Sectoral Innovation System and a Technological Catch-up: The Case of the Capital Goods Industry in Korea

Abstract

This paper deals with the question of why making a catch-up is even more difficult in capital goods industries that are usually led by small or middle-sized companies. It relies upon the sectoral systems of innovation as a theoretical framework for analysis. From the findings, the paper has identified three sources of difficulties in the catch-up of the capital goods industry, particularly in machine tools. First, while small firms in the capital goods industry are usually specialized suppliers to big final goods assembly firms in the consumer goods industry or other industries, and thus the tacit knowledge accumulated from the interface between the producer and the customer firms is very important, a serious difficulty lies in the fact that local client firms are reluctant to use locally made capital goods due to their poor quality and low precision level. Second, while a successful catch-up first requires the ability to produce goods of better quality and lower prices than those produced by incumbent firms from advanced countries, a typical difficulty arises because incumbent foreign firms often react by charging predatory prices upon news of the local development of capital goods by latecomers. Third, if the catch-up firms overcome this barrier, then the next strategy used by incumbent firms is to charge latecomers with legal actions for patent violations. Despite these intrinsic difficulties, the Korean economy has achieved a very slow but gradual catch-up in the capital goods industry. The paper has attributed such achievement to several factors, including the strenuous efforts of the government, niche markets in general-purpose machine tools and emerging economies, and finally, the increasing introduction and adoption of information technology (IT) or digital technologies in machine tools. Furthermore, the three sources of barriers to catch-up imply that any latecomer firms that wish to record a successful catch-up should have these barriers in mind from the beginning of the road towards catch-up. We observe that a successful catch-up requires the ability to produce goods of better quality and lower prices than those produced by incumbent firms from advanced countries. After the initial success, they should also be well prepared against eventual or possible attacks by the incumbent firms in the forms of predatory pricing and intellectual property rights (IPR) charges.