SUMMARY : An Innovative Growth Framework For Korea SW Industry
- 1. Research Purpose
- The purpose of this research is to derive policy frameworks for the innovative growth of the SW industry in accordance with the government's innovative growth, which aims to increase the overall productivity of the economy.
- 2. Research Scope
- At first, this research investigates whether the domestic SW industry has really grown by innovation so far through various theoretical researchs on innovative growth, and tries to find right policy stances for innovative growth of SW industry. Next, by analyzing the data of domestic SW companies in the fields of package SW, IT service, Internet SW and cloud service, this research shows the changes in the domestic SW industry status and many policy suggestions to promote innovative growth.
- 3. Main Contents and Results
- 3.1 Precedent Study For Innovative Growth
- In the precedent research chapter, the overall theoretical discussions about innovative growth based on technological innovation including other industry sectors like manufacturing were reviewed. At first, the positive effects of industrial policy can be proved in the theory of endogenous economic growth considering the effects of technological innovation by R&D investment and the case of high growth in East Asian countries. Second, in order to promote technological innovation in a country, it is necessary to improve the national innovation system consisting of the private and public sectors. Third, OECD countries and Korea are already the Knowledge-based economies and so Knowledge accumulation and innovation, and ICT/SW investment are very important in economic growth.
- On the other hand, the value of SME policy has been more important in the aspects of innovation and diversity in the market ecosystem, except the traditional values like equity and fairness. In Korea, chaebols’ trickle-down effects has kept declining since 2006, making the innovation efforts by SME more important in the view of policy makers. Instead of the supply-based innovation policy traditionally focusing on science and technology research, demand-based innovation policy that promotes innovation based on the demand of general people or public sector has begun to be spotlighted. Public procurement for innovation is being introduced in many countries around the world, and Korea government has also established the legal system for public procurement for innovation since 2010.
- SW industry has many characteristics different from other industries that have been supported by the Korea government. For example, SW is an intangible asset and it has a network effect in which monopoly by the leader occurs easily. Since late 1990s, domestic SW companies have grown as now, competing with big foreign companies in the fully open domestic SW market because the aggressive industrial policies applying to Manufacturing industries in Korea could not be enforced because of Korea-USA trade conflict or WTO. The government's efforts to support the software industry has begun in the mid-1990s, and legal systems have been improved many times, including the recent full revision of the SW Promotion Act. In order for the domestic SW industry to continue its innovative growth based on technological advantages, it would be more desirable to develop a wider variety of products and services and promote their exports, regardless of whether they are large companies or small and medium-sized enterprises. There are a few suggestions such as: ① occupying initial market share by low-end products and creating a new market with innovative products, ② developing new cloud services in line with the trend of software servitization, ③ reducing the illegal copying rate of package software, and ④ proactively using public procurement for innovation.
- 3.2 SW Industry Structure and Public Sector SW Market Analysis in Korea
- From 2007 to 2019, long-term data for software companies including private sector sales, public sector sales, and the number of employees for 12 years were collected to examine the changes in the structure of the software industry. Since the 2010s, the share of SMEs and middle market enterprises has been higher than that of large companies, and the proportion of middle market enterprises has increased most rapidly in the last three years from 2017 to 2019, closely following the group of large companies, and the number of large companies has not changed significantly, but the number of SMEs and middle market enterprises has more than doubled. Public sector SW market sales of big IT companies belonging to the Mutual Investment Restricted Business Group by “Monopoly Regulation and Fair Trade Act” had started to decline before Korea government introduced the more strong restrictions that big IT companies can rarely do the business for public sector SW market in 2013, and now the public sector SW revenue proportion of big IT companies have significantly decreased to 1.3% of the total revenues of big IT companies, but they have made up for this decrease with an increase in private sector sales. As for middle market enterprises, there are a few new middle market enterprises that have rapidly increased sales in the only public sector, but their private sector sales have increased since 2017. For SMEs, both private and public sector sales have increased together, but public sector sales have decreased since 2017.
- According to a survey result of SW product and service that 2,665 SW companies own, 200 ~ 300 new SW products and services are released every year from 2008 to 2017, but the rate of new products and new services except upgrade version has decreased slightly from 60% in 2009 to 38% in 2017, and package SW occupies most shares. Since there is no data from 2018 and later, changes due to the recent cloud service boom are unknown. However, based on the collected data, current SW companies seem to do their business focusing on the traditional IT service market, neglecting the effort for new innovation into a service or subscription business model.
- For SMEs and large corporations, public sector SW sales seemed to play a role of a development ladder, expanding private sector sales and making a locomotive effect to increase the entire software market size in Korea. And it was also confirmed that public sector sales had a strong positive effect on job creation, which was also led by SMEs and large corporations. Finally, the reason why the restriction policy on big IT company’s participation to public sector IT procurement shows a win-win effect seems to be because of the so-called reference effect that SMEs and middle market enterprises getting public sector sales can win additional orders from large companies or other private companies based on those past performances. In addition, if public sector demand about IT or SW increase according to the promotion policy such as the Digital New Deal of Moon Jae-in’s government, SMEs and large incoporations will get more private sector sales and show additional employment demand for a certain period of time in short term. But the effect cannot be kept for a long time. Eventually, the continuous growth of the SW industry must be mostly dependent on private sector demand and investment.
- 3.3 Policy Framework For Innovative Growth in Korea
- The restriction rule which excluded large IT companies from the public sector IT procurement market in the domestic SW market and gave more business chances to small and medium-sized companies, brought quantitative growth of SMEs and middle market enterprises in accordance with the original policy purpose. But this policy also showed the demerits or limits to decrease the trials to introduce new SW technology or the endeavors to find new IT projects promoting digital transformation in public sector. On the other hand, while innovative growth is a important task that all enterprises of the domestic software industry must achieve, large IT companies can play a role as a financial provider like CVC(corporate venture capital), such as Google Ventures and Salesforce. In Korea, a holding company could not own VC due to the financial and industrial separation regulations under “Monopoly Regulation and Fair Trade Act”. But, July 30th of 2020, Korea government announced the plan to allow a holding company to own CVC under specific conditions and this will be expected as a new institutional opportunity.
- SMEs and middle market enterprises need to transform to a company having an strength in SW products and SW services. A company to have an strength in SW products and SW services means a company able to scale up by holding intellectual property rights, that is, copyrights and patent rights, and directly supply SW products and SW services to a large number of users.
- To boom up such change, first, it is necessary to accelerate innovation growth fully utilizing the capabilities of large companies, such as allowing large companies to participate in innovation-creating or difficult-to-solve projects. Second, there is a policy to improve the tender evaluation system of public IT projects so that companies with excellent software development capabilities or companies with SW products and services can win those projects. Finally, the public-private partnership IT projects under the SW Promotion Act, which was enforced on December 10, 2020, needs to be proactively used.
- 4. The Contribution of this research and Suggestions for further research
- 4.1 The Contribution of this research
- This research faithfully summarizes the theoretical discussions that can be used when discussing the innovative growth of the SW industry and the history of domestic SW/ICT policies. Based on the long-term data of domestic SW companies, the trend of SW industry structure and the relationship between public IT procurement market and the performance of SW companies were analyzed. And this research includes the prediction result of the ripple effect of the increase in public SW demand in near future. This presents the support direction and policy proposals of large companies and SMEs for the innovative growth of the SW industry, which can be referred to in future policy making, and some of the policy proposals have been already included in the policy “Executive plans for SW Promotion” announced by the Ministry of Science and Technology jointly with relevant ministries in December 2020.
- 4.2 Suggestions for future research
- Future research needs to focus on the detailed strategies to achieve that domestic SW companies develop more diverse SW products and services and get more revenues from overseas based on them. In other words, some decision makings for right and efficient policies are necessary like which SW company needs to be supported by the goverment - a) a SW company obtaining the meaningful domestic market share with preexisting SW products/services, b) a SW company developing products and services aimed at the overseas market from the beginning. Also, will the government's role be only to support the overseas expansion of developed products and services? Or, is it necessary to support SW companies to develop SWproducts and services, such as promoting new product R&D projects under conditional purchase order. Finally, further research is required for the detail roadmap and strategy to replace the traditional role of the IT project building new IT systems with SW products and services and specific requirements of innovation-creating and difficult-problem-solving projects that big IT companies can tender for.
