3. Promoting the diffusion of technology to boost productivity and well-being

Rapid diffusion of technology is key to supporting output growth and raising well-being standards in the context of a rapidly ageing population and a weakening trend in global growth. The COVID-19 outbreak is also strengthening the existing trend towards digitalisation, with a growing use of artificial intelligence and remote services by firms and households (Box 3.1). While Korea has made tremendous economic progress over the past decades, its productivity remains below the OECD average. This largely reflects gaps between large firms and SMEs and between industry and services. Productivity gaps are mirrored by wage inequality, which is among the highest in the OECD, and more broadly by differences in working conditions and levels of social protection among different categories of workers (OECD, 2020a). Digitalisation offers huge opportunities to raise productivity economy-wide and to tackle inequality, but widespread diffusion requires adequate policies, notably to enhance skills, adapt regulations, create networks for technology diffusion and innovation, and ensure cybersecurity.

Korea is a frontrunner in digital technologies and one of the top five contributors to the development of emerging digital technologies. Over 2013-16, Korea accounted for 4 to 46% of global patenting in fast-growing information and communication technology (ICT) fields (Figure 3.1). The digital infrastructure is also outstanding. Access to high-speed internet is almost generalised and 5G was introduced nationwide earlier than in any other country in the world. Within one year of 5G services’ commercial introduction on 3 April 2019, the number of subscribers had almost reached six million, with high fibre-backhaul availability enabling fast adoption (OECD, 2019a). Korea’s density of broadband fibre subscriptions is the highest OECD-wide (Figure 3.4).

The government’s plan for innovative growth focusses on digital opportunities raised by the use of 5G, which brings three key advantages. First, its higher speed allows the transmission of large volumes of data, for instance for virtual reality TV or hologramme calls. Second, its lower latency allows instant response, for example for automatic and connected vehicles or Internet of Things (IoT) devices. Third, its hyper-connectivity allows the simultaneous connection of numerous sensors and devices, as needed in smart factories and smart cities. The government promotes numerous projects relying on 5G to increase competitiveness and innovation in industries (for example smart manufacturing, smart grids and smart healthcare) or enhance the quality of life by solving social problems with smart cities and homes (notably in Sejong), as well as smart roads and traffic systems. The expected effects include higher production, exports and employment (Fourth Industrial Revolution Committee, 2017). Amid the COVID-19 outbreak, Korea contained the spread of the virus, using advanced digital tools based on artificial intelligence and mobile apps, as well as remote access to daily life services (telework, online classes, e-commerce, telemedicine…).

Korea’s dynamism in digital technologies is reflected in its high share of value added and employment in ICT sectors (Figure 3.5). Even so, economy-wide productivity is far below the OECD average (Figure 3.6). This reflects several structural features. Low-productivity sectors like trade, transportation, accommodation and catering account for a higher share of total employment than the OECD average (28% against 25%). Moreover, most jobs created in new Korean small and medium sized enterprises (SMEs) are in low productivity activities, like in many OECD countries (OECD, 2019c): in 2017, 56% of jobs created by the birth of new SMEs were in trade, transportation, accommodation and food services. Furthermore, in high-productivity sectors like manufacturing, SMEs account for a high share of enterprises and of employment, but are less productive than large firms (2018 OECD Economic Survey of Korea). This productivity gap is observed across OECD countries but is substantially larger in Korea (OECD, 2020a).

Firms can raise their productivity by adopting digital technologies or benefit from spillover effects from firms adopting digital technologies within the same industry (Gal et al., 2019). Korea’s ICT manufacturing productivity is far higher than in other industries, with a much wider gap than in the average OECD country (Figure 3.5). Non-ICT manufacturing also enjoys a larger relative productivity advantage than the OECD average, albeit much smaller than in ICT. Conversely, there is scope to increase productivity in services, especially in ICT services, which are knowledge-intensive and tend to be more productive than other services (Sorbe et al., 2018).

Smart factories use information and intelligence technology (cloud computing, big data, artificial intelligence, IoT) to move the production process from traditional automation to a fully connected, flexible and optimised system, and design customised products at mass-production prices (Kim et al., 2019). Smart factories present several advantages in terms of production performance and employment. In enterprises that have adopted smart technology and actively used and shared data generated by technology, productivity and product variety have improved, while defect rates have fallen (Kim et al., 2019). Smartification of factories can contribute to job creation in the country by allowing factory reshoring (Fourth Industrial Revolution Committee, 2019). The composition of workers in smart factories can also change as the use of advanced technologies attracts young workers and lowers the intensity in physical labour, facilitating the employment of women and older workers. There is already evidence of a slight increase in youth employment in some enterprises, after they adopted smart technologies, but not yet in the employment of women and older workers (Nho, 2019).

Smart factories are central to the government’s plan for the Fourth Industrial Revolution. At the end of 2019, Korea had 12 660 smart factories. To promote the development of SME smart factories, the government has introduced pilot smart factories as benchmark for other SMEs, inspired by experiences in countries like Germany and in relevant industries. Factories operating successfully can be designated as pilot factories and get financial support for half of their expenses spent to purchase smart devices and develop partnership programmes. In early 2020, 51 SMEs in car parts, paper, electronic parts, aircraft and machinery industries became pilot smart factories. Other strategies to expand and upgrade smart factories include financial support from the government and large business partners, the construction of a cloud-based smart factory for SMEs with insufficient data storage and management skills, and development of training and diplomas in smart factory-based technology (Fourth Industrial Revolution Committee, 2018). The goal is over 30 000 smart factories by 2022.

The development of smart factories goes through five levels (Table 3.1). In Korea, the level of development in smart factories is still low. In 2018, most of them were at the basic or intermediate I level (80.0% and 18.6% respectively), only 1.4% were at the intermediate II level and none of the SMEs had reached the advanced level. The main reasons behind this slow development include a lack of workers with the relevant skills and of an efficient retraining system, as well as underdeveloped innovation networks promoting collaboration between innovative companies, especially between SMEs and large enterprises (Fourth Industrial Revolution Committee, 2019). A sample of SMEs that adopted smart technologies were surveyed by the Korean Agency of Information on Technology. Their main problems included the maintenance or instability of the new production system, its incompatibility with former systems, skill shortages and training difficulties. The lack of awareness from managers was also underlined by these SMEs. This contributes to the low level of development in Korean smart manufacturing, since good management practice and interest of CEOs in upgrading their manufacturing system are important drivers of factory smartification. For instance, factories in the bottom 20% of the distribution of incentives in management practices have not experienced any increase in the level of smartification (Kim et al., 2019). The Ministry of SMEs and Startups (MSS) put forward a wide range of measures to further support and enhance the development of smart SME factories in its 2020 budget (Box 3.2).

With the development of ICT technologies, services are increasingly embedded in manufactured products, a phenomenon known as “servicification” of the manufacturing industry. Manufacturing firms increasingly rely on services, either as inputs, as production activities within the firm, or as output sold bundled with goods (Miroudot and Cadestin, 2017). For instance, manufacturing uses services, such as R&D, design, transport, logistics, finance, distribution and marketing as inputs. These input services can be produced in-house or outsourced. Manufacturers of cell phones can bundle their product with telecommunication services to allow users to install apps, which will generate additional service transactions, such as audiovisual services with video streaming and music, publishing services with e-books, or computer services with video games. Smart manufacturing, as well as IoT and 3D printing, contribute to the increasing servicification of manufacturing. ICT services, such as computer programming, software publishing, telecommunication, data processing and advanced data analytics, are the main producers and users of data, which are central to smart manufacturing. For instance, data processing services like cloud computing generate data for smart factories, while advanced data analytics services optimise the production process based on this real-time information (Hallward-Driemeier and Nayyar, 2018).

Servicification of manufacturing helps firms create value and increase their productivity and exports. Manufacturing firms use three types of services to create value: input, in-house production, and output (Miroudot and Cadestin, 2017). In the case of service inputs, manufacturing firms may improve their productivity or reduce their costs, by using legal, management, engineering or banking services. In the case of in-house production, more R&D increases the innovative capacity of the firm and its competitiveness, while more IT services improve the production process and productivity. For example, there is evidence of higher exports for Swedish manufacturing firms that have a larger share of manager, professional or technical services – more likely to be in knowledge-intensive services – in their in-house production (Lodefalk, 2014). In the case of sales of services bundled with manufacturing goods, after-sales services or installation and maintenance services become new sources of income for firms.

Korea is lagging behind the most advanced OECD countries in the development of manufacturing servicification, in terms of service inputs, production and exports. First, the share of service inputs in Korean manufacturing exports is one of the lowest among OECD countries (25%), with half of these inputs outsourced to foreign firms (Figure 3.7). Like in other OECD countries, Korean manufacturing industries mainly use distribution services as domestic and foreign services inputs (12% of manufacturing exports), as well as professional and administrative services (5%), while ICT services are barely used as inputs (1%). Second, the share of in-house services produced by Korean manufacturing firms to export their goods is one of the lowest among OECD countries (less than 10% of gross exports), along with Eastern European countries, while the United States and Germany have over 20% of in-house services in their exports (Miroudot and Cadestin, 2017). Third, Korea has the lowest share of firms selling both manufacturing goods and services (3.5%), after Mexico, Chile and Iceland, based on the ORBIS database (Miroudot and Cadestin, 2017). The share of firms exporting both manufactured goods and services is even lower (0.5%).

In Korea, productivity in ICT services and other business services are respectively equal to 74% and 41% of that of manufacturing. Productivity is even lower in trade, transportation and accommodation (31% of manufacturing productivity). Traditional services have intrinsic characteristics that reduce the scope for productivity gains. Compared to goods, they tend to be less standardised and require more face-to-face interactions in their delivery. This reduces productivity in services through three channels. First, the additional transaction costs reduce competitive pressures, efficient reallocation mechanisms and hence incentives to improve productivity. Second, the gains from economies of scale and automation are smaller. Third, services are less tradable within and across countries, which limits productivity gains from trade through knowledge spillovers, better specialisation and heightened competitive pressure (Sorbe et al., 2018).

Digital technologies offer new ways of producing and consuming services. For instance, artificial intelligence and advanced robotics can automate cognitive tasks typically carried out in service activities. Digital platforms can enhance competition among service providers and increase productivity in services, by reducing information asymmetries between consumers and service providers, thanks to ratings and reviews, or by substituting existing services, like Kakao T and TADA for taxis or Baemin for delivery services. Digital platforms also provide a wide range of services for consumers, like market services that can replace home production, such as housework with gig economy platform Daelijubu, or innovative FinTech services, such as peer-to-peer money transfer services proposed by Viva Republica’s mobile app “Toss”. However, the rapid emergence of digital platforms is facilitated by strong network externalities and the intensive use of data as input to their matching algorithms, which favour the emergence of dominant platforms and hinders competition. In Korea, Kakao T emerges as a dominant platform in transportation, with 24 million users registered, representing over 84% of the economically active population as of September 2019 (Kakao, 2019). The exact definition of gig economy workers is under discussion among tripartite partners. The National Learning Card introduced in 2020 will support the participation of gig workers in vocational training. Other measures under discussion include the extension of industrial accident compensation insurance and unemployment insurance to platform workers.

Digital technologies improve the tradability of services and provide alternative ways of trading. For instance, blockchain provides new financial services that are fully digitally tradable and require no direct physical interactions. However, in the case of Korea, exports of digitally deliverable services are well below the OECD average, even though barriers to digital service trade are among the lowest in OECD (OECD, 2019d; Figure 3.8). SMEs can also benefit from digital technologies to gain access to international markets and take advantage of enhanced linkages to enhance their productivity (2018 OECD Economic Survey of Korea). E-commerce can help SMEs expand their business within and across countries, by significantly reducing upfront fixed costs, such as logistics or customer services (OECD, 2019e). In low-productivity sectors like accommodation and trade, where SMEs are more numerous, the share of Korean firms using websites for online ordering or reservation has significantly increased and has room to rise further (Figure 3.9).

The development of smart factories, servicification of manufacturing or digital platform requires sophisticated digital technologies, such as cloud computing, big data, IoT and artificial intelligence. Korea actively contributes to the development of emerging digital technologies and benefits from a nationwide coverage of 5G. However, Korea still lags behind most advanced OECD countries in the adoption of these sophisticated digital technologies, especially in SMEs. This hinders the development of smart manufacturing. The lack of digital skills in SMEs and among older workers is also a barrier to the diffusion of digital technology.

Over the past two decades or so, Korea remained at the cutting edge of ICT technologies, thanks to outstanding achievements in mobile devices, chips and appliances. In recent years, Korean firms have strived to reinforce their global competitiveness in new digital technologies, such as artificial intelligence, cloud computing, big data, 3D printing and IoT. However, IITP (2019) estimates Korea has a two-year lag in 3D printing, artificial intelligence, big data and cloud computing, and a one-year lag in IoT compared to the United States, which is considered the frontrunner in these technologies. Only 23% of Korean companies use cloud computing, against over 50% in the Nordic countries (Figure 3.10).

However, the Korean government and private firms are taking measures to catch up, especially in the adoption of cloud computing and artificial intelligence. Major business groups like Samsung and LG already committed to ambitious plans to expand their cloud-based systems. Samsung is expected to establish a cloud-based business management system by 2020, while LG is expected to switch 90% of its subsidiaries’ IT infrastructure to a cloud-based system by 2023. Cloud computing services are key to lowering barriers to the adoption of the latest technologies (OECD, 2019c). They provide both individuals and businesses with on-demand access to ICT over a network at any given time. For SMEs and young firms, cloud-computing services are an important asset for digital transition, reducing the cost of experimenting with new technologies and increasing flexibility, as data processing and storage are managed in a remote data centre. During the COVID-19 outbreak, Korea stood out among OECD countries with its use of artificial intelligence to significantly speed up and improve diagnosis efficiency, especially with its test kits (Box 3.1).

Digital technologies are increasingly powerful and affordable for SMEs, but are not used to their full potential. The gap between SMEs and large firms in the adoption of sophisticated digital technologies is wide and higher than the OECD average (Figure 3.11). This gap reflects several obstacles to the adoption of digital technologies faced by SMEs. First, Korean SMEs are concentrated in services like trade, transportation, accommodation and food services, which are less knowledge intensive (Sorbe et al., 2018) and hence less prone to innovation than manufacturing: 56.7% of service firms are not innovating (against 47.9% in manufacturing) and they are less likely than manufacturing firms to engage in innovation to pursue cost reductions (Kang and Lee, 2019).

Second, SMEs tend to lack information and funds. They are often not aware of the potential new digital tools could offer to increase their productivity or lower their production costs. They also consider the costs of adopting more sophisticated digital tools to upgrade their business model as too high (OECD, 2019c). According to the Survey on the Informatisation Level in Small and Medium Business conducted by the Korean Agency of Information on Technology, these are the main difficulties SMEs faced while participating in the smart manufacturing programme. In 2017, 57.4% of the 356 companies surveyed mentioned the lack of information on smart factories and 50.8% the issue of raising initial investment. The lack of information causes a lack of trust, which is the main obstacle to the adoption of cloud computing by SMEs (OECD, 2019c).

Third, SMEs face a lack of skilled workers and low access to training. For one third of SMEs in the 42 countries covered by the OECD/Facebook/World Bank Future Business Survey, hiring and keeping skilled employees is the most pressing challenge (OECD, 2019c). Compared to other OECD countries, Korean SMEs have more difficulties to hire high-skilled university graduates than larger firms because they offer less attractive jobs in terms of wages, stability, working hours and career advancement opportunities (OECD, 2020b). Across OECD countries, smaller firms lack soft skills for innovation, such as managing and communication skills, readiness to learn and creative problem-solving skills (Grundke et al., 2017). In Korean micro-firms, 34% of workers have low problem-solving skills in technology-rich environments (against 28% for the OECD average), while this share is much lower in large firms (19%), according to the OECD Survey of Adult Skills (PIAAC). In addition, training participation in Korean SMEs is one of the lowest among OECD countries, especially in micro-firms. The duration of training is also shorter in SMEs than in large firms: the median hours spent on (non-formal) job-related training is 32 hours per year for SME workers, compared to 48 hours in larger firms, according to PIAAC data. For SME workers, the main barrier to training is the lack of time because of work (52% of workers, against 32% for the OECD average). For firms, the lack of manpower is the most frequently cited reasons for not implementing or supporting training (30% of SMEs), along with fear of poaching (OECD, 2020b).

Adequate digital skills are key to thrive in an increasingly computerised society and economy. A digital divide is opening up between those who can get the most out of the Internet and online activities and the others. This in turn exacerbates well-being inequalities. Koreans have access to high-speed Internet, which allows them to undertake diversified and sophisticated online activities, such as online purchasing, Internet banking, online learning or uploading self-created content on sharing websites such as Youtube. The types and sophistication of activities undertaken on the Internet depend on several factors, like age, educational attainment, familiarity with online services, trust and skills (OECD 2019b).

In Korea, the types of activities carried out by Internet users vary widely across age groups. In 2019, 92% of Koreans aged 16-74 used Internet daily, the highest share among OECD countries, after Iceland, Denmark and Norway (OECD ICT Access and Usage by Individuals Database). While this share varies across age groups, with nearly all Koreans aged 16-24 being daily Internet users, it is also one of the highest for Koreans aged 55-74 (78%). The difference between youth and older people relates to the sophistication of their online activities. Individuals aged 55-74 limit their use of the Internet to basic activities, such as reading newspapers and news magazines online, and do not make the most of the wide range of online activities available. For instance, e-commerce gives access to a wider choice of products and can offer a more convenient shopping experience for persons with low mobility. Across OECD countries, young individuals engage more in online purchasing, but the age gap between e-consumers is usually small. In Korea, the age gap is the highest among OECD countries: 88% of individuals aged 16-24 versus only 24% of those aged 55-74 participate in e-commerce (Figure 3.12).

This digital divide in the diversity and sophistication of online activities reflects gaps in digital skills (problem-solving skills in technology-rich environments), as well as in basic skills (literacy and numeracy). An analysis on a sample of European countries directly connects digital and basic skills to the profile of Internet users. Lacking basic cognitive skills is a barrier to performing any online activities, while lacking digital skills is a barrier to performing diversified and complex online activities like e-finance, learning and creativity (OECD, 2019f). Korea has the largest gap in digital skills between youth and older people (Figure 3.13). The share of 16 to 24 year-olds with limited or no digital skills is the lowest across OECD countries (37%). But nearly all adults aged between 55 and 65 lack digital skills. Age gaps in Korea are also observed for basic skills, though they are smaller than for digital skills. Less than 2% of Koreans between 16 and 24 lack basic skills in literacy and numeracy, against 30% of Koreans between 55 and 65 (OECD, 2019f). Digital and basic technology divide between the elderly and young generations is primarily due to a sharp increase in educational investment during the period of rapid economic growth in the 1970s and 1980s, as well as insufficient investment in lifelong learning.

In an ageing and increasingly digitalised society, it is essential to keep up with the need for new skills and equip individuals with the adequate skills to participate in diversified and sophisticated online activities. Otherwise, the digital divide will exacerbate well-being inequalities as part of the population will be left behind. For instance with e-commerce, if higher competitiveness of online vendors causes physical stores to close down, it could limit the access to certain products for part of the population (OECD, 2019b). In addition, the COVID-19 outbreak underlines the growing importance of e-commerce as consumers increasingly switch to online shopping to avoid further spreading of the virus (Box 3.1). In addition, individuals with a well-rounded skill set (literacy, numeracy and digital) are better prepared to face changes in their job content induced by digitalisation and automation (OECD, 2019f). This is particularly relevant for workers in Korean SMEs whose jobs face higher automation risk than in larger companies (44.3% against 36.5%, OECD 2020b). Having a well-rounded skill set can help workers be re-assigned to non-routine tasks more easily.

The lack of adequate skills and knowledge is the main barrier to the diffusion of digital technologies among firms and workers. Preparing individuals to thrive in a digital society begins in families and at school and continues at work with on-the-job learning and training. The lack of strong innovation networks between SMEs and academia or large firms and the presence of stringent regulations hinder the adoption and diffusion of digital technologies. R&D and commercialisation of new products and services should be further promoted in innovative and productive SMEs. Stringent barriers in product markets and in services should be lowered to adjust to the rapid development of digital innovations.

Teachers play an important role in ensuring that students and workers develop relevant skills to thrive in the context of the digital transformation, but also in raising awareness of the risks associated with new technologies. Teachers’ digital competencies are key in that regard and there is a positive relationship between teacher problem-solving skills in technology-rich environments and student performance in computer problem solving and computer-based assessment of mathematics (OECD, 2019f). In Korea, the share of teachers (including adult learning teachers) with high digital skills is low compared with the most advanced OECD countries (Figure 3.14). The lack of digital skills raises issues amid the COVID-19 outbreak as teachers had to switch to online teaching (Box 3.1). Among OECD countries, a relatively high share of Korean teachers have the “use of ICT for teaching” included in their formal education or training, or in their recent professional development (for instance attending courses and seminars outside of school). Nonetheless, more than half of Korean teachers do not feel sufficiently prepared for the use of ICT for teaching and the share of teachers in high need of training in ICT skills for teaching is above the OECD average (Figure 3.15). The quality of their training in ICT skills should be improved. As is currently discussed by the government, lifelong learning teachers should have mandatory refresher training to update their skills on a regular basis. Furthermore, to attract highly-qualified lifelong learning teachers, and hence increase the quality of training, their working conditions and wages should be enhanced. Their pedagogical and professional skills could also be publicly highlighted, as it is the case with Singapore’s adult education network SkillsFuture SG (OECD, 2020b).

Workers with ICT professional skills (such as programming and data analytics) are needed to support the diffusion and the efficient use of digital technologies, as well as to compete in the digital economy (Cho et al., 2019; Sorbe et al., 2019). In terms of graduation fields, the share of Korean tertiary graduates is the second to Germany among OECD countries in natural sciences, engineering, ICTs, and creative and content fields (Figure 3.16). These qualifications are especially useful in increasingly digitalised working environments (OECD, 2019b). Artificial intelligence and big data have proven to be core technologies to tackle the COVID-19 outbreak, which implies that more specialists and high-level researchers in these technologies are needed (Box 3.1). The Korean government started to take steps in this direction by promoting plans to train more experts in fourth industrial revolution core technologies. In December 2019, the government initiated a strategy promoting the adoption of artificial intelligence, which includes making artificial intelligence courses compulsory in primary and secondary schools, opening artificial intelligence departments in colleges and providing training to the military and public officials. Such courses and training should be extended to other fourth industrial revolution core technologies like big data and training should be provided to private sector workers as well.

Firm-based training can complement and update academic qualifications and enhance the generic digital skills of all workers, as well as complementary skills like managerial skills. High managerial skills are required to improve business processes and are associated with higher digital adoption and productivity (Bloom et al., 2019; Sorbe et al., 2019). Among OECD countries, workers in very digital-intensive sectors are more likely to receive formal firm-based training leading to official qualifications than workers in other sectors. Korea has scope to increase firm-based training, as even in very digital-intensive sectors, participation is relatively low compared to OECD frontrunners (Figure 3.17). The lack of access to training in SMEs, compared to larger firms, and the low quality of training are important issues. In 2015, 52% of SMEs provided only legally mandatory training (mostly industrial safety and health training) or no training at all to their workers, based on PIAAC data. Compared to other OECD countries, Korean SME workers seem to be less satisfied with their training, with less than a third of them finding it useful. The government is already addressing issues related to the lack of training participation in SMEs. Nevertheless, there is still a lack of information about the benefits of training, available training options and their quality, as well as available financial support (OECD, 2020b). Career guidance services can raise SME workers’ awareness of training opportunities and understanding of their training needs. However, Korea counts numerous competing online career guidance platforms (HRD-net, Neulbaeum, Work-Net, Q-Net, regional lifelong learning portals, K-MOOC, Smart Tech Education Platform), which makes finding information more difficult for workers. The government should merge the many online career guidance portals into a single one to centralise information on available training programmes and help users navigate training options. Targeting adult learning programmes on SME managers would help ensure they are aware of the potential of digital technologies and hence supportive of workers training. Korea could learn from other countries like the United Kingdom, Mexico, New Zealand and Australia, where special management programmes are provided to SMEs’ CEOs and owners. Financial incentives to reduce training costs are numerous for Korean SMEs and are funded by the Employment Insurance for SMEs that meet a number of criteria. Making these criteria less restrictive would allow more SMEs to be eligible to these government-supported subsidies. Furthermore, financial incentives should be aligned to SMEs’ training needs and hence be more generous for innovative training contents or methods that better fit SMEs’ need. Finally, developing an online guide like in Ireland (Supporting SMEs Online Tool) would help SMEs be aware of all the subsidies.

Digital technologies create new opportunities to update and develop new skills throughout life, for instance via distance and modular learning. Education systems such as massive open online courses (MOOCs) provide a wide range of courses to anyone at any age by top universities, the business sector, international institutions or independent experts. In Korea, MOOCs like those provided by Tooling U-SME specifically for manufacturers and their workers can teach needed digital manufacturing skills (Kim et al., 2018). E-learning allow studying and working at the same time and even obtain full degrees with modular learning, providing flexibility to workers and savings to firms, especially in SMEs where lack of time is the main barrier for workers (OECD, 2019f; OECD, 2020b). Korea has the third highest participation rate in online courses in the OECD, after Mexico and Finland (Figure 3.18). Drawbacks of e-learning include the lack of information on their quality and the risk of exacerbating inequalities. Indeed, youth and high-educated adults are more likely than older and low-educated adults to further develop their skills through such education systems. In Korea, 59% of youth aged 16-24 have used Internet online courses in 2019, while this share is only 20% for people aged 25-54 and 5% for 55-74 year-olds (Figure 3.18). A similar pattern is observed in other OECD countries, but the age gap is the highest in Korea. More basic ICT courses should be provided to older and low-qualified adults who are also over-represented in SMEs (OECD, 2020b). Regarding older adults, Korea could take advantage of existing infrastructure like senior universities which help improve seniors’ well-being and could operate as an extension of adult lifelong learning (Jun and Evans, 2019). Users are over 60 years old and courses are mainly related to hobbies and health maintenance. But courses dedicated to ICT could be introduced, either as basic courses or as university-level courses like in Germany’s Universities of the Third Age (Schmidt-Hertha, 2019). Finally, the government should collaborate with education and training providers, employers, job-search agencies and MOOC platforms, to increase participation in open education and expand the use of distance and modular learning on the job, as well as define standards and good practices to better signal quality courses (OECD, 2019f).

The digital divide between Korean SMEs and large enterprises is high and Korean SMEs do not take advantage of advanced technologies enough to enhance their productivity. Access to finance is critical for SMEs to adopt innovation and scale up. Overall, SMEs in OECD countries face financial barriers to the adoption of innovation, especially young firms, start-ups and innovative ventures (OECD, 2019c). The Korean government supports SMEs through the Korea Small Business Innovation Research (KOSBIR) programme and R&D grants since 1998. KOSBIR is based on the US Small Business Innovation Research (SBIR) programme that supports SMEs in three phases: feasibility, R&D and commercialisation. Compared to SBIR, KOSBIR dedicates most of the funding to the R&D phase, at the expense of the feasibility and commercialisation phases. Reallocating financial support for turning successful technology R&D into commercial applications could help SMEs convert their R&D inputs into economic benefits. The proportion of firms able to launch new products or significantly improve existing products is much lower in smaller firms than in larger ones. The lack of funds and of market analysis and research consulting on project feasibility are considered as the main barriers to commercialisation, especially for small firms (Yang, 2018). Promoting e-commerce could help SMEs sell their products to a wider range of consumers. For instance, Israel’s National Digital Programme has a component dedicated to e-commerce with an assistance package that includes subsidised training and grants to establish a digital marketing system.

However, when it comes to support commercialisation, financial markets and innovative financial services like Fintech should also be considered for funding and expertise on project feasibility. Directing R&D support towards innovative SMEs and boost their productivity requires an efficient selection process of recipients. For instance, recipients of R&D grants selected on the number of their registered patents expanded their investments in R&D, intellectual property rights, tangible assets, human capital and marketing over the period 2010-15, but on average did not show significant improvement in their value added, operating profits and sales, unlike non-recipient SMEs (Lee, 2018a). Fintech brings new opportunities for SMEs seeking finance (OECD, 2019c). In August 2020, the three data bills (Personal Information Protection Act, Information and Communications Network Act and Protection of Credit Information Act) were to come into effect. Fintech companies are expected to be among the first applicants to have access to anonymised personal data like electricity bills and use them to establish new credit ratings using algorithms. SMEs can then have higher credit ratings than those provided by commercial banks and have access to funding for their R&D and commercialisation projects.

R&D support mainly benefits firms already investing in R&D. Providing SMEs in manufacturing and services with innovation vouchers would encourage them to engage in innovative projects and assess the feasibility of their research projects, for instance by purchasing studies on potential for new technology introduction from universities and research institutions (Kim et al., 2018). Introduced for the first time in the Netherlands in 1997, innovation vouchers are now used by many European countries, as well as in regions of Canada and the United States. Vouchers are usually granted as a one-off payment to SMEs that covers all the eligible costs. In some countries like Estonia, Germany, Ireland and Italy, recipient SMEs are required to provide a share of own-funding (Box 3.3). Evidence of advantages in using innovation vouchers include increased R&D projects, reduced time-to-market, and further collaboration with academia (Cornet et al., 2006; Matulova et al., 2015; Sala et al., 2016). Overall, innovation vouchers would help developing innovation networks, which are limited in Korea, and facilitate the diffusion of digital technology (2018 OECD Economic Survey of Korea).

In addition to promoting collaboration between SMEs and academia, encouraging collaboration between SMEs and large enterprises would enhance innovation diffusion, for instance through an open collaborative platform to exchange new products, services and big data (Fourth Industrial Revolution Committee, 2019). The United States and other OECD countries focus on the importance of networks for the growth phase of start-ups and SMEs (Box 3.4). The Korean steelmaker POSCO paved the way for a successful collaborative platform between SMEs, large enterprises and academia. It started introducing new technologies like big data in 2015. In July 2019, POSCO became the first Korean smart factory designated as “Lighthouse Factory” by the World Economic Forum, which establishes a list of global leading factories applying core fourth industrial revolution technologies (artificial intelligence, big data and IoT). One of POSCO’s special features is the collaboration with academia, SMEs and start-ups to build its own smart factory platform (World Economic Forum, 2020). POSCO collaborates with universities like POSTECH and UNIST to provide special training in artificial intelligence. This collaboration has brought more than 60 artificial intelligence experts in POSCO. By providing big data to a SME specialised in data mining like ECMiner, POSCO succeeded in optimising their equipment with artificial intelligence. The academics, SMEs and start-ups that collaborated with POSCO can help constructing another smart factory based on POSCO’s technology (POSCO, 2020).

Regulatory frameworks are often unable to adjust to rapid technological innovations, like FinTech services or gig economy platforms. Stringent regulations limit possibilities to experiment and create uncertainty for innovators, hampering investment in digital innovations and the emergence of new business models (Planes-Satorra and Paunov, 2019). Furthermore, stringent regulations are barriers to competition and reallocation, hindering productivity growth. Reducing them can boost the diffusion of digital tools and maximise their impact on productivity (Sorbe et al., 2019, 2018). Product market regulations in Korea are among the most stringent in the OECD, especially state involvement in business operations, barriers in service and network sectors and barriers to trade and investment, which are among the highest across OECD countries (Figure 3.19). Reducing barriers to trade and investment would promote foreign investment in R&D and SME innovation through better connection to global innovation networks (2018 OECD Economic Survey of Korea). Services in Korea also face high trade barriers in transports and telecommunication (Figure 3.20). These sectors are important for the development of manufacturing servicification and reducing barriers in these sectors would enhance productivity. Indeed, there is evidence of a positive association between services deregulation and productivity of manufacturing firms using services as inputs, for example in the case of Czech Republic (Arnold et al., 2011).

Services like ride hailing and medical services are subject to strict regulations, hindering the development of new business models or the commercialisation of new digital products. Companies like Uber and Kakao Carpool struggle to service the Korean market, because of the “Passenger Transport Service Act” that limits commercial use of private cars during rush hours (7-9 in the morning and 6-8 in the evening). Huinno had to delay the launch of its wearable electrocardiogramme monitoring system until 2019, despite finalising its development in 2015 (before the Apple 4 watch) because of the stringent regulations on medical services. Regulatory sandboxes are recommended to enhance regulatory flexibility as they allow firms to experiment innovative products and business models without being subject to all existing legal requirements (2018 OECD Economic Survey of Korea). The government has introduced regulatory sandboxes since January 2019 in areas such as FinTech, the medical sector, manufacturing, electronics, telecommunication, energy and mobility. In terms of digital technology, regulatory sandboxes have been approved for app-based platform technology, IoT, big data, blockchain, artificial intelligence and virtual reality. Huinno was among the first firms to benefit from the regulatory sandboxes programme. Furthermore, amid the COVID-19 outbreak, the ban on telemedicine services was temporarily lifted, allowing patients to consult their doctors without risking mutual exposure to the virus (Box 3.1). In 2019, 195 projects were approved by the regulatory sandbox system and over 200 projects are aimed at in 2020. The government also announced the designation of regulation-free special zones. Like regulatory sandboxes, they allow firms to experiment innovative technologies in designated areas without restrictions from regulations (digital healthcare in Gangwon, blockchain technology in Busan, autonomous driving in Sejong and so forth). After four years at most, if a regulatory sandbox is considered effective and safe, it can lead to the definitive suppression of the regulation that was temporarily waived, its amendment, or the extension of the trial period. It can also lead to the creation of licences with a narrower scope, for example for FinTech companies, which could be allowed to provide some banking services, without needing a full banking licence. Follow up on this strategy should allow identifying regulation breaches and reviewing regulations, notably in the case of telemedicine.

Digital technologies provide a wide range of innovative products and services to individuals. However, increasing online activities entail higher exposure to digital risks like privacy violations or cyberbullying, as well as higher addiction to digital activities and tools. The COVID-19 outbreak also highlights the importance of digital trust, as individuals and firms rely more on remote services like telework, online classes and e-commerce (Box 3.1). Reaping the full well-being benefits of digital transformation requires ensuring online security, as well as raising individuals’ awareness of digital downsides and dangers. This implies the need for better digital education in schools and at work, better digital security technologies and the involvement of the government to lead by example.

Ensuring trust in digital technologies is key to promote their adoption and diffusion among individual users. A lack of online security or digital privacy will make users more reluctant to trust such technologies and engage in the digital economy (OECD, 2019g). For instance, better trust in payment services is essential for the development of e-commerce (OECD, 2019e). E-consumers must be protected against financial losses resulting from fraudulent payment card use after completing an online payment. Greater openness of the government to share online data and information previously unavailable to the public can promote innovation in the public sector and improve people’s trust in institutions (OECD, 2019g). This in turn can increase people’s trust in online activities.

E-government can also encourage firms to adopt digital technologies to exploit synergies between digitalisation in the public and private sectors, and hence increase their productivity (Sorbe et al., 2019). Korea performs well in this regard, ranking second in the world on the United Nations e-Government Development Index (United Nations, 2020; Figure 3.21) and first among OECD countries in open-useful-reusable government data (Figure 3.22). In June 2020, the Ministry of Interior and Safety presented the post-Corona Digital Government Innovation Development Plan, following the October 2019 Digital Government Innovation Promotion Plan. Its goal is to promote digitalisation in the public sector. The expansion of non-face-to-face services will be accelerated through the use of mobile ID cards and the MyData portal, which will allow people to use government services from their smartphones from 2021, as well as download personal information held by public institutions, and submit that information directly to public authorities and banks. Besides, online education will be expanded. The Korean government also plans to increase the provision of customised services related to health check-ups, national scholarship applications, civil defence education or tax payments. The openness of public data will be further promoted to strengthen cooperation between the public and the private sectors, and support new industries such as autonomous driving and healthcare. Finally, the government will further develop digital infrastructure in the public sector by increasing 5G wireless networks and building a security control system using artificial intelligence. Civil servants will also follow more training on digital government innovation (Ministry of Interior and Safety, 2020).

However, Korea has a relatively high share of individuals reporting security incidents, even though this share has significantly decreased since 2010 (Figure 3.23). Security incidents like losing information, time or device damaging after catching a computer infection (virus, worm, Trojan) are the most frequent, while financial losses resulting from fraudulent messages (phishing), fake websites asking for personal information (pharming) or fraudulent payment card use affect fewer users. For such security incidents, Korea is close to the OECD average. However, Korea has the second highest share of Internet users experiencing privacy violations in the OECD (malicious attacks, poor data security, accidental publication of user data), which may hold back the development of on-line applications (Figure 3.24). There are also growing concerns across countries about “predictive privacy harm” related to the use of big data by companies to predict individuals’ preferences and behaviour, which can harm their physical safety and mental health (OECD, 2019g).

Better online security can be achieved through higher skills, more robust digital security technologies and the involvement of the government to lead by example. High-skilled individuals are more likely to be aware of online security threats and find solutions to address them, like managing the access to personal information online, using anti-tracking software and changing website settings to limit cookies (OECD, 2019f). A well-rounded set of skills in literacy, numeracy and problem-solving in technology-rich environments improves individuals’ abilities to protect themselves against online security breaches. Additional education from school and training explicitly dedicated to such digital issues can also increase individuals’ awareness and help them adopt a safer online behaviour. Digital technologies such as blockchains can also be powerful tools to strengthen safety of transactions and information exchange or block hacking (quantum cryptography communication). In this regard, Korea lags behind countries like the United States, Japan or China (IITP, 2019). Research and investment in these next-generation security technologies must be promoted with financial incentives.

Other downsides of digital transformation include cyberbullying and other forms of online harassment like cyber-stalking, as well as excessive dependence on the Internet or smartphones. Hidden behind the anonymity provided by the Internet, bullying perpetrators feel freer to harass their victims in their public and private lives, at any time, by spreading false rumours or sending threats. Such online harassment can generate severe mental health problems, leading in extreme cases to suicide (OECD, 2019g), as was the case for two K-pop singers in 2019. Children and teenagers are more exposed to online harassment, especially as smartphones keep them connected at all time to the Internet and social networks. Parents with higher digital skills are more likely to educate their children about a sound use of the Internet and address cyberbullying issues (OECD, 2019f). ICT education at school, as well as information campaigns on Internet cyber violence prevention are key to promote a sound web culture.

The increasing use of new technologies and devices may also generate health problems (such as sleep disorder, depression or stress) and harm social relationships, mainly because of the constant connectivity and the wide range of online activities (Montagnier, 2016). This mainly affects youth and children who can end up missing school. In Korea, youth aged 10-29 are at much higher risk of Internet or smartphone addiction than other age categories. In the case of smartphone addiction, risks are also higher for children less than 10 years old (Figure 3.25). Provide specific and compulsory ICT courses in school and training in firms, can help raise awareness of dangers related to digital addiction and reduce it.

The relationship to work has changed amid the COVID-19 outbreak as more firms resorted to telework to contain the spread of the virus. In the United States 5% of working days were spent at home before the outbreak, against 40% during the pandemic (Bloom, 2020). Korean firms also rapidly turned to telework. Based on a survey of 300 enterprises, 45.8% of large enterprises, 30.6% of mid-sized enterprises and 21.8% of SMEs practiced teleworking after the COVID-19 outbreak, against respectively 9.7%, 8.2% and 6.7% before the outbreak (Korea Chamber of Commerce and Industry, 2020). The Korean government also encouraged the use of flexible work arrangements in SMEs – staggered hours, work from home, remote work – by simplifying the procedures to apply for a subsidy from late February 2020. The subsidy can go up to KRW 5.2 million (USD 4 300) a year per worker. After the COVID-19 crisis, the number of teleworked days is expected to decrease, while remaining higher than before the pandemic. In the United States, 20% of working days are likely to be spent at home – four times higher than before the COVID-19 crisis (Bloom, 2020). Beyond containing the spread of the virus, teleworking can improve firms’ productivity, workers’ well-being and help tackle other economic and social issues, such as gender and regional inequalities, housing, carbon emissions and traffic congestion (Bloom et al., 2014; OECD, 2020c). However, teleworking can also have adverse effects, such as lower productivity for workers who lack an appropriate working environment at home, less innovation because of impaired communication or increased hidden overtime. To make the most of teleworking, policymakers can promote the diffusion of best management practices, self-management and ICT skills, investment in home offices, and fast, reliable and secure ICT infrastructure for firms and workers (Bloom, 2020; OECD, 2020c).

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