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keun lee

Windows of opportunity

South Korean economist Keun Lee examines how technology industry leaders emerge

Eduardo Cesar Keun Lee: “The State should act to fund innovation and this includes sharing technological risks”Eduardo Cesar

What causes companies or countries to relinquish leadership in a particular industrial sector? And what factors contribute to the emergence of new innovation leaders in the world? These questions guide the research of South Korean economist Keun Lee, a professor at the Seoul National University in South Korea and president of the International Schumpeter Society, which promotes studies on innovation influenced by the ideas of Austrian economist Joseph Schumpeter (1883-1950).

Lee is dedicated to the study of successive leadership changes observed in high-tech sectors such as cellular telephony and memory chips.  Known as “catch-up cycles,” those changes occur when longtime leaders of a particular technology lose their status while new companies or countries take the lead.  Lee took part in a forum on emerging economies held in August 2017 at the University of Campinas (Unicamp). Holding a PhD in economics from the University of California Berkeley, in the United States, he is editor of the journal Research Policy and council member of the World Economic Forum.

What are catch-up cycles?
They are the successive leadership changes that occur in sectors of industry.  Companies or countries emerge as international leaders while longtime leaders lose their status.  Later, the new leaders are dethroned and the cycle repeats. Longtime leaders may lose status, for example, when they ignore the rise of new technologies or prefer to avoid risks.

How does the succession occur?
Through windows of opportunity that emerge as a sector develops.  I identify three types of windows of opportunity.  The first is associated with scientific and technological changes.  It’s what happened in South Korea when it took advantage of digital technologies, leaving Japan, the leader in the analogue era, behind.  The second type of opportunity has to do with changes in demand.  The growth of Chinese and Indian markets opened a window of opportunity to new companies in emerging countries. The third type are institutional windows of opportunity. These are when States establish policies to promote certain industry sectors, such as what took place with high-tech companies in South Korea, the telecommunications sector in China and the pharmaceutical industry in India.

How important is the concept of leap-frogging, or technological leap in that process?
Countries that are seen as lagging behind in a particular field of technology may make leaps when a new techno-economic paradigm appears, and thus, surpass longtime leaders.  But it is important to add that leapfrogging is related to an advanced stage of technological development and therefore, it only takes place when companies or nations have achieved a certain level of capabilities and an effective innovation support system.  When one is not ready to make the leap, the opportunity could even prove destructive.

Is being well prepared, enough to take advantage of the window of opportunity?
Leapfrogging can be a double-edged sword. Look at the case of Solyndra, for example, the U.S. company that went bankrupt in 2011. It decided to invest in the manufacture of photovoltaic cells using materials such as copper, indium and selenium.  The problem is that the solar energy market still uses mainly silicon to make the panels because the other two materials are very expensive. No matter how much a company dominates a more efficient technology, the market was not ready for that.

Are successive changes in leadership common in other sectors? 
Yes. The commercial jet industry is an excellent example because it bore witness to two leadership changes in the past three decades. The first was in 1995, when European aircraft manufacturers British Aerospace and Fokker lost their leadership status to the Canadian company Bombardier. In 2005, Embraer assumed the leading role. In that sector. It was a change in demand that had created windows of opportunity.  In the first change, the European companies that built air craft that seated 70-120 lost status because of the demand for smaller aircraft that seated only 50.  In the early 2000s, the demand swung back in favor of larger jets that seated up to 180, representing an opportunity for Embraer. The memory chip industry also went through successive changes. In 1982, leadership migrated from the United States to Japan, and 10 years later, from Japan to South Korea. Since then, Korean companies have maintained that leadership and there are no signs that this will change anytime soon.

What did it take for a company like Samsung to achieve leadership in the mobile telephone sector?
The American company Motorola invented the cellphone and is considered a pioneer.  However, with the emergence of cellular telephones based on new digital technologies, the Finnish company Nokia took control of the market. In the era of smartphones, however, South Korea’s Samsung and the United States’ Apple ousted Nokia. Samsung chose to take a chance on creating something new instead of investing in devices like those that Motorola and Nokia were making. This is what I call the strategy of leapfrogging. The company did not need to dominate the previous technologies and processes in order to invest in something new.  Often, in order to achieve leadership, you have to change the target and invest in new technologies, and this involves risks.

What is the State’s role in how companies seeking to be leaders perform?   
There are countries such as China and South Korean that are strengthening industrial sectors by enforcing protectionist measures.  The State should act to fund innovation and this includes sharing technological risks.  When a company decides to enter a new segment, or bet on a disruptive technology, it can’t go it alone.

In the 1980s, Brazil and South Korea were practically at the same socioeconomic level.  Why did the Asian country manage to prosper as a technological powerhouse while Brazil did not?
Brazil was late to open its markets and took too long to adopt policies and incentives capable of generating national champions in technology fields.  In addition, Brazil has a very large domestic market, which may have contributed to the fact that companies were focused on domestic demand rather than internationalization.  Because of its much smaller domestic market, South Korea needed to carve out markets in other countries.  This forced Korean companies to invest in innovation, otherwise they would not have survived.

What is the current importance of the so-called technology clusters, such as Silicon Valley?
Innovation systems continue to depend on the emergence of startups that have the potential to develop new technologies, and thus, produce new leaders.  Innovation clusters are critical to achieving that goal although I’ve noticed that startups seem more determined to advance in order to be bought out by big companies than to become big companies themselves.  Those poles are able to provide a synergistic environment between companies large and small.  It is an environment conducive to sharing ideas and knowledge.