The an ongoing debate over whether industrial policy should

The Industrial policy of the two economies
that we will be analysing vary indefinitely, on the one hand we have Hong Kong
(HK), a small-state economy engaging in laissez-faire industrial policy,
primarily aimed at providing amiable amount of freedom for entrepreneurs and
already established corporate structures. Mirroring this, South Korea (SK)
evidently engaged in a variety of industrial policy strategies, thus it may be
said that they were tactics rather than strategies, in the economic timespan.
South Korea and Hong Kong, in terms of industrial policy, are rather young,
with the first active policies being implemented in the 1960s. I will compare
how South Korean and Hong Kong policy timelines, from the 1960s until today,
differed and how policy allowed for industry development, and evaluate their
impacts on economic development of the nation as a whole. In this report, due
to artificial limits, I shall focus more on the period from the 1980s onwards.

 

So,
what do we consider as industrial policy? It is a form of government strategy
aimed at sectoral growth and development throughout the economy. (Pack &
Saggi, 2006) refer to it as “any type of
selective intervention or government policy that attempts to alter the
structure of production toward sectors that are expected to offer better
prospects for economic growth than would occur in the absence of such
intervention”. There is an ongoing debate over whether industrial policy should
target any individual sector of the economy, or whether it should be universal
for the economy; as some sectors, although with less potential, should not be
neglected, as they may serve for the purpose of mass employment, yet with
little technological education.

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1960s
and 1970s

 

The 1960s, for both South Korea and Hong
Kong were rather rough years due to the Korean War (1950-1953), which not only
impacted South Korea, but also imposed an important embargo on Hong Kong, which
further led to the creation of so-called Hong Kong industry.

 

The 1960s was a period of active industrial
policy development in South Korea, the early 1960s saw the beginning of a
series of five-year plans, transforming the foreign-aid based agrarian economy
in to a self-sustained industrialised economy. These were part of Park’s
regime, which sought export-led industrialisation. The changes to economic
growth contribution in the 1963-1973 period may be seen may be seen from Table
1 (Kim, 1991). Evidently, the South Korean government changes to public sector
capital investments served to develop the economy away from manufacturing and
mining and towards technological advancement is seen in Table 2 (Kim, 1985).

Hong Kong, however, took a substantially
more laissez-faire approach, establishing semi-government corporations such as
the Hong Kong Export Credits Insurance Corporation (HKECIC) in 1960, the Hong
Kong Productivity Council and Trade Development Council in 1966 (Law, 2016). These
were all forms of semi-government institutions, which served as sources of
market information, technology, financial data, and provided management
services to SMEs (Small-Medium Enterprise). From this alone, it can be seen
that South Korea and Hong Kong see their industrial policy as alter egos of
each other; Hong Kong’s relaxed state versus South Korea’s direct interventionist
plans.

At its
peak, the manufacturing sector accounted for 31% of Hong Kong’s GDP (Wong,
1991). During the 1970s, the average size of the manufacturing sector in Hong
Kong had already begun to shrink. Throughout this period of full employment and
increasing wages, smaller manufacturing firms (factories) did rather well, concentrating on the manufacturing of consumer
commodities, such as toys, technology and textiles; successfully
competing for labor, whilst making substantial fixed capital investments.
During the 1970s period, Hong Kong initiated industrial restructuring, caused
by the protectionist pressures from its markets in advanced economies and strong
competition from the other NIEs. Smaller enterprises, did suffer but were not
abandoned by industrial policy developments.

Hong
Kong’s government, consciously engaged in ‘passive industrial policy’ since the
1970s, in order to help industrial development, and positive ‘sectoral-strategy
policy’ was seen as a contradiction to
‘positive non-interventionism’. Thus, prevalent strategies such as public
intervention in research and development, so actively seen in Japan, was not
considered in Hong Kong. Instead, ‘industrial policy’ aimed to promote the
independence of manufacturers, and help them seek FDI rather than rely on
subsidies. Such policies included (Tuan & Ng, 1995):

·      Labour-force-aimed policy for planning and training

·      Trade-facilitation policy aimed at establishing
criteria for production and the provision of technology, information and trade

·      Infrastructure for the creation of and sustaining of a
technological infrastructure aimed at the innovation initiatives including
patents, campaigns and rewards. No
information or figures could be sourced about R aid

Additionally,
commencing in the 1970s, western labour-intensive
productions shifted to zones of lower costs, stimulating the intensification of
the “Four Asian Tigers”, incorporating Hong Kong. Hong Kong, with its benefits:
geographic position, technological expertise, skilled labour force, knowledge
in managing international business, comprehensive legal system and free economy,
became a vital terminus of western manufacture transfers. The advantages also
speed up the city’s industrial development.

South Korean industrial policy throughout this period
was highly interventionist. This is evident by the existence of the 5-Year Plan
series. These were sectoral plans, industrial policy in a very narrow sense,
aimed at the step-by-step process of development. An example of such policy may
include the 1969 Electronics Promotion Law, which acknowledged electronics as a
‘strategic export industry’. Soon after, a comprehensive plan for the direct
adaptation of the industry came into effect; forming the advanced
infrastructure necessary for the industry’s development, with specialised
institutes for R, technologic adaptation such as the Korea Institute of
Electronics Technology, Korea Advanced Institute of Science and Technology, and
the Electronics Industries Association of Korea (Kim, 1985). This clearly
differs from the Hong Kong approach, where we only saw the creation of a few
institutions that promoted manufacturing and growth of firms, whilst South
Korea saw enormous infrastructure investment in the several sectors of the
economy. Thus, it may already be seen that the roles of industrial policy in
the two nations will be different.

Given the
electronics sector plans, ‘positive interventionist’ industrial policy quickly
rotated towards heavy industry and chemicals sector. In 1973, President Park
formally began the campaign for the establishment of a heavy and chemical
sector. The industries were strategically split into several divisions among
which were iron and steel, chemicals and petrochemicals, electrical and general
machinery. Numerous projects were incorporated into the Third and Fourth Plans,
bringing plentiful funding for qualified manufacturers. The typical provisions
and motivations were provided for exporter firms, whilst imports remained
limited for those who were able to supply to the domestic market, promoting
self-sustainability.

Another clear target for South Korean industrial
policy was the automotive industry. Beginning with a rudimentary assembly plant in 1962
that produced approximately 3,000 cars and trucks per year, in the early 1970s
it started to implement special procedures to cultivate this trade (Kim, 1991).
Measures included large-scale funding and high tariffs on imported automobiles,
however none were placed on knocked-down parts, which could be repaired by
myriads of domestic artisans.

1980s and 1990s

For both
South Korea and Hong Kong, these two decades proved to be the game-deciders in
terms of industrial development. Once again, both economies saw polar-opposite
approaches to industrial policy.

Throughout
the 1980s, Hong Kong industrial policy had to adapt to a major shock: the 1979
opening up of China. Hong Kong’s businesses faced high costs
of production and active competition from new emerging industrial nations in
the mid-1980s and, therefore, Hong Kong companies commenced to pursue opportunities
abroad; resulting in a northward expansion, where Hong Kong’s factories became
the frontrunners in industrial strategy. Fascinated by low labour and land
costs in the mainland, Hong Kong companies were spurred on in their initiative
of a northern expansion. Only six years after the opening up of China, in 1985,
the Chinese mainland became Hong Kong’s leading trade partner, surpassing the
US.

Hong
Kong’s position, in the global trade network, had changed, and now there were
several considerations for Hong Kong on what it should become (Wong, 1991):

1.     The Financer: Hong
Kong accounted for up to 61% of contracted direct investment to mainland China.

2.     The trade partner: Over
the 1977-1990 period, China’s import flow through Hong Kong increased 374
times, whilst “Made in Hong Kong” imports increased 869 times. Reborn as a key
entrepot for China, Hong Kong and its goods were now in high demand in the
Chinese economy.

3.     The facilitator: Hong
Kong was a key point of contact for China, serving as a base for Chinese trade
and investment for international companies and Chinese firms, alike. It
remained an important channel of market data and technology transfer for the
region; whilst acting as a free-market proving ground for China’s corporations,
where they could embrace and develop production and market techniques only
acquirable in a free market environment. As such, Hong Kong’s ‘passive
industrial policy’ allowed for it to be shaped into a service based economy.

Further
evidence for this may be seen from Table 4 (Breitung, 1999), the Hong Kong
laissez-faire policy continued, and the flow of labour developed naturally,
with the tertiary sector growing almost doubling from 1981 to 1996, whilst the
level of workers in the primary and secondary sectors declined. As such, we see
that the continued laissez-faire industrial policy with the use semi-government
institutions allowed for a natural evolution of Hong Kong.

South
Korean industrial policy of the 1980s was focused on the development of
techniques for FDI promotion. The 1981 amendment of the Technology Development
Promotion Law yielded several tools for FDI promotion. In comparison to the preceding
1970s industrial policy, the 1980s approach was aimed at direct and indirect R&D
promotion for technology-intensive industries. This allowed for the
establishment of the industrial technology research consortia, with assistance
from the Korean government; enabling the government to encourage certain
R&D projects, such as private research facilities, industrial R&D
projects (Bartzokas, n.d). Here we clearly see that South Korean industrial
policy was once again very interventionist, which, again, was opposite to the
Hong Kong approach, yet the aims of the policies remained similar: the attraction
of foreign investment activity to the domestic economy.

As seen,
South Korean policy has, so far, been accompanied by strong protectionist
policies. Korea did not “graduate” from protective policies until the 1990s (Bartzokas,
n.d). The continuous use of tariffs and import substitution policies, meant that
South Korea maintained ‘target’ industries throughout the 1980s, allowing for
corporations such as Samsung to actively engage in ‘take and build on’, and
thus develop their own innovation schemes. From this, we now see the divide in
industrial paths for Hong Kong and South Korea; HK industry seems to be
shifting away from good production and towards service provision, whilst South
Korea remains on the path of good production and innovation.

The 1990s
proved to be the most active years for both economies in terms of industry identity.
For Hong Kong, this period may almost be called the ‘de-industrialisation’
period. For South Korea, this was the time of rocketing R&D, active product
innovation, and the lifting of heavy protectionist policies to allow domestic
firms to compete globally.

The ‘de-industrialisation’
of Hong Kong was evident in the heavy decline in manufacturing sector employment:
from 42% in 1980 to 8% in 1997. The industrial focus on “Made in Hong Kong”
transformed into “Made By Hong Kong”
(Breitung, 1999), which, despite the decline in employment, allowed for the
preservation of importance of manufacturing for Hong Kong. Such a shift was an
industrial policy development, which furthered the focus of industry identity
in Hong Kong towards the knowledge-intensive tertiary sector, i.e. services. Once
again, this development was not interventionist, rather a HK-typical passive
policy which only nudged and directed industry in the necessary direction. The
manufacturing sector workers, who did not wish to or were not able to retrain,
were offered the move across the border to Shenzhen, mainland China, where 3-5
million jobs, primarily labour-intensive, were created by Hong Kong investors
in the Pearl River Delta Region (Breitung, 1999).

Up until
1997, Hong Kong engaged in ‘positive non-intervention’, however after we saw
almost a U-turn in industrial policy. In 1997, when the hand-over of Hong Kong
took place, a general economic crisis occurred, and there was a qualitative
increase in state intervention. In June 1998, the government issued a HK$ 44bn
rescue package with tax reductions, loans and temporary land sales freezes. The
new economic policy, aimed at creating the “capitalist planned economy”,
similar to Singapore, saw a special focus on the high-tech industry; with direct
subsidies from three separate funds following suit. Numerous technology-focused
projects came to be, such as the ‘Cyberport’ telecommunications and media park
next to the University of Hong Kong (Breitung, 1999). Evidently, the shape of
Hong Kong’s industrial policy mutated and became similar to that of South Korea,
targeting a certain sector of the economy, thus playing a larger role in
economic development.    

South Korean policy in the 1990s also saw a
change, with firms having developed their own innovation techniques and
mastering product creation from scratch, thus further heavy subsidies from the
government were no longer necessary, and these funds could now be utilised
elsewhere. Initiating in the 1990s, and
intensifying in the post financial crisis period, government promotion of
knowledge and technology intensive sectors intensified, in order to free up the
domestic economy and nurture capital movement and trade. The aim of such policy
was financial sector restructuring, and also increasing the flexibility of the
labour market (Park and Koo, 2013). An important role was played by SMEs, such
as venture firms, with high levels of technology and innovative ideas. Support for
newly formed SMEs came in 1997 with the Special Act on Venture Firm Promotion,
which brought about several forms of aid for new ventures including the allowance
of concurrent position of professors or researchers with venture firm managers
and employers (Koo, 2013). Thus, we can see that although not as
protective but still highly interventionist South Korean industrial policy has
edged towards the promotion of independent firms and letting them to actively
engage in R whilst being open to global competition, very similar to Hong
Kong’s earlier policy, but with the added touch of intervention in other
sectors.

 

2000s

 

Industrial policy of the 2000s for both South Korea
and Hong Kong saw a focus on the attraction of FDI and the promotion of the entrepreneurship. In
2000, the HK government launched InvestHK, a department of the government that
is responsible for the attraction of FDI, overseas SMEs, and supporting Hong Kong
corporations abroad. Since 1997, the Hong Kong’s aim of
developing SMEs was backed by more positive industrial policy, although interventionist
and deviating from HK’s initial industrial policy strategies, which included
the establishment of funds, honed to support specific sectors (Law, 2016).

Each scheme was nominated to aid individual business requirements, with
help ranging from export marketing sponsorships to bank loan guarantees to funding
for R&D. Examples of such funds and schemes are: SME Development Fund; SME
Loan Guarantee scheme; and the SME Export Marketing Fund. More recently the
Small Research Entrepreneurs Assistance Programme was introduced to provide
dollar-to-dollar matching grants up to HK$ 2m. Its funding ceiling increasing
to HK$ 6m in 2012 (Law, 2016). Thus, we now see that Hong Kong industrial
policy has completed its 1990s policy U-turn, and is now engaging in more ‘positive
interventionism’, and playing a more significant role in the development of the
economy, just like in South Korea.

In South Korea, Roh Moo-Hyun’s
administration target of balanced economic development and highlighting of product
innovation, saw the formation of cluster industrial policy and an effort towards
regional innovation promotion. Park and Koo (2013) summarise these policies as
following: “The four major policies for regional innovation are
(1) providing the basis for the establishment of RIS (Regional Innovation
System), (2) strengthening the innovation capacity of universities in
provinces, (3) promoting science and technology in provincial regions, and
(4) establishing industry-university-research institution networks” (Park
and Koo, 2013). The official programme launched in 2004, and was called the
Industrial Complex Cluster Programme; aiming to boost specific industrial
clusters whilst promoting SMEs and providing regional support and funding for
innovation. Once again, we see the ‘sectoral positive interventionism’ that
South Korea undertook since the 1960s. Now, the difference in industrial policy
strategy between Hong Kong and South Korea is blurred, as Hong Kong undertook
more interventionist policies, and South Korea lifted its protectionist policies
and began to actively promote independent enterprise, with Samsung being the
obvious standout.