Technology Adoption, Innovation, and the South Korean Miracle

Abstract

Purpose: The main purpose is to understand the microeconomic foundations of the South Korean miracle through careful analysis and a realistic equilibrium model. Methodology: The paper constructs a simple equilibrium model where productivity growth is endogenous to (i) human capital, (ii) the country’s distance to the global technology frontier, and (iii) the level of urban agglomeration. The paper identifies and calculates unobserved productivity terms using various observed variables from South Korean national accounts for the post-1960 period. The paper then presents the structural estimates of the model parameters and the results of the decomposition analysis. Findings: While the South Korean economy was initially using a backward technology, it became an innovation economy in the early 1980s. Structural estimates show that urban agglomeration is not statistically significant in the South Korean case. Finally, a decomposition analysis shows that, in the early 1960s, human capital and distance to the frontier made similar contributions to productivity growth. Originality: The model economy has two sectors. Technology in the modern sector exhibits Constant Returns to Scale, but traditional technology is constrained by Decreasing Returns to Scale. In addition, both the technology adoption regime and the innovation regime can be represented by the same mathematical function, and the article is therefore theoretically original.