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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

Suggested Citation

  • Khan, Haider, 2008. "Building an Innovative Economy through Managed Creative Destruction: A Theory with Applications to South Korea," MPRA Paper 7713, University Library of Munich, Germany, revised 2008.
  • Handle: RePEc:pra:mprapa:7713
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    File URL: https://mpra.ub.uni-muenchen.de/7713/1/MPRA_paper_7713.pdf
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    References listed on IDEAS

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    2. Michael J. Boskin & Lawrence J. Lau, 1990. "Post-War Economic Growth in the Group-of-Five Countries: A New Analysis," NBER Working Papers 3521, National Bureau of Economic Research, Inc.
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    4. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-351, March.
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    7. 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.
    8. Alwyn Young, 1991. "Learning by Doing and the Dynamic Effects of International Trade," NBER Working Papers 3577, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Khan, Haider A, 2010. "Development Strategies: Lessons from the Experiences of South Korea, Malaysia, Thailand and Vietnam," WIDER Working Paper Series 010, World Institute for Development Economic Research (UNU-WIDER).
    2. 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.

    More about this item

    Keywords

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

    JEL classification:

    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • B52 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Historical; Institutional; Evolutionary
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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