Dynamic comparative advantage and sources of international competitiveness in the Korean steel industry
Date
1994
Authors
Kang, Jong-Soon
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Abstract
The Korean steel industry has developed remarkably since it turned to modem steelmaking
in the early 1970s with the establishment of the nation's only integrated largescale
steel company, POSCO. This study explores major factors that contributed to the
development of, and the evolution of intemational competitiveness in, the Korean steel
industry. The conceptual approach employed here is based on the model of dynamic
comparative advantage in a developing country. This model suggests that shifts in
supply-side conditions are the main cause of changing comparative advantage. This
model is subsequently extended to incorporate the effects of domestic demand,
government intervention and industrial policy, and an industry's or firm's capability to
absorb imported technology. A major interest in this study is to examine and assemble a
large amount of data and evidence, including a detailed case study of POSCO, on the
effects of these factors on the growth of the Korean steel industry.
Examination of supply-side issues shows that the dynamics of comparative
advantage in the Korean steel industry were closely associated with rapid economic
growth and industrialisation relative to the rest of the world. Even though many argued
that establishment of a large-scale integrated steel mill in Korea in the early 1970s was a
poor option in light of static comparative advantage considerations, the growth of the
steel industry seems to have accorded well with Korea's changing structure of
comparative advantage and the intemational product cycle of steel-making in the longer
run. The analysis shows also that steel industry competitiveness in Korea had its origins
in a comparative production cost advantage, stemming mostly from its relatively cheap
and abundant supply of skilled labour.
On the demand side, it is shown that both the size and growth rates of steel
consumption and the intensity of steel use in Korea were among the highest achieved in
developing countries and that, with a few exceptions, achievement of a strong
comparative advantage in steel was also associated with high levels of steel consumption
in the domestic economy. While rapidly increasing domestic steel demand has had a
direct negative effect in the short mn on Korea's trade performance in steel, it ultimately
has contributed to the improvement of the trade performance of the Korean steel industry
over the longer term.
Analysis of the significance of industrial policy and the role played by the
govemment in establishing and promoting modem steel-making in Korea shows that the
financial policy of directing available capital to designated industries and firms was a principal agent in industry promotion. It is argued that the role of government in the
establishment of POSCO can be understood as an attempt to transform the industry into a
modem steel-making industry by overcoming problems in capital markets. It is also
shown that the extensive government measures undertaken in the 1970s and 1980s
provided the steel industry, especially POSCO, with various development incentives,
even though it is not so readily apparent whether there were net costs or benefits for the
entire economy and whether the industry's development would have been promoted more
efficiently under a different policy regime. Gradual removal of protection and assistance
for the steel industry from the early 1980s, as it was seen to have moved out the infant
industry stage, is also identified as an important part of its development.
In an attempt to explore the issue of how the Korean steel industry obtained
international competitiveness from an inefficient and non-competitive base, the case of
POSCO is examined. Even though POSCO had to rely almost entirely on foreign
sources of technology and capital to install its integrated production system, its long-run
competitiveness was founded on effective technology transfer practices. POSCO built
plant when new construction work was at low levels worldwide, and so was able to
purchase relatively new technologies and attract low cost finance. Even more important
was its low construction costs, due to its achievement of short construction times and low
labour costs, which were much lower than elsewhere in the world. POSCO's efforts and
ability not only to install plant effectively but also to obtain an international level of
technological capability through rapid and successful learning of know-how and
accumulation of experience are identified as the most crucial firm-specific factors in
creating and strengthening international competitiveness.
A key conclusion is that the establishment of fully integrated steel-making capacity
in Korea in the 1970s clearly accorded with underlying changes in Korea's comparative
advantage. The advantage of relatively low wages was magnified by other factors such
as rapidly growing domestic demand, which allowed large increments to steel-making
capacity, the role of government in the establishment of modem steel-making by
overcoming market failure problems at the early stage of development, and rapidly
accumulating workforce skills and technological capability. The argument also has
several implications for prospects and policy strategies for future development of the
Korean steel industry. As cost competitiveness has been gradually eroded, the central
economic issue for the future of the industry is its capacity to upgrade so that domestic
firms acquire the capability to innovate and advance product and process technology, and
achieve technology-based advantage and higher productivity.
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