Regulation: Korea's next innovation challenge

By Robert D. Atkinson

Korea has rapidly progressed when it comes to innovation. In the World Intellectual Property Organization's 2020 Global Innovation Index, Korea broke into the top 10 for the first time, ranking first in research and development (R&D) and second for human capital and information and communications technology (ICT).

But in the category of regulatory environment ― the degree to which government regulations facilitate instead of hindering companies and entrepreneurs from innovating ― Korea ranked a dismal 52nd, behind nations such as Bulgaria, Columbia, Kazakhstan, and Peru. The World Bank finds the same thing, with the regulatory burden in Korea higher than the global median.

In contrast, the top nine nations in innovation, including the United States, Singapore and Switzerland, have an average regulatory rank of just 9 ― 43 slots better than Korea. Moreover, having a good regulatory environment is highly correlated with a key innovation indicator: ICT and organizational business model creation (i.e., the development and spread of new technology-based business models).

Why is this relevant for Korea? After all, it's in the top 10, so it must be doing pretty well. The answer is that the core challenge now for the Korean innovation economy is to fully make the switch from being a "fast follower" (an economy in which firms are not on the global leading edge of innovation, but rapidly copy the leaders) to being a global innovation leader.

Making the switch from a fast follower to global leader is hard for both companies and countries. One reason is that, to be a global leader, the environment must be favorable for experimentation, failure, and what noted innovation economist Joseph Schumpeter termed "creative destruction." In other words, companies and entrepreneurs know that if they come up with a new product, service or business model they will not be unfairly restricted by the government from getting it in front of consumers.

While consumers might like the new thing, incumbent players in the same category ― whether big or small ― often do not. Not only do they often use their own market power to block a more innovative competitor, but they also rely on government to keep or erect regulations and rules that make it hard for the upstart innovator to succeed ― just as incumbent taxi drivers thwarted the emergence of ride-sharing companies like Uber in Korea, even though Uber now operates in over 85 nations.

While disruptive innovation often can topple large firms ― for example, as Kodak was toppled by the emergence of digital cameras ― it can also disrupt small, less efficient firms. This points to a broader policy challenge in which Korean policy explicitly focuses on protecting small companies, including retailers, from competition. Too many Korean programs, incentives and regulations are designed to protect small companies, even though on average they are much less productive than larger Korean companies.

In some cases, civil society groups push for rules that end up not only hurting innovation and innovators, but also consumers. A case in point is Korea's body of data protection laws, which, notwithstanding recent reforms, limit data innovation that can help consumers and are stricter than rules in the United States that have enabled U.S. companies to lead the world in data innovation.

The end result of overly burdensome and protectionist regulations is less innovation, slower productivity growth, and reduced consumer welfare.

All too often because of these forces policymakers want innovation without real innovation (e.g., disruption). In other words, policymakers are happy to have Samsung develop 6G wireless equipment, or SK the latest semiconductor, or LG a world-leading battery, but when it comes to innovations that might disrupt jobs, communities, and industries, they worry and talk about the precautionary principle and protecting consumers. This approach might have worked when Korea was a rising innovator, but it is now a weight on the shoulders of the nation, keeping it from being at the forefront of innovation.

Maybe this aversion to creative destruction is a natural result of an economy and a society that has outperformed virtually every other economy in the last half century and might want to protect its considerable achievements ― for such growth rates truly were remarkable. But unfortunately, given the rise of China as a fast-following peer competitor to Korea, it does not look as if Korea can afford to rest and hope it can get the "creative" without the "destruction."

If Korea wants to set its sights on being number one in the global innovation rankings, it will need to ensure that regulation is designed in ways that favor the future instead of protecting the past. This can entail enacting measures such as "regulatory sandboxes" ― frameworks that enable firms to work with regulators to test their innovative products, services, and business models with real consumers in a controlled environment on a trial basis.

But sandboxes are not enough. Regulators should learn from the results of sandboxes to streamline existing regulations. One way to do that would be establishing an Office of Innovation Review whose mission would be to serve as an "innovation advocate" in the national regulatory process. It can involve political and business leaders recognizing the importance of embracing the "innovation principle" (the principle that, unless otherwise shown, new technologies and business models are presumed to be positive) when considering government response to new technologies.

As Steve Jobs once stated, "Innovation is what distinguishes between a leader and a follower." Which does Korea want to be?

Robert D. Atkinson (@RobAtkinsonITIF) is president of the Information Technology and Innovation Foundation (ITIF), the world's leading think tank for science and technology policy.