52 Bruce P.

Chadwick

☯
CHAPTER 3

Information Technology Revolution in the

Republic of Korea: Socio-Economic
Development Issues and Policymaking
Challenges

Bruce P. Chadwick

The worldwide explosion of information and communication

technologies profoundly affected economic growth and society in
the Republic of Korea in the 1990s and early 2000s. Among
developing countries, South Korea was hardly alone in pursuing
strategies to capitalize on ICTs as a potential motor of economic
growth and, whatever the strains caused by the present slowdown
in ICT industries as a whole, the Republic of Korea can largely be
considered a success as a developing country that has harnessed
ICTs for economic growth and social transformation. Many other
developing countries – among them India, the Philippines, Jordan,
Brazil, and Ghana – have tried to become world or regional
sources of ICT products and services with varying degrees of
success. The Republic of Korea’s experience can shed some light
on the important factors in ICT-based national development
strategies, as well as illustrate the multifaceted way in which ICTs
interact with economic and social objectives.
 Bytes and Bullets in Korea 53

This chapter will help place the ongoing “Digital Revolution” in

South Korea in perspective, drawing on the author’s experience
with ICT applications in a wide variety of international
development contexts. It will then discuss some of the dominant
features of ICTs in the ROK’s economy. Next, it will turn to some
of the economic governance issues related to ICTs in South Korea.
Finally, it will look at some of the future developments and
implications for both the ROK and other countries considering or
engaged in ICT growth strategies.

Understanding the Digital Revolution

Strictly speaking, information and communication technologies
have existed for centuries, and have been important components of
virtually all economic systems. What has changed in the last 10-50
years has been the development of techniques for managing,
processing, and communicating digital information. With digital
ICTs, information can be duplicated exactly at very low marginal
cost and transmitted quickly over long distances at speeds
unimaginably rapid when compared to previous methods.
Moreover, since text, video, sound, software, and other digital
elements can all be disaggregated into 0s and 1s, they can all be
transmitted through more or less the same digital infrastructure.
Thus, even while prices for telecommunications and many forms
of IT are falling, the benefits of having access to them are
increasing by leaps and bounds, improving the cost/benefit ratios
and the attractiveness of ICT investments. Effective
telecommunications and telecommunications policy has become
even more critical to national development, since new and existing
telecommunications investments will be able to deliver larger and
larger amounts of economically valuable information and products
critical to international competitiveness and domestic quality-of-
life.
54 Bruce P. Chadwick

South Korea is particularly well suited to success in ICT-driven

economic development. It has a relatively high GDP per capita
(around US$ 9000 in 2001, according to the World Bank), literacy
rates of over 95%, openness to foreign trade, a liberalized
telecommunications sector, a history of pro-active industrial
policy, and a population of close to 50 million, 70% urbanized, all
in a land area the size of Indiana. This means that the Republic of
Korea has both foreign and domestic markets for ICT products and
services, a population with some degree of disposable income,
literate citizens capable both of using and finding uses for
information technologies, as well as a business community
engaged in global trade and exposed to evolving ICT business
practices. Moreover, at the southern end of the peninsula and
practically blocked to the north by a secretive, significantly poorer,
and closed-off North Korea, South Korea is, in effect, a
technological island, not unlike Japan, Taiwan, and Singapore, and
thus faces similar needs for effective linkages to international
business and foreign communities.

The effect of ICTs on national economies such as the ROK’s is

fourfold. ICTs and the digital revolution create:
• New industries and economic sectors or sub-sectors
(e.g. the software industry, cell phones, computers
and peripherals)
• New ways of doing business (e.g. e-commerce,
globally distributed organizations, integrated supply
chains)
• New tasks and opportunities for government (e.g. e-
government, privacy policy legislation, ICT
industrial policy)
• New issues in economic and political development
(e.g. availability of information access, computer
literacy, the digital divide)
 Bytes and Bullets in Korea 55

Thus, the effect of ICTs and the digital revolution on economic

growth, social capital, and political development in a country such
as the ROK goes far beyond the contribution of the ICT sector to
national GDP. ICTs affect the efficiency and productivity of other
economic processes, the distribution of economic gains and basic
services, and the transparency and accountability of the
government.

Despite the recent slowdown in ICT industries worldwide, there is

little doubt that the Internet and digital ICTs have changed the
global business environment and are here to stay. Even with the
industry consolidation presently underway, digital technologies
and access to them is diffusing rapidly. The market research firm
eTForecasts expects the number of world Internet users to reach
one billion by 2005, which is triple the user base for 2000.47
Korea’s National Computerization Agency, an advisory
organization to the ROK for e-government policies and
technologies, reports 25 million South Korean Internet users in
2001, or just over 50% percent of the population. Perhaps the most
interesting statistic is the population with broadband access – over
50% of households have access to broadband connections –
making South Korea the world’s leader in household broadband
connectivity.48

South Korea’s extensive participation in medium- and high-

technology export markets, such as auto manufacture, domestic
consumer equipment, cellular telephones, and computer
peripherals, has meant that Korean businesses are increasingly
interlinked to global production chains dependent on shared

47
ETForecast press release, “Internet users will surpass 1 billion in 2005.” 6
February 2001. See eTForecast report from their website:
http://www.etforecasts.com/pr/pr201.htm
48
Herz, J.C.. “The Bandwidth Capital of the World,” Wired Magazine; October
2002.
56 Bruce P. Chadwick

product standards and interlocking inventories and data networks

mediated by ICTs. These industries always were, but are
becoming even more knowledge intensive -- dependent on rapid
and accurate communication between business suppliers and
consumers in global value chains to ensure that products arrive on
time, to specification, and can change rapidly in response to new
technologies, new demands, and new consumer tastes.

Access to knowledge is now a key factor in a country’s economic

competitiveness, and the Republic of Korea’s tradition of pro-
active industrial policy means that the changes demanded by
business deployment of ICTs are more likely to be planned for
than resisted against, at least by management and policy makers.
Businesses require knowledge of customer demands, tastes, and
requirements to ensure traction for their products and adequate
pricing margins available for supplying consumer needs
successfully. Knowledge of and communication with a
multiplicity of suppliers is critical for controlling costs, reducing
inventory time, and speeding design modification and
improvements. Effective management also requires knowledge of
competitors’ products, processes, and innovations in order to plan,
evaluate, and place products and processes appropriately.

With technologies and production processes evolving rapidly,

knowledge of available and emerging technologies, the new
opportunities and product improvements they enable, as well as the
costs of introducing them have become a key means for keeping
businesses dominant, innovative, productive, and relevant in their
specific industries. A business’ knowledge of its own workforce,
its capabilities, training needs, and grievances with management
are all vital to maintaining the productivity of what is often the
most expensive factor of production. Finally, knowledge of
overall productivity is essential to business viability in a constantly
changing and increasingly global business environment. Without
 Bytes and Bullets in Korea 57

knowledge of their own productivity information, companies

cannot make effective decisions on what products to introduce,
discontinue, outsource, and innovate, or how to keep their
management and workforce trained for necessary tasks and
performing profitably.

Industrial knowledge management does not intrinsically demand

ICT-based information and communication networks, but the large
quantities of data and analysis to meet modern global business
needs generally require decentralized data gathering that can be
readily compiled and rolled up to management. Of the options
available for such tasks, most businesses and managers find ICTs,
the Internet, intranets, and similar technologies to be the most cost
effective, particularly when businesses expect to operate on an
international playing field.

As a result, the digital divide both within countries and between

countries is not simply an issue of social equity, but also an issue
of economic growth and international competitiveness, whether in
agriculture, manufacturing, or services. For the Republic of Korea,
the new global business environment linked by interlocking data
networks calls for explicit industrial policy to accelerate the
positive impacts of increased ICT use and to mitigate the potential
downsides of information inequalities, gaps in skills training, and
other transition effects. Fortunately, South Korea’s industrial
planners have both experience and skill in designing industrial
policies, and many favorable policy steps have already been taken.

ICTs in the Republic of Korea’s Economy

The Republic of Korea saw tremendous growth in ICT sectors of

the economy in the 1990s. In 1996, the telecommunications,
computers, computer peripherals, and software services sectors of
58 Bruce P. Chadwick

the economy accounted for 8.1 percent of GDP. Four years later,
this had grown by more than 60 percent to account for 13.0 percent
of GDP in 2000. These figures are even more impressive when
considering that such growth occurred during an overall economic
expansion, so the absolute figures on growth are even higher.
Moreover, the percentage of the workforce employed in these
industries grew from 4.24% in 1995 to 6.04% in 2000, which
suggests that although some concentration of wealth accrued to the
ICT sector, most of the growth from ICT industries was distributed
relatively evenly.

The ROK divides its ICT industries into three main sub-sectors:
the telecommunications-services sector, the hardware and
computer peripherals sector, and the software sector. Of these, the
largest contribution to GDP comes from the IT equipment sector
(about 75%), followed by telecommunications services (about
20%), and the software sector (5%). From 1997 to 2001, growth in
all sectors has been driven both by exports and demands from
domestic sources. In fact, growth in domestic ICT use and
consumption outpaced export growth over the entire period,
creating a helpful cushion of domestic demand for surviving the
present industry shakeout.49
Semiconductors, especially DRAM computer memory, form the
largest single component of the ROK’s IT hardware sector. In
fact, since 1998, South Korea has been the largest DRAM
manufacturer worldwide, according to the Korea Associate of
Information and Telecommunication. The ROK’s investments into
cellular and mobile handset production have made South Korea the
global leader in cellular hardware based on the CDMA standard.
Two challenges confront the ROK on this account: the first is to

49
See Korea Association of Information and Telecommunication, “Information
and Communication Industry Statistics Report 2000” (2000.12), data for 2000
based on “Research on the Trend of Major Information and Communication
Items” (2001.2)
 Bytes and Bullets in Korea 59

maintain this leadership as 3G mobile standards phase in

worldwide; the second is to reduce dependence on foreign
technology licensing and the resulting outflow of hard currency.

Although the absolute contribution of South Korea’s software

development sector is still fairly small, the ROK is rapidly
establishing itself as significant player in software-development
services and as a leader in computer animation. The Korea
Association of Information and Telecommunication reports
average annual growth rates of 30.6% and 49.5% respectively for
the period 1996-2000.
Korea’s emerging excellence in computer animation is traceable in
part to domestic demand in computer gaming, which helps to build
the essential skills base, and international demands for high quality
animation at lower costs than achievable in Hollywood, New York,
or Silicon Valley.

Table 3.1. GDP Growth Rates 1997-2001: Korea, Malaysia,

Japan

Country 1997 1998 1999 2000 2001

Republic of 5% 7% 11% 9% 3%
Korea
Rep of China 7% 5% 6% 6% -2%
(Taiwan)
Malaysia 7% 7% 6% 11% 3%
Japan 2% -1% 1% 2% 0%
Sources: World Bank, World Development Indicators database
(ROK, Malaysia, Japan) and Republic of China National Statistics
(www.stat.gov.tw) (Taiwan)
60 Bruce P. Chadwick

Figure 3.1. GDP Growth Rates (ROK, ROC, Malaysia, Japan) in

1997-2001

GDP Growth Rates (ROK, ROC,

Malaysia, Japan)

12%

10%
An n u al G row th Rates

8% Republic of
Korea
6% Rep of China
(Taiwan)
4%
Malaysia
2%
Japan
0%

-2%

-4%
1997 1998 1999 2000 2001
Year

South Korea’s ICT industries were hit by the global slowdown in

ICT industries that began in mid-2000, but the ROK did not suffer
as badly as other major ICT exporters such as Taiwan, Malaysia,
and Japan. South Korea could count on higher domestic demand
for ICT products and services compared with Taiwan, a more
established and diversified export base in comparison to Malaysia,
and savings accumulated during the previous expansion, in
contrast to Japan.

ICT Governance in the Republic of Korea

South Korea’s national government has played an active role in

promoting ICT expansion in the economy and in government. In
 Bytes and Bullets in Korea 61

1994, the government reorganized the Ministry of

Communications into a new Ministry of Information and
Communication and created the Office of Information Planning
within MIC. Less than a year later, the Informatization [sic]
Promotion Act of 1995 created an Informatization [sic] Promotion
Council and introduced a number of other actions, most
significantly mandating ICT action plans annually for each of the
major sectors, including industry, education, culture, agriculture,
and other. Planning for ICT is a critical step in effective ICT
governance, because standards and processes adopted early on in
computerization efforts have a tendency to constrain the choices
available to meet additional needs later on. By these actions, the
ROK demonstrated that already by 1994 it had identified the
increasing importance of ICTs in both economic promotion and the
delivery of government services.

Linking government ministries through inter-governmental

networking systems was an early priority for the ROK. Among the
electronic projects designed to smooth government were an
electronic government document exchange system, a national
financial management system, and an online government
procurement system. Korea’s National Computerization Agency
estimates that these projects alone have saved over US$ 400
million in government expenditures, as well as improved
procurement time and reduced opportunities for corruption and
graft.

In addition to inter-ministerial coordination at the national level,

the ROK has also launched a number of electronic government
initiatives for citizens and local government units. According to
Suh Sam-young, president of the National Computerization
Agency:
By the end of [2002], 11 strategic initiatives
are to be completed. The government e-service
62 Bruce P. Chadwick

center, social insurance service portal, a

government-wide e-procurement system, Home Tax
Service, national finance information system,
integrated administrative information system of
local governments, educational administrative
information system, personnel policy management
system, government e-document exchange,
government e-Signature and e-Seal system, and
government information system are the 11 priority
projects expected to contributing the efficiency and
transparency of government administration.50

The goals of these initiatives, Suh states, are to create a digital

government that a) better services its citizens, b) provides the best
entrepreneurial climate for businesses, and c) secures transparency
and efficiency of government administration.51

Local governments are also leveraging the human resources, high

connectivity rates, and network features of ICTs to streamline
processes and reduce opportunities for corruption in government
procurement. Former mayor Goh Kun of Seoul instituted OPEN,
for online procedures enhancement, a Web-based information
system for civil applications, in which citizens can trace the status
and conditions of their applications.52 It was specifically designed
not only to reduce costs and speed procurement, but also to make
corruption and graft more difficult to execute. For example,
procurement and service applications are handled and checked by
at least two public servants, each of which face incentives to report

50
See Suh, Sam-young, “Korea’s e-Government Finally at Hand.” The Korea
Times (12 November 2002), InfoTech section, CEO Forum. See also URL:
http://www.hankooki.com/kt_tech/200211/t2002111217234645110.htm
51
Ibid.
52
See URL:
http://english.metro.seoul.kr/government/policies/anti/civilapplications/ for a
description of OPEN on the Seoul city government website.
 Bytes and Bullets in Korea 63

any malfeasance by the other. As a result of the electronic system,

citizens seldom have reasons for direct audiences with bureaucrats,
thus reducing the encounters most likely to result in bribes or graft.
Matt Bonham, Jeffrey Seifert, and Stuart Thorson of Syracuse
University’s Maxwell School of Citizenship and Public affairs
report that surveys indicate 84.3% of Seoul’s citizens believe that
OPEN has contributed to transparency and 72.3% say that it
satisfies their interests.53

South Korea’s attention to ICT governance is hardly limited to

intergovernmental matters and streamlining its own services. As
Mr. Suh mentions above, one of the key objectives is to promote
ICT innovation and entrepreneurship to drive the ROK’s economy.
The main mechanisms to achieve this outcome were:
• Developing national broadband infrastructure to
facilitate private e-services
• Government venture capital funds and loan
programs
• Technical assistance for SMEs for IT planning and
deployment

In the mid-1990s, government efforts to promote broadband

accessibility were probably the most visible programs undertaken,
and they have paid off well, as shown by South Korea’s rank as the
country with the highest rate of broadband penetration. In part, the
ROK’s success is attributable to its high urbanization rate and
population density, meaning that Korea could offer broadband

53
Bonham, G. Matthew, Seifert, Jeffrey W., and Thorson, Stuart J., “The
Transformational Potential of e-Government: The Role of Political Leadership,”
paper presented at the panel on Electronic Governance and Information Policy
(Panel 9-1) at the 4th Pan European International Relations Conference of the
European Consortium for Political Research. University of Kent, Canterbury,
UK (9 September 2001). See also URL:
http://www.maxwell.syr.edu/maxpages/faculty/gmbonham/ecpr.htm
64 Bruce P. Chadwick

services at a lower cost per user than many other countries, but the
role of vision and political leadership in turning opportunity into
reality should not be underestimated.

Serving low-density rural areas continues to be a challenge, even

in relatively compact South Korea. In response, the ROK has
developed a loan program to facilitate the deployment of fiber and
wireless broadband options to rural areas, as well as to promote
rural access points in post offices and local information centers.54
The government recognizes that without these loans and subsidies,
remote areas would likely be cut off from the benefits of Korea’s
networked economy and the existing digital divide would be
exacerbated. Providing such loans may also have the benefit of
reducing the cost of delivering government services to remote
areas.

In the United States, much of the Internet boom of the late 1990s
was fueled by large quantities of venture capital poured into
creative ventures that identified ICT needs and developed services
to meet them. Compared to the United States, venture capital for
ICT activities in the ROK has been in shorter supply. During the
bubble, venture capital rushed to US startups, but Korean
companies had more difficulty emerging from the shadow of the
Asian financial crisis of 1997-98. After the bubble burst, private
venture capital for innovative startups dried up significantly. To
compensate, the ROK created government-sponsored venture
capital programs to encourage Korean entrepreneurs to innovate.
1n 1998 the ROK launched the MOST Fund I for venture capital
with $24 million in capital. A year later MOST Fund II was
launched, with an additional $33 million, as well as the Korea
Venture Fund, with $83 million destined to support ICT startups.
In 1998, MIC also initiated an IT Investment Club to share
54
National Computerization Agency, “Broadband in Korea: Korea Information
Infrastructure.” Seoul, Korea. June 2002.
 Bytes and Bullets in Korea 65

information and knowledge about Korean enterprises of potential

interest to public and private venture funds. In 2002, noting that
many companies needed to expand to the U.S. market to remain
viable, MIC instituted a $50M offshore venture capital fund to help
list Korean companies on NASDAQ.

An early effort to promote ICT-oriented capital markets, the ROK

established KOSDAQ in 1996 as an alternate exchange for new
startup companies. Although KOSDAQ was hit hard only a year
later during the Asian financial crisis, the volume of KOSDAQ
presently exceeds that of the Korean Stock Exchange.55

Noting the importance of research and development to innovation

and ICT competitiveness, the government used the tax code to
stimulate increased research and development into ICTs, ICT use,
and ICT product development. These included 50% tax deductions
for R&D increases, a five percent deduction on pre-existing levels
of expenditure, deduction of a special consumption tax on new
products based on internal R&D, and the exemption of income tax
on royalties from on-the-job inventions.56

In March 1999, the MIC announced its strategy document for an

electronic Korea, called Cyber Korea 21.57 The Cyber Korea 21
vision continues much of the emphasis on broadband building,
governmental streamlining, and private sector promotion. It also
increases attention to Korean capacity building, specifically setting

55
See: Sallmanns Insight, Asian Secondary Boards, April 2001. URL:
www.sallmanns.com/en/research/reports/0001.pdf
56
See American University, Management of Global Information Technology
report: http://www.american.edu/carmel/jw6194a/Korea.htm
57
Republic of Korea, Ministry of Information and Communications, “Cyber
Korea 21: Korea’s Vision for a Knowledge-Based Information Society.” March
1999. A copy of the strategy document is available at:
http://www.innovazione.gov.it/eng/interevento/banda_larga/corea_cyber.htm
66 Bruce P. Chadwick

a goal of “Making Koreans the Best Computer Users in the World”

and targeting success by reforming the educational curriculum to
include extensive computer instruction and computer use, re-
emphasizing access methods models and connectivity for
underserved areas. Cyber Korea 21 further identifies key legal
reforms needed to ensure the viability of e-commerce and e-
government, including copyright protection, electronic signature
legislation, and the creation of a customer report center site to
report privacy infringement and digital rights abuse.

South Korea’s planners and advisors have paid attention to a

number of “soft issues” in their strategy for Cyber Korea 21.
Some of these efforts have already been discussed, such as
attention to rural and underserved areas, the development of legal
frameworks for electronic signatures, and feedback sites that are
accessible information centers and post offices. Groups with
special needs, such as the disabled, elderly, homemakers, etc., have
not been forgotten in the rush to create a wired or e-Korea. The
implementation of Cyber Korea targets these communities through
three directives, including:
• Enhancing ICT literacy for groups with special
needs
• Supporting technology for the disabled and elderly
• Ensuring access to information via community
access centers, etc.

It is still too early to make a final evaluation of the effectiveness of

these efforts, and much will depend on how quickly the global
economy recovers from the present slowdown, but most observers
appear to agree that South Korea’s plans are ambitious, achievable,
and appropriate for a country that aspires to promote effective
economic structures for what they hope will be “the best Internet
users in the world.”
 Bytes and Bullets in Korea 67

Final Considerations and the Future of ICTs in the ROK

The Republic of Korea presents the world with an example of

extremely successful economic promotion in the ICT sector.
Although the current slowdown and consolidation in ICT
industries has affected South Korea as well, many of the
investments that Korean businesses, citizens, and government
agencies have made will continue to produce benefits and
dividends for society. The economic downturn in the ICT sectors
has not meant the end of the Internet or fundamental changes in the
way governments, businesses, and citizens all interact. Broadband
capacity, human capacity building, and service development will
continue to be critical to South Korean competitiveness in an
increasingly globalizing world economy.

South Korea has had several factors working in its favor as a major
ICT power: a sizeable population, high urbanization, income
levels and distribution, extremely high literacy rates, and pre-
existing engagement in export promotion strategies. These have
all set the stage for successful ICT industrial policy and support
from both economic and social factors. As important as these
factors are, they would all amount to little without pro-active
involvement from Republic of Korea’s political leadership to
ensure that appropriate planning, infrastructure, and human
capacity building capitalize on these strengths.

Could South Korea serve as a model for other developing countries

seeking to grow through ICT industries? India and Brazil also
show the value of a literate and educated population to developing
industries in software and multimedia development, but the large
income disparities of these countries have made it difficult to
spread the advantages of ICT development beyond a small elite
sector of their societies. Korea’s sizable domestic market for ICT
68 Bruce P. Chadwick

services proved to be a critical cushion for the industry during the

industry slowdown.

For extremely low-income countries such as much of sub-Saharan

Africa, the Middle East, and Central America, it is hard to see how
the lessons of the Korean experience can be readily applied and
localized. For middle income countries, the potential is larger,
particularly if they are highly urbanized, as are several parts of
Asia.

An intriguing opportunity suggests itself as the global economy

tries to dig its way out of the present ICT slowdown. Many
hardware and software companies are predicting that the largest
growth areas for hardware and software services will be in the
developing areas of the world, where five billion or more people
remain more or less untouched by the digital revolution. The
computing models, software, and equipment needs of these people
are likely to be significantly different (e.g. smaller, cheaper,
power-efficient, wireless) from those employed by the present one
half to one billion, but will probably involve platforms in which
the Republic of Korea already finds itself advanced (e.g. smart-
phones, cellular phones, set-top boxes). As international donor
assistance organizations move to models of “south south”
assistance, there is a potential niche where South Korea could
involve itself to keep on the cutting edge of technology uses and
capture an emerging market.

Indeed, one is hard pressed to decide if the Republic of Korea

should or should not be categorized as a developing country.
Perhaps the opportunity for South Korea to become a future source
of ICT technical assistance to other developing countries is as
much a sign of “graduation” as is its entry into the OECD and it’s
 Bytes and Bullets in Korea 69

position as “number one” in world broadband penetration for its

citizens.