Samsung Town, a major office park in South Korea’s capital city Seoul, serves as an IT and electronics hub for the multinational corporation Samsung. South Korea is the world’s most innovative country, and they have been for nearly seven years (apart from 2020 when they came second, but hey, who’s counting).

Each year, Bloomberg releases a ranking of the top countries by innovation, which is basically a weighted equation for quantifiable areas such as the number of patents filed per million people or the annual R&D spending as a percentage of GDP. Without going to these countries and interviewing its heads of state, this is Bloomberg’s only way to rank each country from one another in terms of “innovation”.

South Korea is indeed a very innovative country – and its economic history after the Korean War has been up and to the right. South Korea is at the forefront of change across many industries, fueled by technology research and intellectual property.

Whether or not South Korea will remain at the top of the innovation index in a decade or two is at the hands of a small number of families who are no strangers to Korea.

Chaebols

A chaebol is a Korean word that refers to family-run conglomerates. A chaebol often consists of many diversified affiliate companies. Samsung, Hyundai, and LG are among the biggest chaebols. These behemoth-sized companies emerged during the 1970s and 1980s with help from immense government support, and their success is the backbone of Korea’s innovation title.

There are 64 chaebols across South Korea. These 64 conglomerates equate to 84% of Korea’s GDP in 2020, but only 10% of the jobs. To put this into perspective, America’s top 500 companies (by revenue) only equate to 61% of America’s GDP in 2020, and 14% of the jobs.

64 family-run companies control South Korea’s economy, future, and innovation.

Innovation Leader

Bloomberg credits South Korea’s innovative crown to the amount of R&D spent as a percentage of GDP, which is the second highest in the world behind Israel. In 1981, the government accounted for 53.5% of total R&D investment, but that share declined to 19.4% in 1990 and 16% in 1994, before heading up again to 24.3% in 2005. Now the private sector accounts for 75.6% of the total as of 2020.

During a period of 24 years, R&D investment increased almost 50 times, with an average annual growth rate of almost 20%. The top 20 firms account for about 57% of the total industrial R&D investments in Korea. This high concentration of R&D spending from the chaebols represents a serious imbalance in Korea’s innovative economy.

South Korea’s Total R&D Expenditure as Percentage of GDP

South Korea’s Total R&D Expenditure as Percentage of GDP

Chaebol Concentration – Young History

The concentration of chaebols can be explained by a few key events. The economic concentration accelerated after the 1997 Asian financial crisis.

In the Korean car industry, from 1998 to 2004, Hyundai acquired Kia. Meanwhile, other major carmakers went into bankruptcy before being sold to foreign firms. This merger and economic correction led to a complete monopoly in the automobile market and resulted in there being only one buyer in the automobile parts and components market – I’ll give you a hint, my favorite car is the Elantra.

Today, Hyundai Motors accounts for about 80% of the domestic automobile market in Korea.

Turn to Intellectual Property

Out of any nation in the world, South Korea ranks first for the number of patent applications per million people. Patent filings per million in Korea were 3,319, proving to be overwhelmingly larger than 1,943 of Japan, the second leading nation in the 2019 index.

Of course, the number of patent applications is a good indicator of the success of R&D spending – which South Korea is second highest in the world on a GDP basis. Patent applications cannot happen without R&D, the same way a chicken cannot exist before the egg. Similar to R&D spending, the number of applications only amplifies the concentration of the chaebols.

Korean chaebols own 86% of the patents granted by the Korea Industrial Property Office, and 98% of the patents granted by the United States Patent and Trademark Office.

The high patent concentration, which is the only variable for which Korea ranked first in the Bloomberg Innovation Index (out of 5 variables, they scored within the top 5 for the others), is a clear testament to the success of the chaebols.

Innovation in the Future

To understand the South Korean economy is to have an understanding of the chaebol, large business conglomerates controlled by their founding families.

In an economy concentrated in a small number of big business groups, single-party purchasers, and monopolies – the chaebols drive the widening wage gap between workers in SMEs and those in the big firms.

The interaction between political institutions and chaebols has had significant implications for South Korea’s economic growth since the 1960s. South Korea is now at a crossroads. Economic concentration is the root of the structural problems now faced by the economy and society.

Innovation is South Korea’s bread and butter – but will this remain true decades into the future? Will the innovative status of the country remain a humble representation of the largest companies, or will it represent the population across the nation?