The following OECD assessment and recommendations summarise Chapter 4 of the Economic Survey of Korea 2005 published on 5 October 2005.
The innovation framework should be upgraded by improving R&D efficiency …
Korea already makes a large investment in R&D, with such outlays amounting to nearly 3% of GDP. It is important to maximise the benefit from this investment by upgrading the R&D system.
Linkages between business, university and government research institutes should be strengthened. The performance-based evaluation system of public-sector R&D should be further developed, taking greater account of its relevance to the business sector.
Incentives for R&D in the universities, which are currently underutilised, should be strengthened.
The government should maintain flexibility in setting research priorities in order to limit the risks inherent in focusing on sectors identified as future growth engines.
Policies should aim at increasing the international integration of Korea in R&D activities.
… developing a risk capital market and a venture business sector …
The authorities have also been active since the 1997 crisis in developing a risk capital market and a venture business sector. Government involvement in this area should be re-focused on leveraging private-sector participation by improving transparency and disclosure requirements. The government certification system for venture businesses should be phased out as planned. The government also offers relatively generous tax incentives to encourage private-sector R&D. The effectiveness of these incentives should be evaluated to ensure their efficiency and the results should be compared with the potential gains from supporting other activities. In addition, while intellectual property rights have been strengthened, better enforcement would encourage innovation activities.
… strengthening product market competition, particularly in services …
In addition to promoting the creation of new knowledge, it is at least as important to use the existing stock of knowledge more effectively. This is particularly true in Korea, given that its average labour productivity per hour is only 40% of the US level, suggesting a large scope for further convergence based on existing technology. It is necessary to strengthen competition in order to encourage the diffusion of knowledge, as well as its creation. Reducing entry barriers and administrative opacity and improving the exit mechanism are needed to support the creation of new enterprises, a key to developing and adopting new technologies. Given that services’ share of value added is steadily increasing, boosting productivity in this sector is essential to sustain growth. The priority should be to remove entry barriers in the areas of retail, business services, health care and social services. The complicated system of land regulation should be simplified and made more transparent to avoid hindering the entry of new firms.
Productivity in the service sector in Korea is relatively low
1. ISIC codes 50-99
2. Including hotels and restaurants (ISIC codes 50-52 and 55).
Source: OECD STAN Database for Industrial Analysis and the OECD Labour Force Database.
… and restructuring the tertiary education system
Ensuring the availability of highly trained human resources is of key importance for innovation. While Korea’s substantial investment in primary and secondary schools, together with extensive private tutoring, has produced good results, the large increase in the number of students at the tertiary level has been accompanied by a deterioration in quality. Reversing the decline will require a rebalancing of expenditures away from primary and secondary schools, where age cohorts have already begun to decline, in favour of tertiary education, where funding per student is exceptionally low compared to other OECD countries. It is necessary to increase the availability of scholarships and loans to ensure that students from low-income families have access to tertiary education. Deregulation and stronger competition to drive the restructuring and consolidation of tertiary educational institutions would help reverse the decline in quality. Greater transparency about the performance of each university and increasing the scope for foreign institutions to operate in Korea would strengthen competition and efficiency in this area. At the same time, it is essential to increase opportunities for lifelong education given rapid structural change and population ageing.
Expenditure on educational institutions per student is low in Korea, especially at the tertiary level
US dollars using PPP's, based on full-time equivalents, in 2002
Source: OECD, Education at a Glance, 2005.
Return to the Economic Survey of Korea 2005
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For further information please contact the Korea Desk at the OECD Economics Department at firstname.lastname@example.org. The OECD Secretariat's report was prepared by Randall Jones, Yokoyama Tadashi and Yongchun Baek under the supervision of Wilhelm Leibfritz.