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The Digital Economy & Global Value Chains: Implications for Korea


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Presentation in Seoul, Korea on December 4, 2018 by Duke-GVCC on joint research on the digital economy and GVCs.

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The Digital Economy & Global Value Chains: Implications for Korea

  1. 1. The Digital Economy and Global Value Chains: Implications for Korea Gary Gereffi, Presenter KIET-Duke GVCC Joint International Seminar on Upgrading Globalization for Innovation Growth: Expansion of Digital Companies in GVCs and its Implications December 4, 2018 Seoul, Korea Presentation of Duke GVCC-KIET research Stacey Frederick1 , Penny Bamber1 , Gary Gereffi1 and Jaehan Cho2 1Duke Global Value Chains Center (Duke GVCC) 2Korea Institute for International Economics & Trade (KIET)
  2. 2. © 2018 Duke University, GVCC DUKE GLOBAL VALUE CHAINS CENTER (GVCC) • University-based research center established in 2005 • Engage in research that addresses development issues and opportunities for researchers, policymakers and firms • Research across projects uses the Global Value Chain (GVC) approach; applicable across geographies, industries and focus areas • 125 reports produced across 35 countries • 150 presentations and 100 publications • 50+ unique GVCs analyzed • Home of the GVC Initiative (sponsored by Rockefeller Foundation)
  3. 3. © 2018 Duke University, GVCC KIET-DUKE GVCC PROJECT • Second joint project between KIET and Duke GVCC • Initial project in 2017 focused on Korea in GVCs: Pathways for Industrial Transformation • GVCs and Industry 4.0 trends; two GVC case studies • Recommendations and future directions for Korea • This project builds on recommendations to explore opportunities in technology-related services in the digital economy. • Describes and defines the digital economy • Illustrates digital transformation in the capital equipment GVC • Identifies common factors in strategies of global leaders • Identifies activities taking place in different key countries. • Today’s presentation highlights key findings from the research and implications for Korea.
  4. 4. © 2018 Duke University, GVCC Introduction What is the digital economy? • Economic activity that results from billions of digital connections among people, firms and devices How is it affecting global industries? • Tech platforms changes way buyers & suppliers interact (e.g. Alipay) • Established leaders facing new competition new tech firm (e.g. Uber/Didi) How are countries responding? • Global race between countries to drive digital transformation to remain competitive (e.g. Industrie 4.0 (Germany)) What does this mean for Korea? • Potential to be a leader, but needs to understand how new technologies & services are shaping existing industries and creating new ones.
  5. 5. © 2018 GVCC, Duke University Architecture of the Digital Economy Image Source: UNCTAD. (2017). World Investment Report (WIR): Investment and the Digital Economy. Red circle indicates the category was included in this research project.
  6. 6. © 2018 Duke University, GVCC Digital Economy & GVCs: Big Picture Trends 1. Incumbent firms earn a larger share of revenue by providing services rather than physical goods. 2. Additional data enables equipment manufacturers to upgrade to analytical consulting services to clients. 3. Dichotomy between the products and services offered and the source of revenue in consumer segments due to advertising. 4. New skill requirements along the entire value chain (programming, analytics, sales, etc.); global shortage of workers with these skills. 5. New forms of education in certifications to respond more rapidly to changing demand. 6. Expanding value creation through collaborative ecosystems over linear supply chains. 7. Largely driven by US firms.
  7. 7. © 2018 Duke University, GVCC U.S. Digital Economy Rapidly growing sector, becoming increasingly important for US economy: • 2006 -2016, the digital economy grew at 5.6% average/year, outpacing overall annual U.S. economic growth rate (1.5%). • Goods and services that are primarily digital accounted for 6.5% of the U.S. economy, or $1.2 trillion, in 2016. Above average growth and high paying employer: • 2016, the digital economy supports between 4 and 6 million jobs (~3% of total U.S. employment). • Nearly all occupations are projected to grow at above average rates over next decade (15% or higher). • Average annual salary almost doubles US average (US$110,000 vs. US$66,000) Source: Author analysis; US BEA and BLS data
  8. 8. © 2018 Duke University, GVCC Project Methodology Review of academic and trade literature to understand key crosscutting concepts and technologies that apply to the digital economy and specifically for industrial digital transformation. • Three digital segments: software, IT services and Internet platforms. • Impact on a key end market: capital equipment Company case studies of 28 leading firms • Eight software, five IT services and six internet platform companies; nine leading capital equipment manufacturers. Identifies common strategies of global leaders to enter and upgrade in information technology (IT) and specifically in capital equipment • Identification and collection of data on key variables at the firm and country levels: R&D, M&A, VC and collaborations. • Provides analysis on activities taking place in different key countries.
  9. 9. © 2018 Duke University, GVCC Digital Economy Segments Segment Segment Types Global Market Value Estimates (US$, 2016) Firm Sources of Revenue Firm Examples from Report Software Application (incl. SaaS and mobile) Operating $335 B Licenses Update fees Service fees Microsoft, Oracle, SAP, SAS, Salesforce, Citrix, Red Hat, Kakao IT Services Operational & IT consulting, business process services, data analysis (software users) $668 B Service fees IBM, Infosys, Wipro, Samsung SDS Internet Platforms Search engines Social networks Cloud (IaaS, PaaS) E-commerce $191 B Advertising Commission Service fees Google, Naver, Baidu, Amazon, Alibaba, Tencent Remains a highly dynamic sector: No agreed international definitions of the digital sector, products or transactions, let alone the digital economy.
  10. 10. © 2018 Duke University, GVCC Software Installation Testing Quality Control Telecommunications Equipment & Service Operating Application Architecture/ Engineering Coding/ Programming Testing Hardware (Electronics) Supporting Industries Specific Activities Consumer (TVs, smart speakers) Personal Computers Smart Phones Internet Service Providers Data Analysis Social Networks E-commerce Web Portals Consumer (B2C) Industrial (B2B) User Experience-UX Software IT Services Electronic Components Final Electronic Devices Capital Equipment Data Centers (IaaS)/ Servers Services Internet Platforms Data Storage/Integration Platform (PaaS) Services Search Engines Solution Architect Consulting Internet Platforms Information Technology-Digital GVC Data Analysts Existing New Mobile; SaaS
  11. 11. © 2018 Duke University, GVCC Mobile; SaaS Software Installation Testing Quality Control Telecommunications Equipment & Service Operating Application Architecture/ Engineering Coding/ Programming Testing Hardware (Electronics) Supporting Industries Specific Activities Consumer (TVs, smart speakers) Personal Computers Cell Phones Internet Service Providers Data Analysis Social Networks E-commerce Web Portals User Experience-UX Software IT Services Electronic Components Final Electronic Devices Capital Equipment Data Centers (IaaS)/ Servers Services ISS/Platforms Data Storage/Integration Platform (PaaS) Services Search Engines Solution Architect Consulting ISS/Platforms Korea in the Information Technology-Digital GVC Data Analysts Consumer (B2C) Industrial (B2B)
  12. 12. © 2018 Duke University, GVCC Firms Profiled • Software: Microsoft, Oracle, SAP, Salesforce, Citrix, Red Hat, SAS, Kakao • IT Services • India: Wipro, TCS, Infosys • US & Korea: IBM, Samsung SDS • Internet Platforms: Google, Naver, Baidu, Amazon, Alibaba, Tencent • Industrial Internet of Things (IIoT) • Integrators: ABB, Bosch, GE, Honeywell, Siemens, Hitachi • Discrete Equipment Manufacturers: Caterpillar, Rolls Royce, Komatsu Digital Economy Segments End Market for Digital Services: Capital Equipment
  13. 13. © 2018 Duke University, GVCC IT-Enabled Services Anything as a Service (XaaS) In-house servers to Infrastructure as a Service (IaaS) • Cloud: AWS, Microsoft Azure, Google Cloud In-house database storage to Platform as a Service (PaaS) • IBM Bluemix, RedHat OpenShift, GE Predix, Siemens Mindsphere Application software to Software as a Service (SaaS) • Salesforce, SAP, start-ups Selling physical products to Products as a Service (PaaS) • Rolls Royce, Komatsu
  14. 14. © 2018 Duke University, GVCC IIoT in Practice: Capital Equipment GVC Sensors Communication Acquisition, Storage and Analysis Systems Integration & Smart Applications Manufacturing Equipment: • ABB, Siemens, Bosch Industry-specific Equipment: • Caterpillar • Rolls Royce Gateway Devices: • Intel • Dell • HP • Cisco Platforms: • Predix (GE), Mindsphere (Siemens), Hitachi Vantara Analytics: • Foghorn, Element Analytics Storage: • AWS, Google Cloud, Microsoft IT Services: • Accenture, SAP, Oracle • TCS, Infosys, Wipro Real Time Processing (Data in Motion) Storage Deep Analytics (Data at Rest) Edge (On Site) Cloud Platform Web & Mobile Control & Monitoring OT+IT  business strategy Select Firm by Segment Data Flows
  15. 15. © 2018 Duke University, GVCC Rolls Royce: Manufacturing  Services “Power by the Hour” • Business Model: XaaS in Aviation in 1960s to business jet segment, rolled out to Defense & Commercial in 1990s/2000s; rolled out to marine & rail in 2016/17 • Organizational: In-house real-time monitoring launched at Derby HQ (2003)  In- house center in India (2000s)  partnership with TCS (2010) launch R2 Labs (2017) 0 5 10 15 2000 2002 2004 2006 2008 2010 2012 2014 2016 Revenue,£Billion Services Revenue Total Revenue Services Revenue ≥50% +10 years Improved longevity of engines,  sales Shift to services  new revenue source Sensor innovation  real-time monitoring Digital sensors & telecom  data  efficiency Data enrichment leads to new applications 1990s 2017
  16. 16. © 2018 Duke University, GVCC Characteristics of Digital Economy Lead Firms • Internal development, investment in R&D and workforce skills • Acquisitions to achieve greater diversity (products and markets) and capability (e.g., IBM, Microsoft & Google – 165+ acquisitions each past 15 years) • Firms have venture capital arms and start-up funds. Global MNEs create incubators for entrepreneurs globally to grow workforce and expand globally. • Collaboration across industries and sectors– common and important
  17. 17. © 2018 Duke University, GVCC Research & Development (R&D) Digital firms spend significantly more on R&D; 12% of revenue compared to 4% (PwC, 2017) India, Singapore and China are most common locations for overseas R&D activities. Upward trend in R&D as a share of revenue for capital equipment firms investing in digital transformation (above)
  18. 18. © 2018 Duke University, GVCC Skill gaps, certifications and incubators • Shift from four-year computer science degrees to program-specific certifications and training (led by software and Internet platform companies). • MNEs invest in start-ups and incubators globally to develop needed talent. 436,000 US job openings in computer occupations between 2016-2026 13% growth rate, faster than the average for all occupations1 < 10% of open developer positions fillable by all US computer science graduates in 20172 Data: (1) US BLS 2018; (2) Salesforce 2018
  19. 19. © 2018 Duke University, GVCC Venture Capital Investments in Digital Economy • Significant amount invested in start-ups by large MNEs; esp. last five years • Top investors are Internet platform companies: Tencent, Alibaba, Google, Baidu • More investment from non-tech companies in digital companies Average deal size in China is the largest Data: CB Insights, Deal Search: Dates: Oct. 31, 2008-Oct. 31, 2018; Industries/Sectors: Internet, Software, Mobile Commerce, Mobile Software & Service, Computer & Hardware Services: IT Services Korea: minimal activity; Kakao a top investor Above: share of deals (#) by geography
  20. 20. © 2018 Duke University, GVCC Collaboration in IIoT: Industrial Internet Consortium • Multilateral: • Public-private-educational & global • + 200 members; founding members • Focused on interoperability, innovation & cybersecurity • New standards for IIOT • Testbed opportunities  feasibility & potential uses • Case studies • Share best practices • Only three Korean members: Samsung Electronics, Korea Industry 4.0 Association and Korea Electronic Technology Institute
  21. 21. © 2018 Duke University, GVCC Inter-Industry & Global Collaboration: Baidu Institute of Deep Learning Silicon Valley AI Lab Big Data Lab Business Intelligence Lab Robotics and Auto Driving Lab 2013 2014 2018 Established in 2000; revenue in 2017: $13 billion Key Points: • Baidu Research: five labs in US (CA) and China (Shanghai, Shenzhen, Beijing) • Significant VC investments since 2015 • Autonomous Driving: leveraged technical knowledge in AI and deep learning to develop technologies in autonomous driving with 90+ global and domestic partners, including Bosch, TomTom, Hyundai, Samsung (via Harman), Nvidia, Microsoft, Tencent
  22. 22. © 2018 Duke University, GVCC Leading Asian Digital Economies • China • Activities mostly for domestic Chinese market (domestic and foreign firms) • Foreign R&D centers and incubators: Bosch, Siemens, GE Digital, Microsoft, Google • Large domestic platform firms: Alibaba, Baidu, Tencent • Corporate tax incentives for digital companies and early R&D requirements for FDI • Singapore • Key activities: headquarters for IIoT, Asia-Pacific, R&D, Innovation • Foreign companies: ABB, Accenture, Bosch, Rolls Royce, Oracle, Red Hat • Active recruitment of R&D & innovation centers • India • Focus areas: IT services; software development & engineering, R&D • Top foreign workforce location across firms • Foreign and domestic firms • All non-Asian industrials and digital have locations (IBM more employees than US) • Large domestic IT service firms: TCS, Infosys, Wipro CHINA INDIA SINGAPORE
  23. 23. © 2018 Duke University, GVCC Korean Economic Strengths Korea has considerable strengths that can serve as building blocks for entering digital services: • R&D intensive economy • Large, vertically-integrated, highly capable domestic industrial conglomerates (chaebol) • Long tradition of effective industrial policy • Cohesive planning-oriented state bureaucracy • Highly educated and skilled workforce
  24. 24. © 2018 Duke University, GVCC Korea Digital Economy: Areas for Improvement 1. Limited participation in the global digital economy 2. Korean firms are often captive or closely tied to Korean MNEs 3. R&D spending may be insufficient and misaligned to achieve global growth 4. Korean firms are not active in VC or acquisitions 5. Korean firms have fewer partnerships and collaborations 6. Foreign digital MNE activity in Korea is low; minimal investments, acquisitions, collaborations or R&D activities.
  25. 25. © 2018 Duke University, GVCC Takeaways & Recommendations 1. International and inter-industry collaboration among digital sectors, services and manufacturers and multiple GVCs is common and necessary. 2. Global shortage of workers with skills and experience in digital services – from programming to data analysts and architects – significant opportunity; ensure human capital development strategy exists and aligned with global trends. 3. SMEs play a key role in innovation; start-up incubators and venture capital funds, particularly with global partners, are a key piece in the ecosystem for innovation and skill development. 4. Focus on specific industries for entry into digital services that capitalize on manufacturing strengths (shipping, transportation, chemicals) and fill a gap in the existing landscape. 5. Embrace the global shift - manufacturers  service providers.