Porter’s Diamond and South Korea’s Information and Technology Industry

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Factor Endowments

South Korea’s two main innate basic factor endowments are its geographic location and the population’s culture of education. With the country’s close proximity to China and other Asian emerging markets, it stands ready to take advantage of its neighbors’ potentially prosperous telecommunications market.

Exportation is a vital, basic factor endowment. South Korea exported 24.2% of its total exports to the People’s Republic of China in 2011 with the main trade industries being automobiles, iron and steel, petrochemical products and electronic products, including telecommunications (Seung, 2012). Also, as a result of national revivalism, South Korea felt the pressure to break the technological reliance that was forced on them by their neighbor, Japan, after they occupied the country during WWII (Snyder, 2010). Another basic advantage South Korea has is the propensity of its population for education. The tradition extends back to the introduction of Confucianism where the scholar is respected as the top of the social hierarchy and the attainment of knowledge was the priority (Asia Society, n.d.). Education is highly valued in South Korea

The advanced factor endowments include the government’s vision and initiatives, a strong IT infrastructure, a well-educated and competent IT workforce, favorable IT policy, and a prominent IT cluster in the Daegu-Gyeongbuk where 16% of the entire domestic production of mobile devices is produced. Throughout the 1990s, the South Korean government initiated several advances and technological projects to upgrade the industry’s infrastructure (Larson, 1995). Currently, 97% of households have Internet connection, 100% mobile phone penetration rates and 40% smartphone penetration. The country is one of the most wired and has the fastest internet speeds in the world (Ahn, 2012). Likewise, the workforce is highly competitive for IT and telecommunications jobs. Workers are a product of a highly competitive education system that is a product of the culture’s emphasis on knowledge. South Korea ranked second in an assessment of education systems from the Economist Intelligence Unit (EIU) in November of 2012 (Gayathri, 2012). These advance endowments that were created and encouraged by the South Korean government as a response to limited basic endowments and were the catalyst for stimulating a surge in the IT industry.

Demand Conditions

The demand conditions in the home market that helped to create a competitive environment and create pressure for the industry to innovate faster and to create more advanced products largely come from home market buyers that are sophisticated and have a high demand for high-level technology. This home market includes individuals and businesses that have widespread social perceptions and expectations for technology and IT. The high penetration of the Internet and technology into the South Korean populace has driven the industry to become more effective and sophisticated, forcing market players to offer higher quality service at a lower price to consumers. This strong trendsetting local market also helps local firms to anticipate global trends (Ahn, 2012). The government has also made an effort to develop the IT industry by privatizing and deregulating which encourages fair market competition in the telecommunication market. The result is lower prices for better quality and service and the creation of a favorable business environment (Dong-Wan, June, Suk-Gwon & Kwan, 2000). The growing market for more advanced technology was created and perpetuated by a cyclical increase in the want and need of the population to access and utilize more advanced technology to strategically gain a placement in the industry both at home and in business.

Related and Supported Industries

South Korea has an economy that is ideal for related and supporting industries creating an environment that nurtured the IT industry. Among these industries that help drive the internal cycle are mobile phones, semiconductors, LCD and communication services and electronics manufacturing (Okjeong, 2011). They were also the first in commercializing the CDMA industry. The Republic of Korea’s government played a pivotal role by creating mobile telecommunication policies, formed the R&D structure for CDMA, mobilized research funds and arraigned for the participation of service providers in CDMA development (Mahlich & Pascha, 2007). The exportation of CDMA technology allowed South Korea to establish a solid network among south Asian countries. In addition, South Korea has not only a leading position in the semiconductor market, especially for DRAM (Dynamic Random Access Memory) but also ranks as a top manufacturer in LCD and mobile phones, ex. LG Group, Samsung Group, Doosann Group and DiaBell (DGFEZ, 2012). Through the reciprocal feedback from these relating and supporting industries, the IT industry creates a competitive environment that stimulates greater enhancement of technological advancements.

Firm Strategy, Structure, and Rivalry

South Korea has attempted to set up a very favorable business environment that helps create competitive advantages for the IT industry. The government has provided some tax- incentives for start-up businesses to encourage angel investors and venture capitalists to foster technology growth. The hope is that the strategy will lower the cost needed to use the telecommunication infrastructure and encourages diverse capital resources. The result is achieving a “creative” economy to revitalize growth and create more jobs (Swire, 2013). Also, there are FDI incentives aimed at foreign businesses to encourage investors. The result is a huge number of small and medium-sized venture companies in the IT industry that encourages the continuous development of innovative technology and improvement of business models in the business sectors through domestic rivalry because of market competition (DGFEZ, 2012). The South Korean government continues to foster the global growth of the IT industry by encouraging cutting-edge innovations through policy changes.

Conclusion

South Korea has become a global leader in the Information & Technology (IT) industry within the last twenty years. Upon examination using Michael Porter’s Diamond model the various determinants that made possible South Korea’s emergence into the global market of the Telecommunications industry was spearheaded largely by the government's understanding that reform and innovation among their existing infrastructure were needed in order to emerge as a global leader. Building on the innate basic factors that gave South Korea both a regional advantage of location and a cultural precedent of education, the government initiated an industry restructuring plan that has opened the telecommunication world market and secured its place among advanced nations.

References

Ahn, J. J. (2012, January). Broadband policy in South Korea: The effect of government regulation on the internet. Presentation delivered at Pacific telecommunications council conference 2012, Honolulu, HI. Retrieved from http://www.ptc.org/ptc12/images/papers/upload/PTC12_Broadband Policy Wkshop_Jamie Ahn.pdf

Asia Society. (n.d.). Retrieved from http://asiasociety.org/education/learning-world/south-korean-education-reforms

DGFEZ. (2012). Company setup-incentives & support. Retrieved from http://www.dgfez.go.kr/eng/page.php?mnu_uid=355

DGFEZ. (2012). It industry. Retrieved from http://www.dgfez.go.kr/eng/page.php?mnu_uid=362

Dong-Wan, T., June, P., Suk-Gwon, C., & Kwan, S. (2000). Korean telecommunication industry in transition. Telecommunication System, 14(1), 3-12. Retrieved from http://www.deepdyve.com/lp/springer-journals/korean-telecommunication-industry-in-transition-dKbZSyX8p5/10

Gayathri, A. (2012, November 27). Us 17th in global education ranking; Finland, South Korea claim top spots. International Business Times. Retrieved from http://www.ibtimes.com/us-17th-global-education-ranking-finland-south-korea-claim-top-spots-901538

Larson, J. (1995). The telecommunications revolution in Korea. (1st ed., pp. 114-116). New York, NY: Oxford University Press. Retrieved from http://books.google.com/books

Mahlich, D. J. C., & Pascha, D. W. (2007). Innovation and technology in Korea: Challenges of a newly advanced economy. (1st ed., pp. 287-289). Heidelberg, NY: Physica- Verlag. Retrieved from http://books.google.com/books

Okjeong Monica Baik. (n.d.). Retrieved from http://workspace.unpan.org/sites/internet/documents

Seung, J. K. (2012, January). Changes in comparative advantage of South Korea and her major trading countries. Paper delivered at Bangkok Conference 2012 International business and social science research conference, Bangkok, Thailand. Retrieved from http://www.wbiconpro.com/216-Seung.pdf

Snyder, S. (2010). China- Korea relations: Navigating the swiftly shifting current. Center for Strategic& International Studies, Retrieved from http://csis.org/files/media/csis/pubs/0103qchina_korea.pdf

Swire, M. (2013, May 21). South Korea plans tax incentives for startups. Tax-News. Retrieved from http://www.tax-news.com/news/South_Korea_Plans_Tax_Incentives_For_StartUps____60807.html