South Korea’s industrial transformation was driven by the mutually reinforcing promotion of technology adoption and exports – most notably through the Heavy and Chemical Industry Drive – which generated lasting gains in manufacturing and exports but also induced resource misallocation towards large, politically connected firms.
Editor's note: This article has been adapted from Chapter 3 - Trade and Industrial Policy - of our VoxDevLit on Industrial Development.
One of the common features of the industrial policies in both South Korea and Taiwan was the promotion of new technology adoption from advanced economies and the scaling up of production through exports. Technology adoption and export promotion have contributed to productivity growth and reductions in trade barriers in manufacturing, two key forces underlying the structural change patterns. These technologies, often characterised by mass production and increasing returns to scale, had already reached a mature stage in the global product cycle in Western economies. After acquiring them, East Asian manufacturers absorbed the technologies through reverse engineering and expanded production for export, leveraging cheap labour.
With domestic markets too small to sustain large-scale production, exporting became the main driver of industrial expansion. This process enabled East Asian countries not only to expand overall manufacturing but also to move up the product cycle. Their initial exports consisted largely of non-durable goods such as textiles, but as industrialisation advanced, they shifted towards durable goods – including automobiles, electronics, machinery, and ships – that were more skill-intensive and technologically sophisticated.
These two promoted activities, technology adoption and exporting, were complementary to each other, in line with theory and evidence. Productivity gains from new technologies increased firms’ chance of exporting, and participation in export markets strengthened firms’ incentives to pursue further technological improvements.
South Korea's industrial policy
Given South Korea’s rapid industrialisation and exceptional growth, often described as a miracle (Lucas 1993), its large-scale industrial policy – the Heavy and Chemical Industry (HCI) Drive – has received considerable attention in recent literature. Launched in the 1970s, the policy targeted heavy manufacturing sectors such as chemicals, electronics, machinery, transportation equipment, and shipbuilding via subsidised, government-guaranteed foreign credit allocated selectively to approved firms. It was abruptly terminated in 1979 following the president’s assassination and the subsequent change in administration. Despite its short implementation window of about seven years, South Korea has remained a major exporter in these sectors to this day.
Recent research has documented persistent effects of the HCI Drive policy. Using historical sectoral data, Lane (2025) shows that sectors directly targeted by the policy expanded significantly during the intervention and continued to grow even after it ended. He also finds spillover effects, with non-targeted sectors benefiting indirectly through input-output linkages. Exploiting the place-based nature of the HCI Drive policy and historical firm-level data, Choi and Levchenko (2025) provide complementary evidence of persistent firm-level effects lasting nearly 30 years after the policy ended. They build a dynamic trade model with learning-by-doing and identify the key parameter governing the magnitude of learning from reduced-form estimates. Using the calibrated model, they find welfare gains of about 3–4%. Using repeated cross-sectional plant-level data, Kim et al. (2021) also document persistent effects on plants in targeted region-sectors. However, they highlight an important downside: increased resource misallocation. They find that resources disproportionately flowed to large plants owned by business groups that were the primary beneficiaries of the policy.
While implementing the HCI Drive policy, the South Korean government actively promoted the adoption of new technologies. Choi and Shim (2024a, b) digitise firm-level technology adoption data and document a surge in technology transfer from advanced economies. This was true also in Taiwan, where the government supported technology transfers through the Industrial Technology Research Institute during the 1980s, which later laid the foundation for TSMC, now the global giant of the semiconductor industry. Similarly, Giorcelli and Li (2021) show that technology and know-how transfers from the Soviet Union to China had long-lasting impacts in the steel industry, but only when accompanied by worker training. Exploiting exogenous variation in the timing of transfers due to unexpected delays, they conclude that deeper absorption of technology transfers is critical for long-lasting effects.
Export promotion in South Korea
Another important policy in South Korea was export promotion, implemented through a range of government tools. One such policy was input tariff exemptions for goods destined for export. Using an open economy neoclassical growth model, Connolly and Yi (2015) show that this tariff exemption can explain 17% of South Korea’s catch-up in manufacturing value added per worker relative to G7 countries. The government also established the Korea Trade-Investment Promotion Agency (KOTRA) in 1962, which connected local firms with foreign buyers through trade fairs and market research, reducing information frictions in foreign markets.[1] Taiwan also created its own export-promotion agency, the China External Trade Development Council, which similarly organised trade fair participation and conducted market research.
Betts et al. (2017) quantify the role of Korea’s trade policies using a multi-sector general equilibrium model calibrated to sectoral tariffs and export subsidies. They show that tariff liberalisation accelerated industrialisation, while the removal of export subsidies worked in the opposite direction, with the two effects largely offsetting each other. They conclude that industrialisation was, instead, primarily driven by international specialisation and income effects resulting from relatively rapid productivity growth in the Korean industrial sector.
The challenges of replicating East Asia
Replicating East Asia’s success is far from straightforward. Industrial policy often targets specific sectors, aiming to exploit productivity spillovers or to offset financial frictions. The difficulty is that policymakers cannot know ex ante whether a sector’s current weakness reflects barriers or a genuine lack of potential. Another challenge lies in implementation. Even well-designed policies may fail if bureaucrats do not implement them as intended, due to weak monitoring, corruption, or rent seeking.[2] In such cases, subsidies may be diverted to politically connected but inefficient firms, undermining the policy’s goals and sometimes worsening allocative efficiency. One way to mitigate this issue is to evaluate firms or sectors based on their export performance. This can serve as a more objective selection criterion, as it reflects competitiveness in global markets and is less likely to be distorted by domestic factors such as lobbying or market power. Reed (2024) discusses a broad set of policy tools that policymakers in developing countries can use to address these challenges.
References
Betts, C, R Giri, and R Verma (2017), "Trade, reform, and structural transformation in South Korea," IMF Economic Review, 65(4).
Choi, J, and A A Levchenko (2025), "The long-term effects of industrial policy," Journal of Monetary Economics, 152, 103779.
Choi, J, and Y Shim (2024a), "From adoption to innovation: State-dependent technology policy in developing countries," IMF Working Paper, 24/154.
Choi, J, and Y Shim (2024b), "Industrialization and the big push: Theory and evidence from South Korea,” Unpublished manuscript.
Connolly, M, and K-M Yi (2015), "How much of South Korea’s growth miracle can be explained by trade policy?" American Economic Journal: Macroeconomics, 7(4).
Giorcelli, M, and B Li (2021), "Technology transfer and early industrial development: Evidence from the Sino-Soviet alliance," NBER Working Paper, 29455.
Kim, M, M Lee, and Y Shin (2021), "The plant-level view of an industrial policy: The Korean heavy industry drive of 1973," NBER Working Paper, 29252.
Lane, N (2025), "Manufacturing revolutions: Industrial policy and industrialization in South Korea," Quarterly Journal of Economics, 140(3): 1683–1741.
Lucas, R E (1993), "Making a miracle," Econometrica, 61(2): 251–272.
Reed, T (2024), "Export-led industrial policy for developing countries: Is there a way to pick winners?" Journal of Economic Perspectives, 38(4): 3–26.