Dynamic comparative advantage and sources of international competitiveness in the Korean steel industry
Creators: name: Kang, Jong-Soon
Publisher: name: The Australian National University
Year: 1994
Subjects: subject: Steel industry and trade Korea (South)
subject: Competition, International

description: 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.