Economic development requires three essential inputs: capital, labor, and technology. Since developing countries typically lack accumulated capital and technological capabilities, development economists have long argued that these resources can be most effectively acquired through foreign direct investment (FDI).
South Korea, however, followed a markedly different path. Rather than relying on FDI, the government pursued a strategy centered on the growth of domestic firms. Through policies that restrained consumption and encouraged savings, capital was mobilized and strategically allocated to a small number of large firms in targeted industries. Corporate profits were largely reinvested into production expansion and research and development (R&D), enabling these firms to build technological capabilities over time.
Yet it is difficult to explain the emergence of globally competitive Korean conglomerates solely through these conventional accounts of industrial policy. Our research focuses on the process through which domestic firms accumulated economic rents during the early stages of industrialization. We argue that government policies deliberately favored local firms over foreign investors, creating opportunities for domestic enterprises to secure rents and reinvest them into capability building. In this process, the government broadened the tax base while domestic firms acquired the competitiveness necessary to succeed in export markets.
This project investigates the mechanisms through which the discrimination against FDI contributed to the growth of indigenous firms and, ultimately, to South Korea’s industrial transformation.
Economic development requires three essential inputs: capital, labor, and technology. Since developing countries typically lack accumulated capital and technological capabilities, development economists have long argued that these resources can be most effectively acquired through foreign direct investment (FDI).
South Korea, however, followed a markedly different path. Rather than relying on FDI, the government pursued a strategy centered on the growth of domestic firms. Through policies that restrained consumption and encouraged savings, capital was mobilized and strategically allocated to a small number of large firms in targeted industries. Corporate profits were largely reinvested into production expansion and research and development (R&D), enabling these firms to build technological capabilities over time.
Yet it is difficult to explain the emergence of globally competitive Korean conglomerates solely through these conventional accounts of industrial policy. Our research focuses on the process through which domestic firms accumulated economic rents during the early stages of industrialization. We argue that government policies deliberately favored local firms over foreign investors, creating opportunities for domestic enterprises to secure rents and reinvest them into capability building. In this process, the government broadened the tax base while domestic firms acquired the competitiveness necessary to succeed in export markets.
This project investigates the mechanisms through which the discrimination against FDI contributed to the growth of indigenous firms and, ultimately, to South Korea’s industrial transformation.