1. Purpose and Scope of the Study

Recent economic depression and unemployment issues have amplified the concerns regarding the competitiveness of Korean industries. Strengthening industrial competitiveness is one of the most important issues that the Korean economy faces. A vast amount of arguments and policy efforts on the issue have been made since the economic crisis. However, the growth engines of the Korean economy in the twenty-first century have not been clearly identified, which has been the cause of the increasing concerns and doubts about the competitiveness of Korean industries. What is the current status of Korean industries' competitiveness, and what will happen in the future? What are the best policy-tools to strengthen them?

In order to answer these questions, KDI had launched a two-year project on industrial competitiveness of Korea in early 2003. The KDI project tries to make, first of all, empirical study on changes in Korea’s industrial competitiveness. The project focuses on industries including IT, automobile, machinery and chemicals that are of significant importance not only in their employment and production shares but also in their leading role as the flagship exporting industry. It tries to investigate how firms, interrelated through supply chains and innovation networks, are gaining or losing competitiveness in a specific industrial segment, thereby to identify the sources of the changes in the industrial competitiveness and to derive pertinent policy suggestions. The first year works include to develop the analytical framework that is needed to comprehensively investigate the issues on industrial competitiveness ? readers are advised to refer the first year report for more detailed treatment on methodological issues.

From the first-year research, we were able to draw some conclusions on the current status of Korean industries. 1) It is not sure how long Korea can maintain international competitiveness in her flagship exporting products such as textile, automobile and IT products. 2) The basis of international competitiveness of the Korean exporting products is not so strong. And 3) Korea needs to find out new engines of growth. The challenges faced by today’s Korean economy would be termed as, in need of better words, the transition from the catch-up model to a knowledge-based economy.

The report is the result of the second year work on Korea’s industrial competitiveness. The work is done by KDI research staffs in collaboration with outside experts. Based on the research frameworks that were articulated in the previous year, the report comprises of three parts: Part I on the study of industries, Part II on some aspects of industrial competitiveness, and Part III on international comparison.

2. Analysis of Competitiveness by Industry

Electronics

The rapid progress has been made in the Korean electronics industry for the last 45 years since it started in 1959, and now it is one of the representative industries of Korea. It has become the most important industry in manufacturing sector in terms of exports and value-added production, and Korean enterprises are leading world market in various fields. The report reviews the current situation of competitiveness and strategic initiatives of electronics industry.

The trend in electronics industry can be briefly stated as 'digital convergence' and 'ubiquitous networking'. As the trend is developed, boundaries among industries tend to be blurred, making industry classification used in the past meaningless. Nowadays, 'IT manufacturing industry' and 'electronics industry interpreted in a broad sense' are used as if they are synonym. IT manufacturing industry is divided into four that are digital sets, digital parts, telecommunication and broadcasting equipment, software and digital contents. The Korean electronics industry became distinguished in digital sets and parts with digital TV, mobile phone, semiconductor, display and so forth.

The competitiveness of Korean electronics industry is very high in comparison with other industries. The growth rate and the contribution rate of TFP to the growth is much greater than the average of manufacturing sector. The value-added production of electronics industry in 2002 was approximately 32.1 trillion won covering 18.2% of the whole value-added production of manufacturing sector. Among the four main fields of electronics industry, IT products recorded the highest productivity growth. In the mean time, the productivity growth of companies with more than 300 employees is much greater than that of small-sized companies. In other words, “polarization” is clearly appeared. This phenomenon is also found in export ratio and labor productivity.

We surveyed and interviewed 21 electronics companies to find out the factors affecting competitiveness. As a result, technology, human resources, marketing, SCM, location of the company are the main elements for competitiveness. Among these, technology and human resources are the most important fountainheads. In addition to those, design ability, and quality control are also listed to add competitiveness.

We analyzed market and products trend, situation of competition, and problems to be solved by commodity. The objects are digital TV, DVDP&DVDR, mobile phone, LCD, PDP, and semiconductor. As a consequence of the analysis, in the most commodities, Korean enterprises belong to the top tier group. However, there exists technological insufficiency in some areas and the competitiveness of parts and production material is still very weak.

Strategic initiatives of the Korean electronics industry can be approached with three angles. Firstly, it is competitive relationship among countries. Korea is stuck in the middle between developed countries armed with generic technology and developing countries with competitive edge in price. Here, we can derive 'aiming high-tech and high-value added' strategy. To accomplish this subject, the following sub-strategies are needed; harmonizing technological ability and productivity, improving efficiency of R&D investment, leading industry’s new trend by introducing various mobile and complex products, and increasing the number of leading companies.

Secondly, it is polarization phenomenon and unbalanced growth. The competitiveness of Korean companies in electronic parts, material, and manufacturing equipment are very fragile. From this point, we meet in the face of 'reinforcing competitiveness of main parts, material, manufacturing equipment. The sub-strategies to achieve this goal are as follows; promoting active participation of large firms into the field, inducing FDI in the field and building up newly designed SMEs policy by government.

Thirdly, it is confrontation to technological progress. Next generation technologies such as BT, NT are noticing various technological fusion. The weakest point of Korean firms for this is that there exists big gap in terms of technology between Korea and developed countries in the field of BT and NT. Considering this situation, technological alliances with outstanding companies in the world is essential.


Automobile Parts

Starting from knocked-down assembly production in the 1960s, the Korean automotive industry has grown to be the world’s sixth largest auto-producing country with 3.1 million units produced in 2002. Korea’s automotive industry is considered one of the “growth-engine industries” in their significant role played in the national economy. Despite its rapid growth, however, the Korean automotive industry has to overcome problems, among which a low technology level and a relatively underdeveloped automotive parts industry are cited as the two most demanding tasks. Along with the growth of automobile manufacturers, Korea’s automobile parts industry has grown as subcontractors to domestic automobile companies. The existence of automobile companies affords small and medium sized automobile parts companies, whether they are first or lower tier subcontractors, the leverage to secure home market for growth. The stable relationships between parts suppliers and large companies in the automobile industry began to be dissolved even before the financial crisis. The growth of domestic automobile market had been saturated since the early 1990s when domestic demand for automobile did no longer grow as fast as the previous years. It was the automobile companies to breach the limitations of domestic market size by increasing exports; but most of smaller subcontractors had still remained inactive in exporting.

There has been a structural change in global automobile industry. Fierce competition among automobile manufacturers in the world and the changes in the way to produce automobile and to procure parts are the basic forces behind the structural changes in the world automobile industry. Korea’s automobile and parts companies have sensed the changing business environment for years. Along with market and demand conditions already in change, the financial crisis accelerated the changes and smashed the existing business relationships in automobile and parts industry. In the process of restructuring of automobile and parts industry, the existing relationships between carmakers and parts suppliers began to be dissolved. Conventionally, the automobile parts suppliers, whether they are subsidiary of conglomerate or independent company, were as subcontractors hierarchically organized by automobile assemblers, and the automobile assemblers were all, except one, main companies in the Korean conglomerates, Chaebols. The restructuring of Chaebols and their automobile companies caused this hierarchical relationship to change, even though it is still prevailing. Further, the existence of foreign companies offers a new opportunity to parts suppliers. As foreign contractors do not need stick to the existing relationships, domestic suppliers would have better leverage than the past and more competition as well.

There is a stark contrast between final assemblers and parts producers. Final assemblers, composed of small number of big companies, have achieved spectacular growth for a very short period of time and technological learning. In contrast, mostly composed of small-scale plants, parts suppliers are lagged behind not only in terms of technological capabilities but also in other business areas such as marketing and sales. The capabilities of Korea’s automobile parts producers have been regarded as being inferior to those of carmakers. Consistently over the years, the Korean government has put a strong importance of raising up technological capabilities of parts producers as one of the top policy goals to strengthen the competitiveness of Korean automobile industry as a whole. This emphasis is based on the judgment that Korean automobile parts producers are weak in their industrial competitiveness, compared with the carmakers. This judgment raises a contradiction: if the international competitiveness of Korean cars are enhancing with relatively very low in imported parts/components, then what about the competitiveness of domestic parts?

The chapter shows that Korea’s parts producers has been successful in producing cost-effective products based on efficiency in production processes, they also have some structural weaknesses partly originated from Korea-specific industrial organization. Industrial policy that intended to build inter-firm networks where final assembler was atop and numerous parts suppliers below had been successful in exports promotion purpose but it limited the growth of more varied and technologically agile firms in the industry. Over the years, a small number of parts companies has grown well to the point of competing in the world market, but majority of firms in the sector, in particular those firms in size, are now exposed to rapid changes in industrial organization and technologies. There is a big contrast even within the automobile parts producers, in particular in terms of firm size. With a few exceptions, SMEs in Korea’s automobile parts industry does not possess technological competence to overcome the disadvantage of being small. In other words, one of fundamental weaknesses of Korea’s automobile parts industry is the size disadvantage that hinders to enjoy economies of scale ? one of the key factors of competitiveness in capital-intensive industry. Further, as the global production networks are rapidly expanding and new competitor from low-cost countries are joining there, the gap between those companies that are able to wield global strategies and those not is expected to widen. Yet, the fundamental problem facing Korea’s automobile parts industry is that the companies in the former kind is only a minority.

Machinery

Despite comparatively short history, domestic machinery business has been gradually growing buttressing the national industrial development. And especially the general machinery business described in this study takes a large share in the manufacturing sector of Korea, placed in second in terms of total number of establishments(13 thousand), third in total employees(254 thousand) and fifth in value added(14.7 trillion won) in 2002. And there has been an improvement of trade deficit so it has been surplus since 2001. In spite of those external growth, domestic general machinery business still lacks competitiveness in new product development, core part/material supply compared to those advanced in the machinery field such as the US, Japan and Germany. The unique culture of the machinery business and the course of our economic development are pointed as the primary reasons for low competitiveness other than many things.

The machinery industry is distinctively a basic industry, greatly affecting the national competitiveness because it includes all kind of manufacturing sectors which provide manufacturing facilities firms need to produce goods. But the industry requires accumulated knowhow and field experiences because machines are built with so enormous knowledge of basic science and much experience that it is sometimes called technology embodiment. Thus developing nations can hardly compete with the advanced in the machinery field because it is very difficult to acquire all the various scientific knowledge and technology for a short time. With the fundamental distinction of the industry, uncompetitive nature of the domestic machinery industry can ascribe to the process of the economic development. As well known, Korea has focused on exporting final goods through intensive investment of limited capital because it can show improvements in trade balance in a comparatively short time. This kind of development induced a chain of economic actions that involves import of core parts/materials, processing of assembling of them and selling the finally processed goods. It does not provide enough momentum and effort to increase the ability to develop new products and technologies thus it still remains not much developed. Recently, however, there are very positive changes in the field. There is an increase on the numbers of firms which layout by themselves and some companies among parts manufacturers try to make inroads into the world market with the experience accumulated while supplying goods to the conglomerates. Add to that the increasing number of firms expand investment in research and development and actively apply for the governmental support. Against this backdrop, current domestic machinery industry is now standing on the way to move from general machines manufacturing business based on importing core parts/materials and processing to special machines manufacturing business based on basic technology.

It is expected that there will be increase in demand of automation facility for high productivity mainly from advanced nations and China and other developing nations. And Japan is expected to specialize in the advanced machinery and core parts/materials and Korea and China are expected to compete in the general machinery field. So strategic approaches are needed to spontaneously dealing with the changes of the market and to outdo competitors. Currently the domestic general machinery industry has only a few competitive fields and even the key export products rely much on import for core materials and core parts. Therefore it can not be overstated the importance to concentrate the key resources and efforts to the industry through localization of core parts and materials, developing new export goods and expanding investment in research and development in order to transfer the industry to high value added business. The government has been supporting the industry to encourage the parts and material business with enactment of a special law in 2002. And the MOCIE(Ministry of Commerce, Industry and Energy) is pushing forward with the collective 'regional industry cluster plan' to boom the sector. There are much investment in human resource training as well as research and development and efforts to transfer existing industry clusters into innovative clusters to establish the innovative systems for the country and the regions.

But it is barely possible that the governmental policies alone can successfully make the whole industry competitive and induce the private sector into invest in research and development. Even the advanced nations had experienced long times of industrial development process before they dramatically reformed the machinery industry. So it might take more than ten years for us to see networks and clusters of middle and small sized firms which have technologies that meet the world standard and obviously it requires systematic efforts of the government, the industry and the academic field. And especially there are much less innovation-oriented mid sized firms than the advanced nations and accumulated technological assets are only a fraction compare to them so the government and the industry should set up long term strategies. Especially concentrated investment in the joint research and development projects that aim to localize core parts and materials business and acquire core basic technologies and which have export competitiveness. The main members of the projects should be the industry and the regional experts. In other words selection of strategic products would better be entrusted to the regional experts even submitting the costs for so called the trial-and-error. They would decide long term plans responsibly and make up for the weak points or errors by themselves. The government would have to indicate transparent and fair evaluation rules beforehand, reflect the evaluation result in the next projects and grade the level of support according to the outcome in order to cultivate innovation ability of the middle and small sized firms.

Chemicals

The circumstances surrounding the world market of chemical industry have been faced with great changes since the late 1990's. Developing countries such as China and Middle Eastern countries have been achieving remarkable growth especially in the field of general purpose commodity chemicals owing to intensive government support and localization strategy of chemical companies in advanced countries. In addition, chemical companies in advanced countries have been pursuing the strategy of maintaining and strengthening their competitive advantages in the world market by obtaining economies of scale through M&A, diversifying business areas, and developing high value-added products based on intensive R&D investment. In response to these changes in the world market, Korean chemical companies need to transform their production structure concentrating on commodity products into that of creating high value-added products by enhancing their technology competitiveness and diversifying their products.

Chemical industry includes a variety of fields such as petrochemicals, fine & specialty chemicals, and plastic & synthetic rubbers. While these fields link up with one another in a series of production chains, there exist large differences among them in several aspects such as production structure, technological capability and competitiveness. Some petrochemical products like Ethylene, synthetic plastics and TPA rank among top 5 in the world in terms of production capacity, while fine & specialty chemical companies are very small in their sizes and show very low competitiveness. The proportions of chemical industry out of manufacturing sector are 14.2%, 13.4%, 11.7% in terms of value-added, export and employees, respectively. Production and value-added of Korean chemical industry realized a continuous increase in spite of the financial crisis in 1998, while its export and employees decreased after the crisis though turning into a recovery trend recently.

Recently, labor productivity of Korean chemical industry shows largely a declining or sluggish trend after the financial crisis except for some fields such as basic petrochemical materials and cosmetics. In addition, there exist a distinct gap in labor productivity among various fields within chemical industry, leading to the coexistence of high productivity and low productivity sector. Labor productivity of petrochemicals is at large higher than that of fine & specialty chemicals. In the case of petrochemicals, basic materials and synthetic rubbers show high productivity than synthetic plastics. As for fine & specialty chemicals, productivity of cosmetics, fertilizer and pesticides is much higher than that of dye & pigment and paints & ink. Another characteristic of Korean chemical industry is the existence of a distinct productivity gap by firm size. Labor productivity tends to increase as firm size becomes larger. In particular, productivity gap is very large between firms with more than 100 employees and firms with less than 100 employees.

The level of international competitiveness of Korean chemical industry in terms of RCA and export rate is as follows. RCA index of Korean chemical industry turned into a declining trend after the financial crisis. It is lower than that of Germany but higher than that of China, and is similar to that of Japan. In the case of petrochemical industry, Korea shows the highest comparative advantage together with Germany. However, it should be noted that this comparative advantage seems mainly due to export centered on low value-added commodity products. In contrast, RCA indexes of fine & specialty chemicals are very low with a continuous declining trend after the crisis. On the other hand, export rates of most Korean chemicals turned into declining trends after the crisis. There exists a large gap in export rate within chemical industry. That is, export rates of petrochemicals are very high at more than 40%, while fine & specialty chemicals show low level around 10%.

According to the firm survey, most petrochemical companies recognize that technology and R&D are the most important factor for their competitiveness. However, there appear differentiated patterns among product fields and between commodity and specialty products, depending on the characteristics and ways of their technology development. Companies engaging in the upstream field like basic materials and in synthetic plastics field tend to rely mainly on introducing key technologies from advanced countries and then improving them rather than on self-developing new products and technologies, reflecting the characteristics of products with little room for product differentiation. These companies perform R&D in the limited areas such as reduction in production cost by improving production process and development of new products by diversifying grades and utilizing by-products. For these companies, price competitiveness is more important factor than technology competitiveness based on development of new materials and products.

In contrast with these traditional petrochemical companies, some leading companies like LG Chemicals have performed intensive R&D investment in order to transform into the production structure that centers on high value-added products both in the existing and new business lines. These companies have searched for moving into value chain pursued by chemical companies in advanced countries, focusing on specialty products such as electronics and information materials.

As for fine & specialty chemical companies, the survey shows that they lag much behind those in advanced countries in key technologies that are necessary to develop new materials and products except commodity products and some intermediates. Fine & specialty chemical companies in Korea do not overcome yet the weak production structure where basic materials are exported at low prices but high value-added intermediates are imported from advanced countries. As a result, the majority of the companies, except some fields like dye & pigment, survive as domestic market-oriented companies. In addition, they are exposed to the threat of competition from multi-national companies even in the domestic market. Accordingly, in order for Korean fine & specialty chemical companies to survive and achieve growth, it is necessary to transform into the production structure concentrating on high value-added specialty products and intermediates with opening up new business areas by strengthening self-development capability.

3. Some Aspects of Industrial Competitiveness

Trade Performance and Industrial Competitiveness

Innovation Capability of Korean Firms

The purpose of this paper was the analysis of the technological innovation capability of Korean firms. For the purpose we used 2002 Korean Innovation Survey(KIS) database of STEPI, which has several characteristics compared with other firm level database; its target population for sampling is Korean overall industry, the data covered firms' general technological innovation activities, and it has high comparability with international innovation survey database because it was collected based on the standard guideline. In Innovation Survey, technological innovations are defined as 'technologically new products and processes and significant technological improvements in products and processes. A technological innovation has been implemented if it has been introduced on the market or used within a production process.' In Innovation Survey, the innovation concepts is broader than that of R&D and all R&D enterprises are by definition innovative, but all innovators are not automatically R&D performers.
The chapter compared with the recent EU Innovation Survey results to evaluation of Korean firms' technological innovation capability. In this paper, the firms' innovation capabilities were analyzed in views of the degree of technological innovation activity and its way, especially networking between the innovation actors. We also analyzed the hamper factors for firms' innovation activity.

According to the 2002 Korean Innovation Survey(KIS2002), there were 37% of the total manufacturing enterprises had some form of innovation activity during the period 2000-2001. And 27% firms of the total service enterprises were innovative during 2001-2002 according to KIS 2003. 47% of all the EU manufacturing enterprises and 40% of EU service firms had innovation activity during the period 1998-2000. Glancing over the given statistics, Korean firms were less active to innovation activity, but if compensated for the difference of the survey period, we could not conclude that Korean firms were less active. By firms' employee size, the larger ones, the more active in manufacturing sector, and the larger ones, the less active in service sector. Compared with EU firms, the large manufacturing ones and the SMEs service ones were similar or more active, but the SMEs manufacturing ones and the large service ones were less active in technological innovation activity.

Let's move into the way the firms performed the innovation activity. Korean firms mostly used the internal sources and the suppliers and the customers as the source of the idea for innovation activity, and university and public research institutes were least ones. It also corresponds to EU firms. But it is interesting that Korean service firms answered the competitors as one of most important sources for their innovation.

Generally, Korean firms have performed their activity by themselves without cooperation with outside partners such as university. But according to the comparison results, the public-private-partnership(PPP) in Korea were active as much as EU countries. Korean PPP activity in views of a source of innovation activity and the cooperation partner was higher level than EU countries except a few countries such as Finland. This is considered as the results of Korean governmental effort to enhanced the PPP activity.

The chapter finally analyzed the main hampering factors in relation to enterprises with only on-going and/or abandoned innovation activity and in relation to enterprises without innovation activity. Korean enterprises with and without innovation activity tended to cite a lack of qualified personnel as the most principal factor hampering innovation and the economic factors as second. For EU enterprises, importance of the factor of a lack of personnel and the economic factor were reversed.

Based on the analysis results of Innovation Survey data, we could conclude that Korean firms have great technological innovation capability and are comparable with EU countries' firms.

B2B Electronic Commerce

For the last ten years, Internet has been expanded rapidly since commercial service of WWW started in 1993. As an effect of that, e-commerce took a great leap forward. It is estimated that the world market size of e-commerce is approximately 3~4 trillion dollar in 2003 even though it is impossible to get an accurate figure. We analyze e-commerce as one of the important factors affecting industrial competitiveness. Among various kind of e-commerce, we focus on B2B e-commerce(B2B, hereinafter) since B2B is the most dominant type of transaction in the market and the effect on competitiveness of B2B comes out immediately. The leading business domain of digital economy is classified into three; 'digital enabler', 'e-commerce', 'digital products' and B2B is a type of e-commerce. Thus B2B is regarded as one of the important axes of digital economy.

We can classify the type of B2B in various ways. Firstly, it is divided into Internet B2B and non-Internet B2B by transaction network. Secondly, it is divided into open-ended B2B and cooperative(closed) B2B by being open to the public or not. Thirdly, there are buyer-initiated B2B, seller-initiated B2B and intermediary-initiated B2B by transaction pacemaker. Lastly, it is divided into domestic B2B and e-trade by location of the companies.

In 2001, the amount of transaction of e-commerce was about 119 trillion won and it will be more than 300 trillion won in 2004 by the remarkable progress. In the second quarter of 2004, the weight of B2B, B2G and B2C were 87.1%, 10.7%, 2.0% respectively. Overall, the domestic e-commerce market is growing very fast and B2B is the most important type of transaction. The transaction amount of B2B in the second quarter of 2004 was 67.7 trillion won. The growth rate is 34.7% in comparison with the same period of last year and 198% in comparison with last quarter. Among these, buyer-initiated B2B covers more than 70% of the total transaction. However the growth of other types of B2B is speedier than that of buyer-initiated B2B. In the mean time, cooperative B2B is overwhelming. Analyzing these statistics, we can say that large firms initiate the domestic B2B market and the most of transaction is still closed in nature. Meanwhile, Internet B2B is 98.5% of the total and the weight of domestic B2B is 82.5%, but the growth of e-trade is faster. Manufacturing sector has absolute portion of transaction in B2B. In the second quarter of 2004, the transaction amount of manufacturing sector was approximately 47.6 trillion won which is 70.4% of the total. However the growth rate of non-manufacturing sector is higher than that of manufacturing sector. The total number of e-marketplace was 240 in the second quarter of 2004. Their main business areas are trade, machinery and industrial material, electronics, MRO. But many of them are doing very small-scale business.

Even though B2B in Korea has grown rapidly, we still have a lot of obstacles. The critical obstacles against enterprises are as follows; immaturity of mind-set for informatization, insufficiency of information strategy and system-related infrastructure, huge amount of expenditure for information system, etc. In addition to these, the security system is fragile, the payment system is unstable, and the logistics system is still very weak. From the point of industry, there also exist several obstacles; insufficiency in standardization, irrationality in distribution channel, unsoundness of transaction, market structure flooded with e-marketplaces, overlapping government organization and investment, etc.

Tasks for enterprises are as follows; strengthening mind-set for informatization, building up efficient information strategy, setting up cooperative system among companies, training and maintaining IT experts, standardizing transactional system, restructuring e-marketplace, etc. To the government, the following tasks are essential; developing various incentive policies, reinforcing function of auditing, raising additional fund for activating B2B, excavating and promoting successful cases of B2B, etc.

4. International Comparison

In chapter 10, we overview the last 30 year (1970-2000) structural change by comparing the industrial structure and productivity of Korea and G7 developed countries. We provide cross-sectional and time-series assessment of relative importance of each sector in production and trade by computing the structural composition of value added and employment, export market share, revealed comparative advantage index, and trade specialization index. The major data sources are the OECD STAN database for the industrial structure and productivity analysis and the CEPII CHELEM database for the trade structure analysis. With respect to industrial classification, we focus on five major industries such as textiles and textile products, chemical products, machinery, electrical and electronic equipment, and transport equipment.

The overall empirical results show Korean industrial and trade structure converge to those of G7 countries along with narrowing productivity gap. Beyond these expected observations, the international comparison shows the speed of structural change in Korea has been much faster than other developed countries. It indicates the dynamism of Korean economic development and presents a challenge facing current Korean economy by bringing about growing sectoral productivity divergence as called economic polarization.

The first and foremost characteristic of Korean industrial trend in comparison with other developed countries is the dynamism of structural change. According to the employment structure, the most important index of structural transformation, Korea has experienced both industrialization and de-industrialization recently. While the employment shares of manufacturing sectors in other developed countries have steadily declined since 1970, Korea experienced the rising manufacturing employment until the late 1980s and its turning into the rapid decline afterwards. As a result in 2000, the employment composition of Korea looks similar to that of G7 countries. Despite declining employment, however, Korean manufacturing sector has kept above 30% of total value added in the 1990s, while the manufacturing share in total valued added in G7 countries declined toward about 20% on the average. The decline of manufacturing employment in the 1990s lead to the increase in service employment, particularly in the traditional low paying jobs. It brings about widening sector difference in labor productivity, so called polarization of sectoral growth and income.

The decline in manufacturing employment resulted from the decline of the light industry such as the textiles after the 1980s. Although heavy and chemical industries continued to provide new jobs, the sharp employment reduction in light industries decreased the total employment of manufacturing sector in the 1990s. It implies the rapid transition of Korean manufacturing sector toward more capital and technology intensive style. Among heavy and chemical industries, electrical and transport equipment including automobiles show relatively higher performance than machinery. In terms of labor productivity measured as per worker valued added, the electrical equipment including electronic products achieves more than 70% of the U.S. level by surpassing some G7 countries. However, the labor productivity of machinery stays low at the 25% of the U.S. level. The labor productivity of textile industry continued to stay lower than 10% until 2000.

The structural change and productivity growth is revealed as trade competitiveness. In terms of market share, the textiles show its peak in the late 1980s and decline sharply afterwards, although it still takes about 4% of world market. Although the relative importance of textiles is decreasing, it still keeps its importance in Korean export. Most heavy and chemical products show the steady increase in market share although the trends are different among industries. In 2000, electronic products show strong competitiveness by taking more than 5% world market share but machinery takes less than 2 %. According to the RCA index, the comparative advantage of the textiles has been rapidly declining since the mid-1970s and seems to be turning into comparative disadvantage in short. The RCA indices of heavy and chemical products are in increasing trends. In 2002, electronic products and automobiles are in comparative advantage while chemical products and machinery are in comparative disadvantage. The trade specialization indices show similar trends in trade competitiveness. It shows the concentration of recent trade surplus in electronic products and automobiles.

The overall picture of trade competitiveness indicates that there is still a room to grow by enlarging the market share and enforcing the competitiveness of weak industries such as machinery. However, the sharp decline of textile industries in its production and trade share implies there is also a downside risk if Korea cannot find a competitiveness between advanced countries and other developing countries such as China. Therefore, finding more competitive edges of Korean manufacturing industries is essential to achieve sustained and balanced growth with more decent jobs since the rapid structural change in manufacturing sectors with sharp decline in light industries and following release of employment shares the blame for low service productivity.