[Viewpoint]Support service sector

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[Viewpoint]Support service sector

What do Google, Starbucks, Goldman Sachs, Microsoft, McKinsey and Walt Disney have in common?
The multinationals are some of the most prestigious brands in the world. More importantly, however, they are all service providers. They make as much money as manufacturers by providing to the world information and communications, financial advice, retail stores, consulting and cultural content. In contrast, the biggest and most notable Korean companies are manufacturers such as Samsung, Hyundai Motors and SK.
Does that mean the Korean economic structure is based on the manufacturing industry? Not at all.
At present, the service industry makes up 60 to 70 percent of both the country’s production and employment, about two to three times the manufacturing industry. The problem is that the Korean service industry has not yet produced a world-class company or brand.
Cell phones made by Samsung and cars made by Hyundai have earned the same recognition for their quality at home and abroad. However, even Korean consumers are shunning domestic services. Every year, more Koreans travel abroad. Parents are sending their children to the United States, Canada and even to Fiji in the Pacific to get an education.
Korean manufacturers have aimed to penetrate the markets of developed countries since the early days. In contrast, the service industry has mainly focused on the local market. The consumers were first to embrace globalization.
As a result, the country is suffering from a service industry trade deficit nearly equal to the trade surplus from goods. Hard-earned foreign currency flows out in the form of service consumption abroad.
We have tried to develop our service industry. The current administration has proposed plans to reinforce competitiveness in the service industry on three occasions, from 2006 to last last year. Nevertheless, skepticism still remains as to whether nurturing the service industry will actually help growth.
While the labor-intensive nature of the service industry helps grow employment, it is hard to say whether it brings about productivity improvements. All service fields are not the same. Of course, the service industry deals with individual customers and has a relatively low amount of productivity.
The finance, research and development, corporate consulting and software industries are so-called producer services, which cater mostly to corporate customers. Distribution services, including retail, wholesale, transportation and storage, are highly dependent on machinery and equipment.
In fact, producer services make up more than 30 percent of the total production in developed countries. Combined with distribution services, these industries add up to nearly 50 percent. In conjunction with information and communication technology, the two service industries are seeing technological advances and productivity improvements as quickly as the manufacturing industry. They are fulfilling their role as a growth engine. The Korean service industry, however, is behind these two sectors. Compared to developed nations, the emphasis on producer services is considerably low; the distribution service is said to be the lowest in productivity.
Without opening, competition and innovation, the service industry cannot grow. It should follow in the footsteps of the manufacturing sector, which has developed by adopting advanced technology from abroad and through globalization.
We should not ignore individual consumer-based service industries because of their low productivity. With the latest technology and original ideas, they could become highly valuable. Most of all, the government should drastically ease corporate regulations on the market. Only then will there be proper competition. Through competition, we can hope for the birth of a world-class service company.
Moreover, we need to more aggressively invite foreign direct investment to the service sector, the best way to get technology transferred. The inputs and outputs of the service industry are intangible things, such as knowledge and ideas, so it is harder to get the technology transferred. In addition, we need to remember that the likes of Google and Microsoft were founded in a college dormitory or a garage.
Behind their leap to becoming a world-class company is the effective financial market of the United States, which gives the startups recognition for their genius.
Money is the essential element to turn knowledge and ideas into products, so we also need to prepare a method to screen intangible assets.

*The writer is a senior economist at the Institute for Monetary and Economic Research of the Bank of Korea. Translation by the JoongAng Daily staff.

by Kim Hyun-jeong
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