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. © 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. © 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. © 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. © 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. © 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. © 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. © 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. © 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. © 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. © 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. © 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. © 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. © 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. © 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. © 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. © 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. © 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. © 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. © 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. © 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. © 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. © 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. © 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. © 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.