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Building an Innovative Economy through Managed Creative Destruction: A Theory with Applications to South Korea

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  • Khan, Haider

Abstract

This paper presents a somewhat novel theory of innovation in the economy wide setting. The starting point for this theory is the creative destruction process at the firm and industry level. However, an extension to an economy wide setting requires the explicit theorization of the role of the state as well as an interacting nonlinear market process. The direction in which the theory leads is a complex interaction between state policies and market processes that influence the decisions taken by specific firms in particular areas of innovative activities. The key concept that is developed in this context can be called a Managed Creative Destruction(MCD) process. In a national (or regional) MCD, the creative destruction process characterizing innovation is structured more consciously by the state (or the states in a particular region). It can be argued that China is now going through this process. In this paper the particular case studied is South Korea's recent historical experience. Following Schumpeter we assume that innovation in specific firms can have economy-wide effects. Models based on this idea can be shown to have multiple equilibria. The idea of a positive feedback loop innovation system or POLIS is formalized by picking an appropriate sequence of equilibria over time. It is shown that POLIS has empirical relevance by applying the formal model to an actual economy. Recent financial crisis in many Asian countries, most notably South Korea, seems to have reversed the conventional wisdom regarding the East Asian “miracle”. This paper applies the concept of a POLIS to show that neither the current view that the miracle was a mirage nor the earlier contrarian view that the growth was a result of factor accumulation only is correct. Ultimately technological transformation — in particular the creation of a positive feedback loop innovation system is what makes the difference between sustained growth and gradual or sudden decline. Although various problems remain in both the real and the financial sectors, it will be premature to dismiss the impressive achievements and the future possibilities of the South Korean economy

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 7713.

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Date of creation: 2008
Date of revision: 2008
Handle: RePEc:pra:mprapa:7713

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Keywords: technological transformation; multiple equilibria; POLIS (positive feedback loop innovation system); Korea; South Korean POLIS; Managed Creative Destruction(MCD);

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References

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  1. Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," Working papers 527, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Gene M. Grossman & Elhanan Helpman, 1989. "Quality Ladders in the Theory of Growth," NBER Working Papers 3099, National Bureau of Economic Research, Inc.
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  7. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  8. Young, Alwyn, 1991. "Learning by Doing and the Dynamic Effects of International Trade," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 369-405, May.
  9. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
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  11. Chang, Ha-Joon, 1993. "The Political Economy of Industrial Policy in Korea," Cambridge Journal of Economics, Oxford University Press, vol. 17(2), pages 131-57, June.
  12. Richard R. Nelson & Edmond S. Phelps, 1965. "Investment in Humans, Technological Diffusion and Economic Growth," Cowles Foundation Discussion Papers 189, Cowles Foundation for Research in Economics, Yale University.
  13. Alwyn Young, 1991. "Learning by Doing and the Dynamic Effects of International Trade," NBER Working Papers 3577, National Bureau of Economic Research, Inc.
  14. Kim, Linsu, 1980. "Stages of development of industrial technology in a developing country: A model," Research Policy, Elsevier, vol. 9(3), pages 254-277, July.
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Cited by:
  1. Khan, Haider & Patomäki, Heikki, 2013. "A reconstructive critique of IPE and GPE from a critical scientific realist perspective: An alternative Keynesian-Kaleckian approach," MPRA Paper 49517, University Library of Munich, Germany.
  2. Khan, Haider A, 2010. "Development Strategies: Lessons from the Experiences of South Korea, Malaysia, Thailand and Vietnam," Working Paper Series UNU-WIDER Working Paper W, World Institute for Development Economic Research (UNU-WIDER).

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