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South Korea’s economic transformation is a familiar story, but it has also produced misperceptions. Large, often family-run, corporations known as chaebols were crucial to catapulting the country’s economy ahead, especially the restructurings, R&D, and fierce competition following the 1997 Asian financial crisis. But since then, South Korea’s economy has continued to evolve in important ways that sometimes go unrecognized. Battle-tested conglomerates and start-ups have both become important engines of growth amid a highly competitive, globalized business environment characterized by relentless digital innovation, trends that are likely to continue for the foreseeable future.

South Korea’s Remarkable Growth

Assessing a country’s economic competitiveness involves numerous factors, but per capita GDP is one of the most simple and clear-cut. In 1994, South Korea crossed the $10,000 per capita GDP threshold, but this transition also introduced the possibility of falling into the middle-income trap without joining the ranks of high-income countries. Yet South Korea managed to avoid this fate. Twenty-three years later in 2017, Seoul reached another milestone: exceeding the $30,000 per capita GDP mark and entering the pantheon of advanced economies.

Seoul succeeded in part by focusing on two critical drivers for sustained growth: upgrading technology and maximizing management efficiency. Beyond that, South Korea evaded the middle-income trap through a combination of three factors: R&D, manufacturing, and exports. Other than Israel, South Korea is the only country that spends more than 4 percent of GDP on R&D. Coincidentally, Seoul reached 2 percent of GDP in R&D spending in 1994—the same year it crossed the $10,000 per capita GDP threshold. South Korea invested more than 4 percent of its GDP in R&D for the first time in 2014, and in 2019, that figure reached 4.6 percent. In 2020, South Korean corporate R&D accounted for 79 percent of the country’s total R&D spending as a share of GDP, while the shares of R&D spending by the government and higher education were around 12 percent and 9 percent, respectively. These investments enabled South Korea to become a global player in semiconductors, mobile phones, electric vehicle (EV) batteries, automobiles, and other premium consumer goods. Today, South Korea is the world’s tenth-largest economy, and it ranked as the fifth-leading country for manufacturing output in 2015 according to a Brookings Institution report.

Jung Ku-hyun
Jung Ku-hyun is a professor emeritus of Yonsei University and the former president of the Samsung Economic Research Institute.

Hard power alone does not account for South Korea’s economic success. Several other factors have contributed including the wave of growing South Korean soft power, the restoration of democracy in 1987, the decision to fully liberalize imports in 1989, and the move to join the Organisation for Economic Co-operation and Development in 1996. South Korea is also the only former aid recipient to become a donor country since World War II. Combined, these efforts triggered cascading ripples across the country’s political, economic, sociocultural, and technological arenas.

Chaebols, Start-ups, and Economic Growth

How much do large corporations contribute to a country’s growth? Until the explosion of big tech companies such as Amazon, Apple, Facebook (now known as Meta), and Google in the United States or their Chinese peers (Alibaba, Baidu, Huawei, and TenCent) in the 2010s, the global economy was led by traditional multinational corporations. A number of the corporate powerhouses that have fueled South Korea’s half-century of remarkable growth are chaebols. Among the most prominent ones are Samsung, SK, Hyundai, LG, and Lotte. Numerous factors helped spur the growth of the world’s leading technology giants and other crucial multinational firms, but four in-country indicators are important.

First, the greater the size of a firm’s home economy, the greater its ability to achieve critical scale tends to be. Given the myriad risks of expanding into overseas markets, firms that already reached scale domestically are often better able to absorb costs and cover the risks of international ventures. Second, domestic consumers’ demand for sophisticated, high-quality goods and services drives companies to work assiduously to improve. Third, an advanced science and technology environment, including competitive universities and high-skilled knowledge workers, spurs innovation. And fourth, a competitive industrial ecosystem in a firm’s home country often encourages it to pursue innovation and strive for high productivity.

The country that most stands out on all four indicators is the United States. It also has the world’s key reserve currency and self-sufficient energy resources, other attributes that make it a formidable global economy. As table 1 shows, various indexes for ranking top corporations feature many U.S. and Chinese firms, as well as a handful of companies from other leading manufacturing powers like Japan, Germany, and South Korea.

Given the size of South Korea and how competitive the globalized economy is, even having a few firms like Samsung and Hyundai in the Fortune 100 and other rankings is a notable achievement. Meanwhile, other South Korean companies continue to make inroads. Several other South Korean firms fall outside the Fortune 100 but still are listed in the Fortune 500, including LG, POSCO, Hyundai Heavy Industries, and SK Hynix. Big South Korean tech companies such as Naver and Kakao still lag global leaders in sales, but their market valuations are growing rapidly.

Table 1: Leading Firms Among the Top Advanced Economies
Country FT’s the Top 100 Companies (June 2020) PWC Global Top 100 Companies by Market Capitalization (June 2020) Fortune’s Global 100 (2020) Top 100 R&D Spending by Firms (2019)
United States 47 59 34 35
China 24 13 24 10
Japan 3 3 8 15
Germany 1 1 7 12
South Korea 3 1 3 4
Note: These figures represent the number of firms from each country in the respective rankings.

How much did South Korea’s economic environment contribute to the growth of the chaebols? As the aforementioned statistics show, in the early twenty-first century, South Korea has an edge in R&D investments and falls in the middle in terms of its economic size and industrial ecosystem. The South Korean market is also known as a key test bed for global firms due to its wealth of early adopters of key trends and its choosy consumers.

Conversely, how do firms contribute to national economic development? Do companies’ competitive edges fuel a country’s national economy, is it the reverse, or perhaps some of both? This is a key question in the minds of South Koreans, even though they feel a surge of pride when they see South Korean products from titans like Samsung and LG with a global reach. Many believe that the chaebols succeeded because of protectionism and other favorable government policies in the 1970s and 1980s. That said, successful businesses also help countries address issues like a lack of trained human capital at the early stages of industrialization.

Either way, the vital point is that globalization and international competition sharpened and strengthened South Korean firms (including the chaebols) starting in the mid-1990s and early 2000s. Chaebols went through massive transformations driven by intensive R&D pushes. The 1997 Asian financial crisis was a key turning point. Through massive disruptions but also unparalleled innovations, South Korean companies (including chaebols) became more competitive and global. Samsung’s former chairman Lee Kun-hee, who pioneered the company’s “new management” mantra beginning in 1993, oversaw a landmark achievement a little over a decade later in 2004 when Samsung Electronics recorded $10 billion in profits for the first time in its history. South Korea’s economic trajectory from the 1990s to the 2020s, led by information and communications technology and services, has differed substantially from the country’s growth in the 1970s and 1980s, which was based on heavy industry and chemical manufacturing.

Meanwhile, South Korea’s second phase of economic growth since the mid-1990s has been driven largely by an array of private companies (including start-ups), despite arguably excessive government regulations. Table 2 illustrates just how much innovative South Korean firms have contributed to the country’s economic prospects. South Korea ranked eighth in the world in the 2022 International Institute for Management Development’s (IMD) World Digital Competitiveness Ranking, and the country came in sixth in the World Intellectual Property Organization’s 2022 Global Innovation Index. South Korea would not have managed to become a leader in the digital technologies of the Third Industrial Revolution without the private sector, and domestic companies have played an indispensable role amid the accelerated technological innovations of the Fourth Industrial Revolution in the 2010s as well.

While South Korea’s 1.4 percent share of global unicorns (start-up firms with a valuation of more than $1 billion) is relatively small compared to those of the United States (53.8 percent) or China (14.6 percent), table 2 still shows hints of the rapid transformation that South Korea’s start-up ecosystem has undergone. In particular, as the digital economy experienced an explosive expansion during the early stages of the coronavirus pandemic, South Korean start-ups exhibited remarkable growth in 2021. The total capital flowing into these companies reached $100 billion for the first time last year, according to a research firm called the Startup Alliance. 

Table 2: Leading Innovative Economiess
Country WIPO’s Global Innovation Index (2022) IMD’s World Digital Competitiveness Ranking (2022) StartupBlink's Global Startup Ecosystem Index (2022) Share of Global Unicorn Firms
(% of global share as of September 2022)
United States 2 2 1 53.8%
China -11 17 10 14.6%
Japan 13 29 20 0.5%
Germany 8 19 6 2.4%
South Korea 6 8 21 1.4%

World Intellectual Property Organization, “Global Innovation Index 2022,” 2022, https://www.wipo.int/global_innovation_index/en/2022; IMD World Competitiveness Center, “World Digital Competitiveness Ranking,” 2022,https://www.imd.org/centers/world-competitiveness-center/rankings/world-digital-competitiveness; StartupBlink, “Global Startup Ecosystem Index Report,” 2022, https://lp.startupblink.com/report; and CBI Insights, “Complete List of Unicorn Companies,” September 2022, https://www.cbinsights.com/research-unicorn-companies

The National Security Implications of Emerging Technologies

The digital innovations of the Fourth Industrial Revolution have coincided with a resurgence of great power competition, especially between the United States and China, highlighting the critical importance of resilient supply chains. Soon after he was inaugurated, U.S. President Joe Biden stressed the strategic value of semiconductors, EV batteries, medical supplies, and rare earth minerals. Moreover, lowering dependence on China for these resources and products is seen as a central reason for forging more secure supply chains for goods and services with major national security implications.

In May 2022, Biden visited Seoul just ten days after President Yoon Suk Yeol was inaugurated. As soon as Biden touched down in South Korea, his first official visit was to the Samsung Electronics plant in Pyeongtaek where he was hosted by then Samsung vice chairman Lee Jae-yong (who was promoted to chairman in late October), and his last meeting with South Korean representatives before leaving the country was held with Hyundai Motor Group Chairman Chung Euisun. These visits not only highlighted the growing importance of economic security in South Korea’s alliance with the United States but also the heightened global prominence of South Korean firms.

Yoon and Biden agreed to build a comprehensive bilateral partnership spanning several leading-edge technologies (like semiconductors, AI, and ecofriendly EV batteries) as well as critical tasks such as fighting climate change and building more resilient supply chains. During Biden’s visit, the Hyundai Group pledged to invest a total of $10.5 billion in the United States. A year earlier following a bilateral summit in Washington in May 2021, South Korean firms including Samsung, SK, LG, and Hyundai had announced a combined investment package of $39.4 billion in the United States.

These summits are just one sign that South Korea and its major companies today are no longer static recipients of security benefits; rather, they are contributing vitally to the long-term national security of South Korea and its partners like the United States.

But this does not mean that the chief executive officers of leading South Korean firms are in a comfortable position. Washington wants leading South Korean companies in key sectors such as semiconductors and EV batteries to extract themselves from China-centric supply chains and join U.S.-oriented ones. Yet South Korean companies cannot ignore the Chinese market. China accounts for roughly one-fourth of the global demand for semiconductors, which is about the same level (by some measures) as the United States. If U.S.-China competition intensifies to the point of conflict, South Korean firms will be in a tough bind.

How Corporate South Korea Is Changing

Global competition and innovation are changing what the typical South Korean company looks like. One of the most recent changes in the South Korean economy is the rapid rise of start-ups. As recently as 2011, all of the country’s top ten companies by market valuation were chaebols and subsidiaries. A decade later in 2021, startups like Coupang and Naver made it into the top ten, followed closely by Celltrion (eleventh) and Kakao (twelfth). The remaining companies in the top ten are chaebols,, but they can only remain on top through the brutal pressures of continual innovation. It is time to let go of the old perception that South Korea’s economy is still dominated by old-style chaebols.

Small and medium-sized enterprises (SMEs) remain a key issue for South Korea’s economic future too. It is undeniable that the Big Five chaebols have a commanding presence in terms of capital, technologies, skilled human capital, superior management capabilities, and brand power. They are both competitive and profitable. By comparison, when South Korea’s economic takeoff began in earnest in the 1970s, only a handful of SMEs had key technological know-how. Hence, conglomerates led the way in importing plants and technologies, with most components and materials coming from Japan.1 Conversely, Japan’s SMEs have higher technological capabilities since industrialization began there in the 1880s, whereas for most of South Korea’s SMEs that process dates to the 1970s.

Still, as South Korea’s age of industrialization crosses the half-century mark, highly competitive SMEs are emerging. That said, competition has had societal costs too. It is true that there are more than 5 million self-employed people in mostly service industry professions. Some of these people are going through a stark contest for survival, especially amid the current pandemic. This is a huge social problem.

South Korea’s economy has changed significantly. The popular imagery of the South Korea of an earlier era among observers in the United States was shaped by reruns of the television show MASH, North Korean provocations, and exports of cheap electronic products. Today, audiences across the United States and around the world have begun recognizing South Korean soft power (especially movies and dramas), high-quality consumer goods, and technological prowess. These changes have forced all South Korean firms to embrace competition to excel—chaebols and start-ups alike. Entering the 2020s, the pandemic has accelerated the speed of digital transformations and shifts in the global business environment. The South Korean economy and individual firms could be reaching another critical turning point similar to the 1997 crisis that spurred an earlier stage of innovation.

Notes

1 Kim Kwang Mo, Korea’s Heavy Industry and the Spirit of Park Chung-hee (Seoul: Giparang, 2015). See chapter two.