Korea's Finnish lesson

By John Burton

Many years ago when I was working as a foreign correspondent in Sweden, I covered the rise of Nokia in next-door Finland. Nokia then was what could be described as a Finnish chaebol. It made everything from rubber boots and paper products to electricity cables and TVs. But in the early 1990s, the struggling conglomerate decided to focus on only one sector ― mobile phones and telecommunications equipment.

It became widely successful, dominating the global mobile phone market between 1998 and 2012. During that same period Nokia sales were equivalent to 20 percent of Finland's gross domestic product. It accounted for 30 percent of the nation's R&D spending, 20 percent of its exports, nearly a quarter of corporate taxes and almost 30 percent of Finnish patent applications. At one point, Nokia made up 70 percent of the Helsinki stock market capitalization.

Then in the space of only two years, Nokia collapsed, dethroned by Apple and Samsung in the smartphone sector, causing it to tumble to 10th place among mobile phone vendors worldwide.

The downfall of Nokia serves as a cautionary tale for Korea, whose economic success has grown uncomfortably dependent on the performance of just two conglomerates, Samsung and Hyundai Motor, whose combined sales are now equivalent to 35 percent of the country's GDP, according to one estimate.

The obvious worry among economists and government officials is that if either or both chaebol should stumble, it would have dire consequences for the whole country.

The strategy to avoid the "Nokia effect" is clear. Reduce economic concentration and promote diversification away from cars and electronics to growing sectors such as pharmaceuticals and energy. But restructuring the economy takes time and Korea remains vulnerable.

One warning sign is that Samsung Electronics appears to be losing its growth momentum, with its latest financial results worse than expected, while the Samsung Group's efforts to create new growth engines, including energy and healthcare, have not made much headway so far.

Samsung's heavy dependence on smartphones causes the most concern as it faces increased competition from low-cost Chinese makers, such as Huawei and Lenovo, in a maturing global market. Could Samsung fall victim in the same way as Nokia?

Korea faces two alternatives in reducing its dependence on smartphones and cars for economic growth. One is to return to the traditional chaebol model of having big business groups diversify into a range of industries in hopes of copying the success of General Electric, for example.

But the downside of this strategy is that it can encourage overexpansion as was seen in the 1997 financial crisis, while the dominance of the chaebol is unpopular because it is viewed as contributing to income inequality.

The other alternative is the adoption of the "creative economy" being promoted by President Park Geun-hye to achieve innovation, with a focus on developing small and medium-sized enterprises (SMEs) and the services sector.

Instead of placing economic bets on a few big enterprises to succeed, the creative economy would spread the risk across many companies and sectors. The key to this strategy is encouraging local innovation and entrepreneurship rather than relying on Korea's previous model of perfecting products and manufacturing methods developed elsewhere. The government wants to shift financial and R&D resources to SMEs in hopes of achieving innovative products, new business models and job creation.

In this regard, Finland offers another lesson to Korea as well. Nokia's fall caused the worst industrial slump in Finland in 20 years, but it is a recession rather than a depression. Economists are optimistic about Finland's chances of recovery.

The reason is that Finland already made plans for taking action in case Nokia stumbled by channeling resources to new and innovative small businesses. Ironically, Nokia's earlier success changed the Finnish mindset of fearing failure and increased confidence that other Finnish companies could succeed as well, which encouraged entrepreneurship.

Park's "creative economy" policy has the same goals, but Korea's cultural, corporate, financial and political frameworks could doom such efforts. Comparing the Finnish and Korean approaches is instructive.

Finland relies less on government financing and more on private venture capital to promote new businesses, while the opposite is the case in Korea. Finnish university students have embraced working in start-ups in contrast to their Korean peers who still prefer a stable job in government or the chaebol.

Moreover, Finland's flexible labor laws helped boost the country's start-up culture. Nokia shed thousands of researchers as it imploded but also provided them with start-up capital for new firms as part of redundancy agreements. It would be hard to image Samsung being able to do the same.

Korea is right in promoting the creative economy, but it will only succeed with radical regulatory reforms. In doing so Korea will need a bit more of what the Finnish called "sisu," the defining term of their national character but also of Korea's as well. It means determination, courage and resilience.

John Burton, a former Korea correspondent for the Financial Times, is now a Seoul-based independent journalist and media consultant. He can be reached at john.burton@insightcomms.com.