronics, and
transport equipment-will increase 32 percent a year
during 1982-86. Such a rapid rate of increase will be
made easier because Seoul is starting from a small
base; its machinery exports in 1981 totaled only $1.8
billion-less than 1 percent of the $250 billion world
market.
South Korean economic planners believe that the
knowledge-intensive sectors they are targeting, with
their relatively low energy requirements and high
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t-onnaennai
reliance on skilled labor, will best exploit the country's
primary strength-its work force-while protecting it
from its primary weakness-a lack of natural re-
sources. The other East Asian NICs (Singapore,
Taiwan, and Hong Kong) have opted for similar
strategies. To a large extent this development path is
a natural evolution for these countries as they con-
tinue following the Japanese model. The advance of
the newly industrialized countries into the same fairly
narrow range of medium-technology products, how-
ever, could lead to overcapacity as they compete for
limited overseas markets. Just as South Korea and
Singapore built too much petrochemical capacity, the
four Asian NICs may be building too much capacity
in medium-technology industries. Their leaders are
betting on a robust demand for these products during
the rest of this decade.2
Supporting Policy
Seoul is attempting to move up the technology ladder
using a detailed set of policies. The Ministry of
Science and Technology's Five-Year Research and
Development Plan contains a wide range of policies to
encourage manpower development, enhance domestic
research and development (R&D), and attract foreign
technology. As in the past, Seoul is providing gener-
ous tax and financial incentives to encourage firms to
invest in targeted skill-intensive fields. The govern-
ment is also providing benefits for spending on
research and development and manpower develop-
ment. These include a 10-percent tax deduction for
such expenditures, deferred tariff payments on re-
search equipment and facilities, and a five-year tax
holiday for research facilities. Seoul is also protecting
domestic producers from imports in selected indus-
tries, particularly computers and machine tools, by
banning or severely restricting imports of such prod-
ucts.
Upgrading Labor Skills. To meet the increased need
for skilled workers in these more sophisticated indus-
tries, Seoul is implementing a broad-based program to
upgrade educational and technical training. Univer-
sity enrollment is being expanded significantly, schol-
arships and research subsidies are being increased,
and military exemptions are being granted to gradu-
ate students. In addition, overseas training programs
and exchanges with prestigious foreign universities
are being expanded. By 1991 the Ministry of Science
and Technology plans to train 7,000 Koreans over-
seas, using government funds and grants. In sum,
government spending on education will increase 80
percent in real terms during 1982-86 compared with
the previous five years.
Seoul is also putting priority on attracting Korean-
American engineers and scientists from abroad. By
granting higher salaries and good pensions, the Minis-
try of Science and Technology hopes to induce 2,250
professionals to return to Korea for research or teach-
ing positions on either a permanent or short-term
basis over the next five years. The Korea Advanced
Institute of Science and Technology is already well
along, having induced about 150 Ph. D.'s to return to
Korea. In the private sector, Hyundai-South Korea's
largest conglomerate-has repatriated several
Korean-American scientists to oversee research on
64K RAM microchips.
steel industries.
Strengthening Public R&D Institutes. Seoul expects
the country's nine government research institutes to
play a major role in upgrading the nation's technologi-
cal prowess (see box). These research institutes,
staffed by a pool of well-trained and dedicated scien-
tists and engineers, work closely with private firms in
industry-oriented R&D. The Korea Institute of Elec-
tronics Technology, for example, is the center for the
development of computer technology and semiconduc-
tors. The institute, located in the Gumi electronics
estate in central Korea, is currently undertaking
projects in home computers, software engineering and
manufacture, computer-aided design, and integrated
circuits. The Korea Institute of Machinery and
Metal, located near the massive Ch'angwon industrial
complex in the southeastern part of the country,
focuses on projects relevant to the shipbuilding and
25X1
25X1
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Name
Korea Advanced Institute of
Science and Technology
Korea Advanced Energy
Research Institute
Korea Institute of Electronics
Technology
Korea Institute of Machinery
and Metals
Korea Standards Research
Institute
Korea Electrotechnology and
Telecommunications Research
Institute
Korea Research Institute of
Chemical Technology
Korea Ginseng and Tobacco
Research Institute
Comment
The MIT of Korea-has both educational and research role performs applied R&D directed toward
commercialization by private firms-noted for using reverse engineering to avoid patent restrictions-
top officials did graduate work at US universities.
Center for nuclear-energy-related research-comparable to US national laboratories such as Argonne
or Oak Ridge-working on nuclear fuel fabrication technology and spent fuel waste management-top
officials have technical backgrounds and degrees from US universities.
Provides design and support for semiconductor and computer industries-employs about 250 people,
one-third of whom are engineers-employs 15 Ph.D.'s with degrees from US universities.
Actively seeking to acquire advanced technology and adapt it to Korean needs president has Ph.D. in
engineering from Penn State.
Major efforts are in minerals, geological surveys, and mining technology-building up R&D strength in
coal utilization.
Helps domestic firms upgrade product quality and reliability by providing service for improving
measurement practice.
Most of the other public research institutes are locat-
ed in the Taedok science city in central Korea along-
side private and university research institutes. These
institutes are involved in a broad range of projects
including the Korea Advanced Institute of Science
and Technology's research into fiber optics and bioen-
gineering. The Taedok science city is expanding rap-
idly and the Ministry of Science and Technology
envisions a population of 50,000 people and 30 agen-
cies by 1991. The science park will have a computer
network, central information library, and expanded
housing and infrastructure within a few years, all
designed to enhance the private-sector's technological
capabilities.
Attracting Foreign Technology. South Korean eco-
nomic planners also want to attract advanced technol-
ogy from abroad to accelerate the move up the
technology ladder. Seoul envisions the inflow of for-
eign investment increasing from the $100 million per
year average of recent years to $700 million in 1986.
To encourage this growth, the Ministry of Finance
announced several policies late last year to improve
the foreign investment climate. These measures ex-
panded the number of industries eligible for foreign
investment, reduced red tape, and allowed greater
foreign equity shares in selected industries.
Seoul also views technical licensing agreements and
joint research projects as ways to attract foreign
technology. The government has significantly liberal-
ized regulations concerning technology imports and
this has resulted in increased inflows of technology
imports over the past several years. Joint research
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South Korea: Key Industrial Sites
CHEDO
fil
Cheju?haehyap
0 25 50 Kilometers
r=iiin=om
0 25 50 Miles
Boundary representation is
not necessarily authoritative
3uw
iectkuntcs
Sea
of
Japan
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projects in mechanical engineering, genetic engineer-
ing, semiconductors, and communications technology
are under way or planned with MIT, Bell Laborato-
ries, and ITT.
Increasing R&D Spending. Seoul projects a sharp
increase in R&D spending over the next five years to
facilitate the move into knowledge-intensive industries
(see table 3). The Ministry of Science and Technology
expects R&D spending to increase from the current 1
percent of GNP to 2 percent of GNP by 1986.
According to press reports, Seoul will create a tech-
nology development fund, which will be financed by
requiring government-invested firms to invest 3 per-
cent of their income in the fund and providing tax
incentives for private firms that do the same.
The importance the government attaches to upgrad-
ing the country's technological base is underscored by
the recent initiation of quarterly science and technol-
ogy review meetings in which the heads of the nation's
research institutes make oral presentations to Presi-
dent Chun on their plans and progress. The meetings
are patterned after South Korea's highly successful
monthly trade promotion meetings, which over the
years have contributed to the country's ability to
respond quickly and flexibly to changing market
conditions
Industry's Role
Taking their cue from the government and armed
with technical licensing agreements with multi-
nationals from the United States, Japan, and Western
Europe, South Korea's large conglomerates are gear-
ing up for a major move into skill-intensive areas.
Nowhere is this more apparent than in electronics.
The inauguration of Hyundai Electronics in March
symbolized the commitment of the country's largest
conglomerate to a major thrust into electronics.
Hyundai's president, Chong Chu Yong, announced a
five-year, $450 million investment program to mass-
produce semiconductor chips in facilities in South
Korea and in California's Silicon Valley. Hyundai
plans to produce 120,000 silicon wafer starts by 1984
and 750,000 wafer starts annually later in the decade.
About half of the output is for use in the company's
auto, shipbuilding, and power generation plants.
Table 3
Selected Countries: Ratio of R&D
Expenditures to GNP, 1980
0.7
0.6
2.3
2.3
In preparing for its rush into more sophisticated
electronics, the Samsung Company, Ltd., has recently
merged its three electronics-related firms. Backed by
a technical agreement with ITT, Samsung will pour
$400 million into semiconductors and electronics proj-
ects over the next five years. The company plans to
fabricate 32K RAM microchips beginning next year.
With the start up of its joint venture plant with
Corning Glass in Suwon in March, Samsung has
already become a world-class competitor in one of the
most difficult glass technologies, glass picture tubes
for color televisions
Gold Star, which has been in the forefront of Korea's
electronics industry and has licensing agreements
with Western Electric and Honeywell Information
Systems, plans to turn out 64K RAM chips by 1984, a
goal they can probably reach. According to press
reports, the company's policy is to send large numbers
of technical staffers to the United States each year for
several weeks of training
South Korean firms are also advancing into comput-
ers and robots. Samsung has a licensing agreement
with Hewlett Packard for minicomputer production
and three other Korean firms also will be making
home computers this year. The Kolon group recently
joined forces with Japan's Fanuc Corporation to set
up South Korea's first plant to manufacture industrial
robots.
25X1
25X1
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South Korean businessmen are seeking to move into
other more technology-intensive industries. The
Daewoo Corporation, for example, plans to move into
more sophisticated machine tool production, including
numerically controlled machine tools, and has licens-
ing agreements with firms in the United States,
Japan, and Western Europe. Hyundai will be upgrad-
ing its technological capabilities in the auto industry;
the company has a technical licensing agreement with
Mitsubishi to produce a front wheel drive car that will
be marketed in the United States in the mid-1980s.
South Korean shipbuilders-Hyundai and Daewoo-
have licensing agreements with major European ship-
builders to bolster their move into more sophisticated
ships. The Lucky group is moving into genetic engi-
neering and will pump $80 million into such projects
this year.
Prospects
The Strengths. South Korea has a number of factors
working in its favor in moving ahead with its industri-
al restructuring. The country's highly motivated, well-
educated, adaptable work force remains a major
advantage. South Korean schools will turn out thou-
sands of highly qualified engineers and scientists over
the next decade. According to government projec-
tions, the percentage of the school-aged population
enrolled in higher educational institutes will increase
from 16 percent in 1980 to 31 percent in 1986,
roughly equal to the 34-percent ratio in Japan. The
industriousness and skills of Korean graduates are
acclaimed by businessmen worldwide. According to
US industry specialists, engineering graduates from
Korean universities are well trained even when com-
pared with graduates of the best US schoolsF__1
From a cost perspective, South Korean engineers
remain a solid bargain. Whereas a young engineer in
the United States is paid $2,000 to $2;800 a month, a
Korean electronics firm can hire four or five engineers
for the same cost.
The size and diversification of Korea's major con-
glomerates give the country an important advantage
over the other East Asian NICs. Whereas Taiwan has
only two firms in Fortune's Top 500 firms outside the
United States, South Korea has 10. Korean industrial
giants-Hyundai, Daewoo, Samsung, Lucky-can
afford to gamble on new products and take initial
losses in the new, technology-intensive industries,
offsetting the red ink with profits from their other
business areas. They also have greater financial re-
sources to commit to developing new products. In
addition, South Korea's larger population and GNP
give it a larger domestic market.
South Korea's demonstrated capabilities in assimilat-
ing new technology and the government's clear-cut
commitment also augur well for the country's move
upmarket. Seoul's backing-demonstrated by the
massive sums it is spending on R&D and the support
it is providing to the private sector through the public
research institutes-gives Korean industry a leg up on
its rivals. South Korea has already moved ahead of
the other East Asian NICs (but not Japan) in semi-
conductors. The Korea Institute of Electronics Tech- 25X1
nology's facility in Gumi is starting production of 32K
memory chips and plans to produce 64K chips next
year. According to press reports the plant will be the
largest in Asia outside of Japan. Seoul envisions a 25X1
large domestic market absorbing much of the coun-
try's production; Hyundai and Daewoo, for example,
project 40 to 50 percent of their chips going to firms
in their own business groups.
The Obstacles. The speed and extent to which South
Korea succeeds in moving to more advanced technol-
ogies will depend. on Seoul's success in dealing with
several internal obstacles and on how rapidly interna-
tional demand increases. The country will need to
develop better marketing and quality control to dem-
onstrate to consumers the reliability of its products in
new, medium-technology goods. To date, the quality
of many of these products has been poor. The domes-
tically made Pony automobile and the country's con-
sumer electronics are cases in point. Return rates on
Korean electronics products purchased by American
military personnel, for example, have been high. In
our judgment South Korean industrialists-only re-
cently turning their attention to the marketing aspects
of the production process and the need for better
quality products-will gradually improve in these
areas
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Supplying enough skilled workers could present an-
other obstacle. Despite its ambitious training pro-
gram, South Korea will probably have difficulty
meeting the demand for skilled workers, particularly
scientists. According to the Ministry of Science and
Technology estimates, the country will have a short-
age of 30,000 scientists in 1991. This will probably
mean that Korean scientists will continue to work long
Table 4
East Asian NICs:
Direct Foreign Investment a
hours-often 12 hours a day.
Perhaps the most significant problem is the country's
somewhat tarnished image among foreign investors. A
number of foreign companies have charged that the
policies of the South Korean Government have been
arbitrary and unresponsive in recent years. Even
though leaders in the Chun government have been
working hard to ease investor worries, South Korea is
lagging well behind Singapore and Taiwan in attract-
ing foreign participation in its industrial restructuring
effort (see table 4). Many observers, including the
World Bank, believe that South Korea will not be able
to meet its ambitious goals, especially in electronics,
without larger inflows of foreign technology through
joint ventures. Top government officials are aware of
this need and liberalization measures have been an-
nounced. To date, these new regulations have not been
fully implemented, in part because of resistance with-
in some ministries. In recent months, however, offi-
cials in favor of increased foreign investment have
gained greater influence, and we believe they will be
successful in expanding and implementing policies
more favorable to foreign interests.
A closely related problem is the reluctance of many
companies in the developed world to provide advanced
technology to South Korean firms. Japanese industri-
alists, in particular, fear the competitive threat posed
by South Korea. Japanese firms have been unwilling
to provide South Korea with advanced technology in
the electronics, shipbuilding, and steel industries. The
lack of South Korean patent protection has been the
major factor in discouraging several US firms from
sharing technology with South Korea.
South Korea has been
getting around this obstacle to some extent by pirat-
ing technology from advanced countries, particularly
in the computer field for home computers and in video
tape recorders.
Singapore
739
941
1,669
1,797
Taiwan
114
126
161
151
South Korea
89
36
8
101
Hong Kong
NAb
NAb
NAb
NAb
a Data are annual flows reported by IMF Balance-of-Payments
Yearbook.
b Not available.
Internal factors aside, South Korean success in its
industrial restructuring effort will hinge in large part
on the rate-of economic growth in the developed
world. Even with strong domestic demand, much of
Korea's output is targeted for OECD markets.
South Korean licensing
agreements with multinational corporations generally
do not provide guaranteed markets for the output. As
a result, import demand in the United States will be a
major determinant of South Korean export per-
formance.
Significant Advances Coming. We do not foresee
South Korea moving into a broad range of high-
technology products. It lacks the size and financial
capabilites to imitate Japan's broad industrial devel-
opment, and its level of technology will remain well
behind that of developed countries for at least the rest
of the 1980s. But in our judgment, South Korea will
be successful over the next five years in establishing
market niches in selected medium-technology prod-
ucts. South Korea will:
? Move rapidly into more sophisticated products in
the already established shipbuilding industry, fur-
ther enhancing competitiveness in this sector.
25X1
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2.5X1
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? Make significant advances into selective medium-
technology, skill-intensive areas such as machine
tools, small computers, computer peripherals, and
telecommunications equipment.
? Move rapidly into higher quality products in the
traditional textile and footwear industries.
In shipbuilding Seoul hopes to expand exports from its
current 8-percent share of the global market to about
10 percent, a gain that would be made largely at the
expense of West European and Japanese firms. In
microelectronics and machine tools, South Korean
companies will be competing to some extent with both
US and Japanese companies; in some cases the Kore-
ans are aiming at product lines that US and Japanese
firms are giving less emphasis to as they themselves
move up to higher technology goods, such as in less
sophisticated lathes and lower priced stereo equip-
ment. Nonetheless, some small and medium-sized US
companies are likely to feel the increased competition.
In textiles and footwear Seoul's strongest competitors
will be the other East Asian NICs.
Implications for the United States
Aside from the clear strategic gain for the United
States resulting from a dynamic and successful South
Korean economy, Seoul's move upmarket will create
both economic costs and benefits for the United
States. On the benefits side, it will generate increased
import demand for advanced production equipment.
According to the US Embassy in Seoul, demand will
be particularly strong for analytical and scientific
instruments, special machine tools and construction
equipment, large-scale computers, industrial controls,
telecommunications equipment, and electronics indus-
try production and test equipment.
If price and quality are comparable, Seoul will favor
US suppliers over Japanese or European firms. Seoul
is sensitive to US-Japanese trade problems and works
hard to keep its trade with the United States in
balance by purchasing more from the United States.
South Korea has a large deficit with Japan and
discourages purchases from Tokyo where possible.
Partly reflecting Seoul's "buy American" policy, the
US in 1982 surpassed Japan as the largest supplier to
South Korea for the first time in 15 years. Rising
Korean incomes will also stimulate demand for US
consumer goods and agricultural products.
In addition, South Korean interests in trade and
finance matters in international forums should more
closely coincide with those of the United States.
Korean interests will increasingly lie with the devel-
oped rather than the developing countries on North-
South issues. In the GATT, for example, Seoul is 25X1
likely to be more supportive of the United States on
trade issues.
Seoul's industrial restructuring will include substan-
tial import liberalization resulting in easier access for
US firms to the Korean market. US firms should also
find increased opportunities for direct investment and
technical licensing agreements as Seoul liberalizes its
investment regulations. The Chun government, how-
ever, will go slowly in removing protection from the
new industries it is fostering, especially machinery
and electronics.
South Korea's new industrial policy will also create
some problems for the United States. Korean exports
to the United States are now made up largely of low- 25X1
technology, labor-intensive goods such as textiles,
footwear, and consumer electronics. As we have seen,
however, during the 1980s South Korea will increas-
ingly compete with US industry in medium-technol-
ogy products-such as home computers, computer
peripherals, and machine tools.
We do not expect the technology transfer issue to
become a major problem in US-South Korean rela-
tions, at least in the near term. South Korea does not
possess technologies sought by the Soviets and is
unlikely to reach such a stage over the next two or
three years. Beyond then, however, South Korea could
produce goods sought by the USSR such as semicon- 25X1
ductors, computer software, and telecommunication
equipment. Because of political differences-which
currently limit economic exchange to small amounts
of indirect trade-we do not expect South Korea to be
an important supplier to the Soviet Bloc.
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