Technological development and rates of return to investment in a catching-up economy: the case of South Korea

Technological change has been the key driving force in the growth spurt of East Asia in the past decades. Assimilation theorists stress the importance of building up technological capabilities and demonstrate the dynamic processes of technology assimilation and learning, which have taken place through case-studies. However, especially after the Asian financial crisis, it can be argued that it is not enough to show that firms have increased their technological competencies. It is also important to assess the economic returns to the pecuniary investment flows linked with these learning processes. The main idea put forward in this paper is that investment in technology is necessary to maintain rates of return to physical capital investment, and that this is increasingly difficult, the closer a country gets to the global technology frontier. This idea finds support in an analysis of the development of four technology-intensive industries in South Korea, using technology investment indicators such as foreign direct investment, R&D expenditures and technology licensing fees. The results suggest that a strategy of technological diversification might generate higher returns to investment than a pre-occupied search for industrial leadership.