The Republic of Korea invested roughly 0.5 percent of GDP in R&D in the mid-1960s with the government responsible for 80 percent of the investments. By 1995, gross R&D expenditures (GERD) already represented 2.3 percent of GDP with the private sector responsible for 80 percent of these expenditures. Korea’s GERD was significantly larger than the OECD average (2.07 percent) but still behind the GERD for the U.S. (2.51 percent). By 2006, Korea’s GERD of 3.2 percent positioned it among the OECD leaders. The corresponding figures in 2005 were 2.6 percent for the U.S. and 2.25 percent for the OECD.<sup>8</sup> In parallel with a greater role of the private sector in R&D, the government has continued to foster university-industry linkages through fiscal incentives and government procurement of advanced technologies. On almost all indicators of human resources for S&T, Korean scores exceed those for China by a large margin.

By the early 1990s, the technological capability of Korean firms had transformed into innovation grade. According to the metric of the number of patents granted by the US Patenting Office, Taiwan, China became the eighth and Korea the ninth largest recipient of patents surpassed only by the US, Japan, Germany, the UK, France, Canada, and Italy in 2003 (OECD, 2008).

There are also other dimensions of the Korean model that contributed to an innovation-friendly environment: a high savings rate, broad macroeconomic stability (since the 1980s), and a high level of investments in education. Our focus here, however, is on the distance-shortening policies pursued by South Korea and discussed further in section 8.

# **5. How much has China caught up?**

In the early 1980s, China’s distance to the Korean technological frontier<sup>9</sup> was extremely ‘long’ in most industries (figure 4). It was 80 percent in the Food industry, Industrial chemicals and Iron and steel industries, and about 60 percent in Electrical machinery and Transport. Textiles were China and Korea’s largest industry and China’s distance to the Korean technological frontier in this industry was about 60 percent but in the Wearing Apparel industry, Chinese productivity was about 300 percent greater than Korea’s.

Throughout the 1980s and the early 1990s, China’s distance to the frontier grew even _longer_ for two reasons _._ First, the Korean technological frontier was not static – in nearly every industry, the frontier was a rapidly moving target -- a reminder that catch up is not about closing a fixed gap, but requires a country to grow at a rate that outpaces productivity growth in the frontier country (for each industry, see the adjacent chart in millions of US $). In 1980-96, China’s leading industries had productivity growth rates that were significantly below those of Korea. As an example, Chinese productivity growth in Industrial chemicals was only 4.6 percent compared to 11.4 percent for Korea; only 5.4 percent in Iron and steel compared to 12 percent for Korea and so on (table 2). Since 1997 however, Chinese productivity growth has been in the double digits relative to the drop to single digits in most Korean industries. The second reason why China’s distance to the frontier widened throughout the 1980s is that the productivity dividend from its liberalization reforms did not begin to accrue in large measure until almost the mid1990s.

> 8 See Dahlman (2008) and OECD (2008) for further details. 9 Distance to the frontier is measured by manufacturing value added per worker.

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