Revisiting R&D policy

The highest priority for the Korean economy is creating jobs. Adding jobs is directly related to fundamental issues like increasing income and resolving polarization. However, we must not forget that business competitiveness is the most important factor in job creation.

To revive the economy, the government is working hard to boost employment by stressing macroeconomic policies and supporting venture start-ups. However, the government measures lack a microeconomic approach to enhancing competitiveness. When companies have a competitive edge, people are encouraged to start new businesses. However, Korean companies’ profitability and productivity have gone down considerably, and if an external shock like the global financial crisis happens again, we cannot be sure our businesses would survive.

Interest coverage rates of 30 percent of list companies in Korea is less than one, meaning they cannot pay the interest on loans with earnings. It is difficult to guarantee their survival. The average operating profit percentage of Korean companies is 5 percent, compared to 15 percent for U.S. companies. Korea’s productivity is half that of the United States and two-thirds of Japan. Low profitability and productivity means low management quality. In short, Korean companies are not managed well. There is much room for potential growth, depending on how we do.

To improve the competitiveness of Korean companies, comprehensive reform of management practices, from research and development, to human resources and corporate culture, is necessary. The Federation of Korean Industries and the Chamber of Commerce provide assistance to small and medium-sized businesses through the management advisory team. These efforts need to be continued and expanded, and managers at all levels should attend lectures and discuss management issues as part of a nationwide management reform campaign. They need to understand the desperate need to change in order to survive.

Managers and employees need to engage in open discussions about what their company needs to enhance competitiveness and what is lacking. Without a sense of crisis, companies cannot change their mind-sets and practices. Moreover, financial institutions, such as banks, should pressure companies to change by lowering their credit rating and applying tighter loan requirements and higher interest rates on companies that are not willing to change for the better.

According to various reports on management practices of Korean companies over the past few years, small and medium-sized companies in Korea have been found wanting in their efforts to nurture a talented work force and develop technology to expand in the global market. There are far fewer “hidden champion” companies in Korea than in Germany, Japan and even Taiwan. In order for Korea to become a manufacturing power like Germany, technology-oriented small and medium-sized businesses need to support conglomerates solidly.

The government’s research and development policy needs to be fundamentally changed to focus investment on solid small businesses. Recently, the media reported that Korea’s R&D budget per GDP is the largest in the world, but the effect has not been substantial.

Also, the moral hazard in the course of budget execution has led to a waste of R&D funds.

In order to prevent moral hazard, the practice of distributing government funds to the private sector in the form of subsidies needs to change. From now on, government R&D funds should be focused on national projects and basic research, such as weapons development or aerospace, and the government should become a venture investor to directly fund potentially promising projects to share in the future fruits.

For the government to become a good venture investor, we need a team like the Office of the Chief Scientists. The office would consist of experts in technology, management and investment; discovering promising technology sectors; and providing necessary consultations throughout the process. If necessary, the office would be able to connect projects with related government agencies or research centers.

We can learn from the success of Israel’s Yozma Fund. While discovering and helping small businesses become stronger through technological development, the government fund needs to provide investment and support at all steps of the process and share the success through dividends or royalties. Then, the R&D fund can grow on its own. To create a good cycle of proper venture investment, enhanced business competitiveness and job creation, the government R&D fund should not be distributed as subsidies, as shown in the current system.

Translation by the Korea JoongAng Daily staff.

JoongAng Ilbo, June 1, Page 29

*The author is a professor emeritus at Sogang University.

by Rho Boo-Ho