Samsung, Apple, and Intellectual Property in Korea – UPDATE: Saenuri drops Reform of Chaebol Corporate Governance *sigh*

UPDATE: This story couldn’t be more perfectly timed for argument I make in this post. (H/t to Zach Keck.) This one sentence captures a lot of what is wrong with the political economy in Korea: “Compelling conglomerates to unwind their intricate cross shareholdings would ‘expose companies to hostile foreign takeovers,’ Park Geun Hye told reporters.”

Wow. So globalization is for ‘foreigners’ but not for us. We should be allowed to capture 20% of the US or EU auto market, but we don’t want anything like GM buying Daewoo or Lonestar-KEB ever again on our own turf. Foreigners should be excluded from Korea’s biggest firms, even though those firms are hugely dependent on foreign sales and Korea’s growth generally is dependent on foreigners’ willingness to run near-permanent trade deficits with Korea. Talk about biting the hand that feeds you. The sheer selfishness and xenophobia of that line is shocking. And I don’t believe for a second that that is really Park’s own belief. She used to support greater reform, and Korean conservatives are the most neoliberal element in Korean life (President Lee pushed through the FTAs, e.g.). That sentiment almost certainly reflects pressure from the chaebol families on the hoped-for winner to back-off the ‘economic democratization’ rhetoric. So if you ever wonder why foreigners think Korea is mercantilist or where the ‘Korea discount’ comes from, here you go.

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It’s been a few months since the nasty Apple-Samsung battle led to a record lawsuit victory over Samsung in California. The Korean national response was downright vitriolic, but hopefully tempers have cooled enough that some reflections on how Korea can avoid this kind of stuff in the future are useful. I am displeased to say that Korean media turned down the following op-ed, but happy to note that The Diplomat was interested and posted this on Friday. The point of the media is not to flatter and tell us what we want to hear (see: the US media in 2002 on Iraq) but to challenges us to think beyond our prejudices. I am once again grateful to Zachary Keck, the assistant editor at the The Diplomat, for his interest in my work. So here we go:

“The bruising Apple-Samsung fight raises major intellectual property rights (IPR) issues that Korea and Asian economies generally are ill-prepared for. Unless the concerns raised by the Samsung-Apple scrap are resolved, Korea should expect regular trade friction with major partners and regular accusations of copying and cheating. As wealthy countries, including now Korea, move away from manufacturing and further into services and information, the need for innovative Korean firms will only grow. Neither Korea’s corporate structure – dominated by mega-oligopolies with strong disincentives to innovate – nor education system – overwhelmed by rote learning and plagiarism – position Korea well for the future.

Korea’s traditional export strengths are in manufacturing – cars, ships, electronics, and heavy industries. These generate 40% of GDP and much of Korea’s foreign exchange. However, unless Korea shapes up its service economy, it will increasingly compete ‘backward’ against the BRICS (Brazil, Russia, China, India, South Africa) over manufacturing, rather than ‘forward’ against the US, EU, and Japan over innovative services. I find that the Korean business media generally ignore this to focus on the chaebol, but its costs are already apparent: Korea’s late arrival to smart phones (some five years after the US) led directly to the Samsung’s desperation and Apple’s counterpunch in the courts.

Industrial skills diffuse easily. Just as Korean companies were able to compete away American manufacturing jobs in the 1980s and 90s, so the BRICS and Southeast Asia are doing that to Korea today. As Korea enriches, fewer Koreans are willing to work in a factory. Of the hundreds of Korean undergraduates I have taught, not 5% tell me they expect to work in manufacturing. And Korea’s chaebol have scarcely invested locally in the last two decades; new capacity is built either closer to markets to prevent local protectionist backlashes (as in the US), or elsewhere in Asia where labor costs are lower.

These trends are not uncommon. As globalization spreads, more and more people enter the global labor force, pushing down the wages. Given the greater education needed for many service jobs over manufacturing ones, the latter more easily leak away to foreign competition. The US too had to shift, painfully, from an industrial economy manufacturing ‘stuff,’ to a service economy making information. Manufacturing accounts for not 15% of the US labor force now. But American services – education, research, film, music, video games, health care, banking, software design – are now global leaders and, crucially, sit atop the value chain generating massive revenue through innovative ‘first movement’ into new areas (tech giants like Google or Apple are obvious examples). By contrast, Korea’s biggest companies face competition from dozens of other firms (whether old rivals like Sony, or new ones from China) in well-established areas. These firms are successful of course, but will not lead the future nor generate the long-term innovation Korea needs to fend off rising BRICS competitors.

Moving Korea toward more innovative production will require two major changes, perhaps so deep they should be called cultural. First, Korean education needs to emphasize creativity and free-thinking more. Far too much pre-college training focuses on the rote recitation of answers with little underlying comprehension. Math and science may fit this model well, but it is disastrous applied to the humanities and social sciences. It encourages an intense ‘copying culture’ in which the instructor’s thoughts are treated like ideal answers to open-ended questions and parroted back. This is the single most challenging part of my job here. Ask any foreigner instructor in Asia what is her biggest challenge, and she is likely to say plagiarism. Plagiarism extends to the highest levels of Korean academiaand is the biggest reason why Korea still lacks a globally ranked university. That Apple accused Samsung of plagiarism is no surprise.

More generally, Korea needs to develop much greater respect for IPR. Mimicry may the highest form of flattery, but in post-industrial economies, it is also increasingly a crime. Because industrial production is moving to BRIC-like countries, companies in wealthy states increasingly generate their revenue from innovative services and useful information. Because Korea has not yet fully moved into the information economy, the costs of e-piracy feel invisible. But there already has been one major casualty: gaming-obsessed, chaebol-friendly Korea lacks a major recognizable gaming label like Namco or Activision. Domestic downloading pirates profits away, and console gaming has flopped as consumers eschew paying full price in stores. (This is also what destroyed DVD and Blu-ray sales in Korea, damaging those creative industries as well.) This Korean penchant to illegally download almost everything will generate increasing trade friction, particularly under the new US and EU FTAs. And Asian firms generally that egregiously copy will increasingly become litigation targets, just as Napster was eventually shut down for abuse of copyright.

The second big shift Korea needs to avoid more IPR litigation is decentralization of its economy. The extreme oligopolization of Korea’s economy by the chaebol is destructive in many ways – it encourages rent-seeking, facilitates political corruption, generates a too-big-to-fail mentality, and inhibits a proper currency float. It also discourages innovation. Large firms that permanently dominate their markets become complacent, bloated winners with obvious incentives to keep out competitors and slow changes that might damage secure revenue streams. A very obvious example is Microsoft, whose OS monopoly led to the complacency that generated the awful Vista. Microsoft attempted to keep out competitors with gimmicks like purposefully making Windows difficult to use with non-Microsoft software.

Korea’s biggest companies are in a similar position, which is why innovation, even in Korea’s strong sectors, rarely comes from Korean firms. The chaebol may perfect extant technologies, but they lag at break-out innovations, largely because disruption does not benefit these gargantuan established winners. Rising challengers shake-up markets with clever new innovations, but the extreme concentration of Korea’s economy almost deliberately quashes local ‘animal spirits.’ The cell phone industry is an excellent example. Dominated for years by KT and SK, the market was stagnant, with dull flip-phones whose primary innovations were gimmicky colors and lights, while the US phone industry had already created Blackberry and Windows Phone. When the iPhone hit and Koreans learned of it, Korea’s telecom oligopolists panicked. They pressed the Korean government to maintain a gimmicky security standard for two years to prevent the iPhone’s arrival, while Samsung effectively reverse-engineered the iPhone (and then the iPad) to create a competitor. In the end Samsung’s reputation was tarnished and Korea’s consumers spent almost five years without smart phones that westerners simply took for granted.

Samsung-Apple is just the beginning of Korea’s troubles as it enters into the mature world of OECD competition where information is frequently a copyrighted product. The media’s nationalistic response that the lawsuits are anti-Korean protectionism ignores both the long history of Korean mercantilism and the importance of patent protection in modern economies. The piracy damage to Korea’s digital industries, like gaming and DVD, are a case in point. Koreans are no less creative than anyone else, but their educational and economic structure strongly encourage copying not innovation. If this does not change, expect more lawsuits.”