STRATEGIC DYNAMICS OF INTER-FIRM CATCHING-UP AND RIVALRY: THE FUNDAMENTALS, OVERCOMING MID-COURSE CHALLENGES, AND POST-CATCHING UP POSITIONING

Abstract This paper investigates dynamics of inter-firm catch-up and rivalry with focus on the strategies of the late-comer firms trying to make an entry and then sustain their position. Based on a detailed examination of 15 catching-up cases in Korea, we have conceptualized strategic fundamentals, ways to overcome inherent challenges, and sustainable positioning after catching-up. The perspectives have also been discussed in the framework of sectoral system of innovation. We present a threefold summary: firstly, the strategic building block required for catching-up is innovation capability, a capability to develop new product and process. It may be acquired by a combination of three elements relevant teachers, an effective access to foreign technology, and continuous in-house learning from trials and errors. Secondly, successful catching-up tends to be accomplished through path-creating (or leapfrogging) rather than path-following, and in industries of shorter life-cycle. Thus, later entrants should take the opportunity of the changing technological paradigms in order to overcome the challenges en route to catching-up. Finally, small and medium-sized firms are more likely to achieve sustainable catching-up in industries where tacit knowledge, rather than (codifiable) scientific knowledge, is important. Development of firm-specific tacit knowledge also strengthens post catching-up positions.

Key word: Catching-up, Developing countries, Innovation capability, Path-creation, Product differentiation, Tacit knowledge

1. Introduction In recent years, there has been growing interest in the research society on development of emerging markets (Luo and Tung, 2007). Emerging markets are technically referred to a group of middle to higher income countries in developing world (World Bank, 1981). The typical traits of emerging markets are less developed institutions and insufficient resources including technology, capitals, and managerial talents (Khanna and Palepu, 1997). Given the situation, it has been a major research arena to investigate the mechanism that enabled some firms in emerging markets to build technological and managerial capabilities, and to become global brands. While less highlighted than this group of firms (mainly the big business), a substantial number of small and medium-sized enterprises (SMEs) have also been competing at the global frontier. They have acquired design capability based on the subcontractor experience, and have further succeeded in own branding. This group of the SMEs in emerging markets has demonstrated that, despite absence of upfront technology as well as financial and human resources, it is possible for firms in emerging markets to compete against the firms from advanced economies in the world market if the SMEs in emerging markets adopt and implement an appropriate strategic. The SMEs in emerging markets can be expected to gain further momentum for catching-up because the global production network is being increasingly developed with ongoing advances in technology. It is a very interesting phenomenon that this group of firms, previously subcontractors with cheap-labor advantage, has overcome shortage of resources and technologies, and has upgraded to possession of product design and finally to own branding. Accordingly, there have been scholarly attempts to highlight implications of the changing status in firms in emerging markets.

For researchers in the strategy and international business areas, technological development of firms in emerging markets is a traditional domain, though the focus has been on large, well-established, and branded business groups. For entrepreneurship researchers, SMEs have been a primary focus, while they have been investigated in the context of the countries where institutions are well developed. Finally, for researchers in the area of global production network, SMEs in emerging markets mainly subcontractors have been the center of attentions and numerous studies in these literatures have concentrated exclusively on collaborative system and mechanism. Nonetheless, catching-up of the SMEs in emerging markets has been affected by competition as well as collaboration with the firms in advanced countries. In fact, not until recently, did a notion emerge that customers in the production network are running the potential risks that subcontractors become their competitors (Arrunada and Vazquez, 2006). Despite the fact that 60 percent of all firms in emerging markets are SMEs (The Economist, November 13, 2004), growth of SMEs in emerging markets has largely remained unattended. While upgrading of the SMEs in emerging markets is a timely and crucial concern in developing countries, the existing theories offer little guidance on this subject. To date, little is known about the antecedents, strategies, and mechanism of catching-up accomplished by SMEs in emerging markets (e.g., Special Issues in Journal of World Business, 2008). Even if some findings are available, they are usually either from the perspective of outsourcer, who farms out the work, or from the viewpoint of production network system itself, which regards collaboration as given.

We argue that more attention should be devoted to exploring how the SMEs in emerging market have implemented catching-up strategies and how they responded to several types of challenges appearing in the course of upgrading. Our rational is that the perspectives of the firms whose works are farmed out are not sufficiently discussed, but these issues are very important to practitioners and managers in emerging markets, given the substantial presence of SMEs in their national economies. It is also a central question to government of emerging markets that how the SMEs can move to more profitable businesses and can stand on a par with the firms in advanced economies in the world market. Therefore, our research question is that how the SMEs in emerging markets have upgraded capabilities from contracted manufacturer to product designer, and have ultimately succeeded in own branding. We address these issues by exploring the strategic implications of the successful catching-up accomplished by SMEs in emerging markets, based on the analysis of the successful catching-up cases demonstrated by the 12 Korean SMEs. This paper is organized as follows: In Section 2, we discuss relevant theories that approach catching-up of latecomers. Section 3 introduces our methodology and Section 4 presents in-depth case studies. Section 5 provides inferences based on the case studies and further discussion, and Section 6 concludes the research.

2. Theoretical Perspectives and Hypotheses

Catching-up Revisited: Horizontal Upgrading, Vertical Upgrading, and Implications

Previously, catching-up was regarded as a relative speed on a fixed technological track (Perez, 1988); nevertheless, as more latecomers joined the rank of frontier firms by creating new technological path, definition of catching-up has been requested for modification to reflect up-to-date situations (Lee and Lim, 2001). In our study, catchingup is defined as the ability to participate in the competition at the world technology frontier (Chu, 2009), and is measured by both technological capability and market share (Lee and Lim, 2001). Certainly, technological capability and market share are independent concepts, although they have some correlation. However, because increasing market shares without substantial promotion of technological capability do not guarantee a sustainable position, latecomers which took over markets, in the long run, converge to a group of firms which possessed technological capability in the entered markets. This is our conceptualization of catching-up. The catching-up study takes a unique position in the literature because the nature of catching-up has been controversial. The ongoing debates can be briefly recapped as two contrasting theories that view the central factors for catching-up as strategic actions by the forerunners versus endogenous learning by latecomers. First, mainstream economics posits that forerunners consider rivals actions when formulating decisions for innovation. The fundamental motivation for the strategic interaction is that forerunners intend to reap profits from their current products as long as possible (Arrow, 1979; Tirole, 1988). Accordingly, the forerunners intentionally reduce their speed of innovation, expecting to be replaced by new entrants. In this view, the forerunners subsequently regains a dominant position with a superior version of the new technology, but its attempt to accelerate discovery implies that catching-up achieved by latecomers is inferior, based

on the fact that latecomers, in order to catch-up with the forerunners, should invest more but the outcome is the same as with the previous outcome achieved by the forerunners. On the other hand, neo-Schumpeterian economists claim that, because latecomers lack skills, product knowledge, finance, and cutting-edge technical equipment, upgrading of latecomers is not influenced by the strategic choice of the leading firms but is largely driven by accumulated learning (Nelson and Winter, 1982). This group of scholars suggests that developing countries have shown an innovation pattern different from developed countries and catching-up by latecomers, hence, should be understood in terms of capability building and resource acquisition (Bell and Pavitt, 1993; Amsden and Chu, 2003). The basic reason for the continuing debates lies in the neoclassical assumption that technology is free (Amsden, 1993). In practice, acquisition of technology is very hard and expensive, in contrast to economic theory. In this light, catching-up is a dynamic process of searching, learning, internalizing, and re-creating technology and the accompanying essential resources. The process an approach to catching-up is largely of two types: horizontal upgrading (Amsden and Hikino, 1994) or vertical upgrading (Chu, 2009; Chen, 2008). The process of catching-up through horizontal upgrading consists of an entry to a more profitable industry based on formation of more complicated skills, and the subsequent innovation within the entered industry (Lee and Mathews, 2009). Because latecomers lack cutting-edge technologies, they always feel threatened by the rising domestic wages, which will enable lower-wage countries to replace their position as times goes on. Therefore, latecomers continue to enter new emerging industries via

diversification in order to maintain their sustainable catching-up position. Accordingly, catching-up through horizontal upgrading urges latecomers to move to newer industries as fast and early as possible. Most catching-up studies have focused on horizontal upgrading (diversification across industries to skill-enhancing direction), for example, technical learning of Samsung Electronics for entry into the semiconductor industry (Kim, 1997) or resource mobilization of TSMC in the semiconductor entry (Kirby, Chen, and Wong, 2009). Scholars presume that national ownership of firms should be related to horizontal upgrading (Lee and Mathews, 2009; Amsden and Chu, 2003). Yet it is not clear when and how latecomers facilitate the process of innovation (Chang, Chung, and Mahmood, 2006). Another catching-up approach is vertical upgrading. In contrast to the path of horizontal upgrading, latecomers also acquire technology by doing subcontracting with multinational enterprises and accumulate production technique. Based on the experience of subcontracting manufacturing, some latecomers have developed a capability of conducting R&D (Rasiah, 1994), and have eventually built their own brands (Chu, 2009). The vertical upgrading differs distinctively from horizontal upgrading because the approach can be depicted as climbing up the technology ladder, i.e., moving from the low-margin markets to the high-margin markets within related industries (from original equipment manufacturing to original design manufacturing, or to original brand manufacturing). Catching-up through vertical upgrading is a recent observation because the number of the OBM firms who were previously outsources is very small. Nevertheless,

this pattern of catching-up is remarkable in the industries where technologies are modulized and manufacturing processes are codifiable. Acer, for example, has come a long way to finally label its logo on the PCs. Traditional economic theory seldom addresses this topic, although upgrading to the ODM status is a pressing issue that OEM firms in emerging markets face every day. It is surprising that even industrial organization economics which provides a dominant paradigm about the relationship between upstream and downstream firms hardly mention the particular kind of upgrading that we are concerned in this study moving from OEM to ODM, or to OBM. The economics view focuses only on profit-maximization scheme of outsourcers, treating the dynamic situation of subcontractors as given. Accordingly, in the mainstream economics, the changing status and the matching roles of latecomers are missing in the discussion of production relationship with their customers, who are usually the firms in advanced economies. Another perspective is global production networks (GPN), which note the categorized roles of subcontractors in developing countries. GPN treats subcontractors as a part of hierarchical system, and focuses on the collaborative network itself. While a strategic set for upgrading latecomers is heavily influenced by competitive environment and rivalry among peers, this aspect has not been elaborated in the GPN studies. As a result, there are few studies that discuss the types of challenges arising in the course of technology upgrading and the ways to overcome them. Based on the existing literature, we have noticed that vertical upgrading suffers from shortage of literature and evidence, despite its topical significance particularly for developing countries. Hence, it urgently calls for a new perspective that provides building

blocks of catching-up strategy for latecomers which attempt to climb up technology ladder, namely moving from OEM to ODM, and/or to OBM.

Strategic Management Interprets Catching-up: Knowledge-Based View and Dynamic Competitiveness

Strategic management has devoted to explaining the success of the incumbent firms the forerunners in advanced economies where the resources are abundant and their achievement of competitive advantages. On the other hand, in contrast to its elaboration on the incumbent firms, it seldom addresses the success of new entrants, except second-mover advantage (Liberman and Montgomery, 1998). In the perspective of second-mover advantage, firms may deliberately make entry decision in order to reduce trial-and-error costs. The second movers, however, never suffer from resource scarcity. To the second movers, entry is a strategic choice; to latecomers, the probability of entry is determined by the level of capability. It is a remarkable distinction between the secondmovers in advanced economies and latecomers from emerging markets. Nevertheless, the theories in strategic management did not pay attention to the group of firms, to whom capability one of the key factors to determine the success of firms in the theory of strategic management matters so much. Because the position of a latecomer is threatened by other latecomers that offer more competitive prices, latecomers have been seeking to enter more profitable business segments or industries. Accordingly, it is a reasonable assumption that an OEM contractor wants to proceed to the ODM stage, which pays for higher product margins.

The first task to upgrade capability into the ODM position is to thoroughly understand technical aspects of a product. Usually in emerging markets, capability of product design has been obtained after possession of production know-how (Amsden and Chu, 2003). The road to mastery of product design varies, as sources of skill formation are comprehensive. However, the existing evidence consistently suggests that it is a firms own efforts that have built product-design capability of latecomers. Technological capability, unless developed by learning through trial and error, feedback and evaluation, cannot be company-specific and industry-specific (Chandler, 1990). Latecomers which successfully upgraded into OBM tend to be more proactive in R&D so as to offer more development or design value to buyers (Chu, 2009). They may practice branding first in the small domestic market, and then execute an eventual entry into the full-scale brand competition. However, own branding itself does not provide an opportunity of accumulating production know-how based on technical learning. Further, building distribution channels is very costly and risky. Due to huge marketing costs incurred from moving to OBM, some firms in Taiwan often tend to intentionally remain without brand (Chu, 2009). Despite the cost of own branding, the existing literature argues that branding is actually the most valuable asset in firms, particularly for sustainable catching-up position (Lee and Griffith, 2003). As production network evolves, firms can produce anything through outsourcing but brands. In this light, what the firms can really own is brand only, the most powerful source of monopolistic rents as well as the ultimate goal of catchingup.

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The aforementioned upgrading process implies that dynamic capability serves as a basis of the sustainable position in catching-up. Dynamic capability is the competence that enables firms to timely respond to the changing environments. Broadly speaking, sources of the capability are categorized as absorptive capacities, combinative capabilities, and institutional resources. Absorptive capacities enable latecomers to raise efficiency in learning. Due to lack of frontier technology, latecomers continue to learn from external sources even after successful own branding. The acquired technical information needs to be further processed by blending the internal knowledge, which creates a new basis of knowledge. At the same time, due to the fact that the market where latecomers mobilize resources is less developed, latecomers should be able to connect intra-firm knowledge with institutional resources. The sustainable position of own branding is built based on entrepreneurship, which quickly configures the prospective customers and manifests their needs as product development. As shown in Amsden and Chu (2003), the firms in Taiwan who successfully executed catching-up strategy toward own branding entered the market when the product just turned mature. Thus, even though they went ahead for own branding, they did not conduct cutting-edge R&D, but focused on development and process innovation. While Acer, ASUStek and BenQ have been pursuing own branding, their R&D intensity has not increased sharply. They continue to focus on development and design, but stay away from the basic and scientific R&D, which is the basis for competition at the world technological frontier. The profit margins on ODM businesses probably are too thin to support a higher level of R&D.

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Strategies of Small and Middle-Sized Firm Catching-up: What the Existing Theories Dont Tell

A firms strategy connotes a set of broad commitments made by a firm that defines and rationalizes its objectives, and formulates the way it intends to pursue them. However, the suitability and effectiveness of the Western strategic paradigms and practices in the context of emerging markets have been questioned. In the Western strategic theory, competitiveness of a later entrant is based on firm-specific resources. When a later entrant wants to upgrade its capability into the more profitable markets, the firm attempts to build resources as rare, inimitable, and non-transferable as possible. In contrast, latecomers are likely to target least rare, most imitable, and most transferable resources when they attempt to catch-up with the forerunners. Therefore, latecomers tend to lack a specific history which tends toward firms having highly specialized skills. Their strategic resources are relatively straightforward to attribute the main factors involved in their successful catching-up (Reed and DeFillippi, 1990). The experiences of latecomer upgrading primarily the cases of large conglomerates show that latecomers tend to upscale and thus try to overcome the disadvantageous position in resource portfolio. Most evidence suggests that, as latecomers enhance the technological capability, their R&D intensity increases. Also, the State agencies assisted latecomers resource mobilization, such as amassing capital and making it available for investment in largescale plant, or in reducing risks by public sector development (Mathews, 2002). Government-led networking, for example, the CDMA consortium in Korea or

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establishment of the science parks in Taiwan enabled latecomers in the countries to leapfrog the technological paths. The literature on catching-up by the SMEs in emerging markets suffers from scarcity. All anecdotes about large firms in emerging markets, however, consistently imply that the small and medium-sized enterprises (SMEs) in emerging markets are facing more serious resource constraint than the large conglomerates are. The resource shortage is specifically notable in technical knowledge, finances, and managerial skills. Therefore, catching-up by the SMEs in emerging markets is expected to follow a different path that does not project the trajectory of the large-sized latecomers.

3.Methodology

Our study presents the catching-up dynamics of 12 Korean firms. Some achieved catching-up while others not. Cases were randomly selected. We collected data for this study from both interviews and archives. We conducted in-depth interviews with executives and managers of the sample firms following a pre-designed interview protocol. Interviews were administered in a semi-structured format. The demographic profile of 12 Korean firms varies, in terms of operating industries, age, size, or the ways that they attempted for catching-up.

4. Antecedents

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4.1. Climbing up the Technology Ladder: Aurora World, Hankook Chinaware, and Lock&Lock

Aurora World: Established in 1981, Aurora World has continued to climb up the

technological ladder in the toy manufacturing industry, from OEM to ODM, and finally to OBM. During the early 1980s, the firm exported to advanced economies like other subcontractors (OEM) did, but it quickly sensed that the toy market was saturating and the wages were increasing. Therefore, as an attempt to make more profits in the declining toy business, it decided to upgrade into OBM. The first task to become an OBM firm is to capture new markets and offer to consumers products based on excellent design. Aurora World scanned the rising popularity of plush dolls. At the same time, Aurora World elaborated upon improvement on materials and fabrics used to make plush dolls. For this strategy to work, Aurora World composed 40% of the total number of employees working at its headquarters with R&D personnel. It further set up overseas research labs in nine countries and networked them for information sharing. Consequently, the unit price of products (OBM) manufactured by Aurora World tripled, compared to that as an OEM firm. As of 2005, its gross sales revenue amounted to 130 billion Korean Won, of which overseas sales accounted for 70 percent.

Hankook Chinaware: Hankook Chinaware was established in 1943 and grew up

via the OEM mode. In 1995, it introduced its own brand to the global market, Saint James and Prauna. Because of the long history in the chinaware manufacturing, Hankook Chinaware possessed extensive tacit knowledge. Not satisfied with being a supplier,

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Hankook Chinaware initiated a project of independent branding. The firm clearly understood that, in order to combat with the forerunners, its new brand should be technologically superior to or, at least, differentiated from the existing products. Hence, Hankook Chinaware decided to upgrade product quality. Learning from the Japanese firms and Wedgewood, Hankook Chinaware acquired know-how in crafting bone china. With the acquired production technique, it entered the premium market in 2003. The entry was supported by the continuous development of new materials for the chinaware technology, for example, adoption of far-infrared radiation and nano technologies to enhance hygiene.

Lock&Lock: Lock&Lock is specialized in manufacturing airtight containers. After

its establishment in 1985, the firm produced more than 600 household supplies. However, experiencing the Asian financial crisis, Lock&Lock became aware of the need to build its own brands. It thus disposed of most product lines, saving only a few related to the airtight container manufacturing. While the current products used a soft-material cover for seal-tight attachment to the container, consumers were frustrated with the problems of the soft-material cover: if used for a long time, sealing power weakened. If sealing power was strengthened, lifting a cover was hard. Lock&Lock clearly saw how to fix the problem. The solution was to optimize the thickness of the cover hinge. After countless experiments, Lock&Lock found out the exact thickness required for the best cover. Also, applying the concept of an automobile sash, it engineered a rubber-packing cover. As a consequence of the unceasing efforts for innovation, Lock&Lock won the highest market share, ranked at the top on the power brand list, after five years from its OBM debut.

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4.2. Competitiveness Building with Tacit Knowledge: Shimro Musical Instruments, Cuckoo, and HJC Helmet

Shimro Musical Instruments: Established in 1986, Shimro Musical Instruments

has been specialized in manufacturing and sales of strings. Before the string business, it used to import musical instruments overseas. Trading musical instruments, Shimro Musical Instruments became awakened to the needs to produce strings to serve the local demands good quality and low price. As an entry strategy (eventually as OBM), accordingly, Shimro Musical Instruments acquired production technique from the German artisans. Notably, production of musical instruments requires the significant inputs of the artisan skills but it is difficult for firms in developing countries to master the tacit knowledge. If OEM firms do not overcome the barriers, they cannot be promoted to ODM or OBM. Given the situation, Shimro Musical Instruments, instead of falling into technological dependency, actively used the opportunity of subcontracting and accumulated production skills. It successfully combined the craft with the Japanese style mass-production system, and defeated Suzuki, the dominant manufacturer in the global string market at that time.

Cuckoo: Founded in 1978, Cuckoo supplied rice cookers to LG and Philips. When

the Asian financial crisis happened in 1998, Cuckoo witnessed a sharp decrease in the customer orders. Therefore, based on the production know-how accumulated over time, it began to develop new products, standing as an independent label. Obtaining an idea from

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an iron pot, Cuckoo noticed that a heavy lid formulated an ideal pressure for rice-cooking, and that a round-shaped surface evenly circulated water, which provided an optimal condition for cooking raw rice. Through numerous experiments, Cuckoo finally found an ideal pressure for rice cooking, at the same time, identifying a structure to sustain the high pressure. In addition, noting that pressure is always accompanied with the safety concern, Cuckoo subsequently introduced two innovative technologies for smart rice-cookers: side-packing device that automatically emits heated vapor if internal pressure within a rice cooker goes overly high, and valves that discharge heated vapor if pressure-adjustment device does not work properly.

HJC Helmet: Starting from the leather clothing business in 1971, HJC Helmet

began to produce motorcycle helmets from 1974. A few years after subcontracting (OEM), it launched its brand and, from 1984, started off to expand abroad. In order to take over market shares from the Japanese firms, HJC Helmet developed new materials that satisfy both durability and light weight. The new helmet quickly attracted consumers because durability (the capacity of shock absorption) and light weight are two opposite qualities for a helmet that motorcycle riders needed desperately. Further, the new product developed by HJC Helmet obtained international safety standards certificates of Snell and DOT. Supported by the product quality, HJC Helmet has dominated the motorcycle helmet markets in the United States since 1992.

4.3. The Battles over Catching-up and Being Caught-up: Amore Pacific, Missha, and The Face Shop

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Amore Pacific: Founded in 1945, Amore Pacific is one of the earliest cosmetic

firms in Korea but its business was hit hard by the opening of the Korean cosmetic market in 1996, followed by the Asian financial crisis in 1996. After the crisis, Amore Pacific began to benchmark LOreal and soon diversified its brands, grouping them into the high-end, middle-end, and low-end. Because Amore Pacific is a firm from emerging market, moving to the premium market required special efforts. The entry strategy for the premium market was twofold: building a high-end corporate image and development of oriental herb cosmetics. While the firm paid attention to marketing, its accomplishment of catching-up was attributed to the continuous product development. In the early business stage, Amore Pacific acquired relevant technologies through licensing from the forerunners, for example, Shiseido or Coty. Nevertheless, the buy channels had a inherent limitation for further learning as Amore Pacific grew up. Accordingly, Amore Pacific established an R&D center in 1978. The lab has so far produced more than 500 patents, registered both domestically and internationally. Another source to enable Amore Pacific to defend its leading position after catching-up is the continuing collaboration with universities. Through the efforts, Amore Pacific extracted oriental herbal essence and applied it to the cosmetic products.

Missha: In 2000, Missha trailblazed online marketing for cosmetics, through

which it removed distribution costs. After its success in the online cosmetic sales, it went offline, building a brand-shop system that connects manufacturers directly with consumers. Misshas production strategy is based on outsourcing. It established R&D centers but the share of R&D investment over its sales revenue has been very marginal.

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The price competitiveness of Missha was soon challenged by new entrants and its market share has decreased over time.

The Face Shop: After two years that The Face Shop entered the cosmetic business,

it recorded the fourth largest market share. From the very beginning, The Face Shop imitated the strategy of Missha regarding distribution system, product types, or even homepage layouts. The only difference is that The Face Shop did not neglect the importance of R&D, while it continued to build a corporate image that highlighted on the aspects of natural skin care. As a result, The Face Shop registered eight patents within four years. In addition, from technology cooperation with the Japanese or French firms, the firm continued to internalize the up-to-date cosmetic technologies that the forerunners possessed. Given the nature of the cosmetic business, The Face Shop paid careful attention to store interior and the ornamental design for cosmetics. Consequently, consumers were favorably impressed at The Face Shop and began to associate its products with the natural, organic, or pure cosmetics.

4.4. Mergers and Acquisitions in the Digital Industry for Catching-up: NHN

NHN: NHN used to be one of the Samsungs intra-firm ventures. With continuous

product R&D and technology-oriented mergers and acquisitions (M&A), NHN grew fast to become a market leader in the online search industry. Launching database search service in 2002, NHN sharply increased market share. Its service facilitated book search up to 10 million pages; at the same time, NHN introduced other types of the online

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services, for example, online news, mobile search, real time keyword search ranking, and the various online contents including blog, online community, and photo gallery. In addition, NHN caught the growth potential for the online game industry and began to acquire small-sized game software developers. By way of M&A, NHN significantly enhanced technological competitiveness: first, it supplemented technical weakness. Acquisition of a firm that developed search algorithm solutions, for example, perfected NHNs search technology. Another acquisition of a game software developer substantially improved problem-solving capability of NHN. NHN also benefited from M&A in product diversification. Through continuous M&A, NHN became capable of offering more diverse contents and services to consumers.

4.5. Innovation and Rivalry in the Supply Industries: Jusung Engineering and Sunstar

Jusung Engineering: Through long-term supplier relations with Samsung

Electronics and LG Semiconductor, Jusung Engineering acquired know-how in the semiconductor-equipment operation, particularly in the area of problem solving. With the knowledge, Jusung Engineering developed the technology of low-pressure chemical vapor deposition (CVD) in 1996, opening the era of equipment localization in the semiconductor industry. In order to continue innovation, Jusung Engineering has closely collaborated with universities to search technological trends and to access the problem-solving expertise. As a result, Jusung Engineering successfully developed atomic layer deposition (ALD)

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system in 1999, which is going to replace the CVD technology in a near future. Quickly following its development of the ALD system, the firm began to produce the ALD machinery and became the first mover.

Sunstar: In 1986, Sunstar succeeded in localization of parts and components in

the sewing-machine manufacturing industry. At that time, however, the forerunners in advanced economies possessed technology superior to Sunstars: their sewing machines saved threads when sewing works ended or suspended temporarily. It took six years for Sunstar to complete learning of the technology from the Japanese firms. During the learning process, Sunstar amassed a stock of know-how about the sewing technologies. Based on the tacit knowledge, Sunstar developed a sewing machine that automated patterns of needlework. The new sewing machine brought Sunstar the third rank in the global sewing-machine market share. However, due to the nature of competition in the sewing industry too many competitive rivals Sunstar decided to enter the market of computerized automatic needlework sewing machine (CANEM), a technology much more sophisticated than automated needlework. Because manufacturing the CANEM product required specific knowledge and complex know-how, only one firm dominated the CANEM market. The CANEM technology was highly tacit, specific, and proprietary. Thus, Sunstar chose inhouse development rather than consulted external sources. In 1996, Sunstar finally developed the technology and further introduced the compact version of CANEM, attracting the U.S. market where embroidery firms are usually small-sized. We briefly overview each catching-up story in four industries. The summary of the 12 antecedents is provided in Table 1.

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[Insert Table 1 here]

5. Discussion

5.1. Strategic Fundamentals of Catching-up: Innovation Capability and Path Creation

Cases discussed in the previous section first indicates that innovation capability among others as the foremost strategic basis in the execution of catching-up. While technological capabilities are broadly referred to a set of capabilities involved in improvement, renovation, or innovation of firms (Westphal, Kim, and Dahlman, 1985), our focus here is on the skills and ability necessary to create new products or processes, the type of skills depending on the novelty of the new technology (Amsden, 2001). All firms which accomplished catching-up endeavored to build innovation capability. For example, Aurora Worlds climbing up the technology ladder from original equipment manufacturing (OEM) eventually to original brand manufacturing (OBM) was led by its enhanced design capability. With better product quality and design uniqueness, Aurora World was able to continue to attract foreign buyers and successfully overcame entry barriers and counter-attacks by the forerunning companies with their own brand. Although Jusung Engineering and Sunstar were driven into a corner by foreign firms as well as domestic large conglomerates who alleged Jusung Engineering and Sunstars entrenchment upon their intellectual property rights, they overcame the critical

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difficulties owing to their innovation capability which enabled them to develop product with their own intellectual property rights. Therefore, we argue that product design capability constitutes a strategic basis of sustainable catching-up, without which catching-up cannot embark. If late-comer firms do not possess innovation capability, they cannot introduce new or differentiated products or services; consequently, they cannot compete against the forerunning firms. Then, catching-up is discouraged or not even attempted. Our next, and more important, question is how firms acquire innovation capability. Cases discussed above show that acquisition of innovation capability requires trinity, namely, (a) relevant teachers, (b) an effective access to foreign technology, and (c) continuous in-house learning from trials and errors. First, the existing literature on the East Asian experiences suggests that the relevant teachers are generally foreign firms, universities, or public research institutes, as shown by (Rasiah, 1994; Wong, 1998). Second, effective accesses include a variety of channels, including subcontracting, joint production, licensing, equity-based alliances, or joint R&D (Amsden and Chu, 2003; Lee, 2007). Finally, acquisition of innovation capability is completed only when in-house learning from trials and errors is accompanied, based upon what is learned from their teacher through various channels (Kats and Allen, 1982; Kogut and Zander, 1992; Mathews and Cho, 2000). The in-house learning from trials and errors generate technological uniqueness and organizational idiosyncrasy. However, isolated attempts to do everything in-house on ones own is doomed to fail. In addition, learning from foreign or external firms tends to lower learners risks and is sometimes more efficient than internal development (Sobrero and Roberts, 2001). Thus, the probability of catching-up,

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accordingly, increases as firms are better at connecting their (external) learning with (internal) knowledge creation. In this sense, it is a recursive process of accessing, learning, and new knowledge creation (Nonaka and Takeuchi, 1995; Nagarayan and Mitchell, 1998). For example, Shimro Musical Instruments had a teacher of the German artisans, and learned from them core skill of handmade production of violins, and eventually created their own hybrid technology after a long process of trials and errors. Hankook Chinaware learned initial bone-China technology from Royal Doulton Group, a global bone-China brand, and then established a joint venture with Miji Tech, a firm specialized in application of nano technology, in order to learn about nano technology. Based on these new knowledge bases, this company was able to develop their own Silver nanotechnology based bone-China. In sum, the strategic and necessary fundamentals for catching-up is innovation capability which enable to develop new product and process, and these capabilities may be acquired by three elements of relevant teachers, arranging effective access to foreign technology, and finally continuous in-house trial and error and R&D. Combination of these three elements often enable the late-comers to accumulate their own tacit knowledge based on ones own experiences accumulated over time (Mathews, 2002; Teece and Pisano, 1998), which is the factor that makes their initial catch-up more defendabld and sustainable, as is discussed below. The cases discussed in the preceding sections show that successful catching-up tend to involve the element of path-creating, namely the later-comer picking up their path different from the their forerunners. Here, path-creating involves not only developing

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new products different from those of the incumbents but also developing new markets or market segments. In contrast, we observe that simply following the same path of the incumbents does not lead to guarantee the successful entries. Shimro Musical Instruments, for example, combined two opposite production methods for manufacturing the strings, the European-style custom-made technology and the Japanese-style mass production technology, and thereby able to create a new production approach satisfying consumers thirsty needs both handcraft-type quality and mass-production type e prices. Cuckoo, another example of path-creating catching-up, offered new products to the consumers by combining effectively the gas-pressure technology and the old electric rice cookers technology. Thus, their cooker is able to offer both conveniences of electric cooker and quality of gas cooker. Another company of HJC Helmet developed new synthetic plastics from blending two kinds of materials acrylonitrile butadiene styrene (ABS) copolymer and polycarbonate (PC) plastics. The new plastics is a real novelty as it stroke a critical balance between hardness and shock absorbing resilience, which was previously regarded as incompatible each other. This feature has become a great selling point for HJC Helmet. Finally, while it used to specialize low-end segments, Amore Pacific entered the high-end cosmetic markets with newly internally-developed oriental herbal cosmetics rather than copying the existing cosmetic products originating from the West. While these cases highlight the importance of path creating based on innovation capability, specifically in the area of product development, we notice sectoral differences over how to create your own path and products by cultivating new knowledge bases.

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If target technology is newer, learning from external sources (acquisition of explicit knowledge) becomes crucial. Shimro Musical Instruments, for example, invited the German artisans to learn their core production technique; Hankook Chinaware learned from Royal Doulton Group, as well as from Miji Tech. On the other hand, if target technology is more related to ones prior knowledge bases, application of tacit (internally developed) knowledge to new product development is essentially required for successful catching-up. The firms including HJC Helmet, Lock&Lock, and Aurora World accumulated tacit knowledge developed through trials and errors, and therefore nurtured their innovation capability. . Finally, if target technology tends to evolve fast and integrative along with other fields, as witnessed in the online industries, mergers and acquisitions may be an effective strategy to keep updated with new product technology and knowlege. Like Google or NHN, many firms have forged ahead by acquiring others which possess new technology.

5.2. How to handle the Key Challenges in the Course of Catching-up and to Move beyond the Entry Barriers

The next task for firms who can conduct product development on their own capacity is to make good sales performance. Because of the insufficient marketing skills, many firms, even with innovation capability, find themselves frustrated in the middle of competition against the forerunners (Berger and Lester, 2005; Fuller, Akinwande, and Sodini, 2005). The threats arise when the firms, previously subcontractors (OEM), now have to build distribution channels and engage in sales. Upon witnessing subcontractors

26

upgrading to OBM, old buyers frequently turn to compete against them, trying to curb the growth. We have observed that domestic conglomerates, the big buyers for domestic suppliers, tend to turn aside local supplies. Since the quality of supplies determines that of the completed goods, conglomerates usually behave picky over procurement. As a result, unless both product quality and price are superior to other suppliers, negotiation does not even begin. The cases discussed in this study suggest how later entrants should couple technological catching-up with sales. Some knocked at emerging markets earlier than entering advanced economies; others adopted the sales-on-credit strategy. If a firm expands to an advanced economy as a stand-alone, hiring several marketing experts from the host country is an essential tip. Alternatively, a firm may consider a more recent and less costly marketing approach to attract customers. Rock& Rock and Missha, for example, relied on e-commerce or TV-based mail orders for marketing channels. By adopting the latest marketing technique that no forerunner explored, these firms successfully penetrated into the new businesses. Another obstacle in the course of catching-up is the forerunners attempts to deter growth of the emerging rivals. Transition from OEM to OBM ordinarily sacrifices relational disconnection with the current buyers, the lead brands (Arrunada and Vazquez, 2006). What is worse, the lead brands often file lawsuits against new entrants, or execute sharp price-cut or even dumping. As the history of the Korean business illustrates, once the Korean suppliers successfully developed new products, they always struggled in the following attacks of predatory pricing by the rivaling firms in advanced economies.

27

Aurora World, Sunstar, and Jusung Engineering, all without exception, had to go through hardships of litigation. Their experiences demonstrate that firms on the catching-up track should be well aware of the potential challenges imposed ahead by the forerunners, particularly about battling over intellectual property rights. Otherwise, they may want to give up halfway or even may end up with bankruptcy. In this regard, the strategic action of Aurora World to these challenges is perhaps one of the best antecedents in the catching-up history. In order to prepare for any possible litigation, Aurora World got insured for manufacturing goods liability, and thus successful negotiated with a plaintiff when a real legal dispute occurred. In addition, as an extension to the catching-up preparation, the firm went incognito toward the OBM status: when building its own sales network in the United States, Aurora World registered as a new name for the subsidiary in order to veil its identity. Likewise, Cuckcoo did not disclose in public any plan for new product development; even its R&D team worked only at night, avoiding the eyes of rivals.

5.3. Sustainable Positioning of Post-Catching up and Building My Entry Barriers: Continuous Innovation and Tacit-Knowledge Promotion

Path-creating catching-up requires R&D-based product differentiation as a strategic basis of an entry to the target market. Even after catching-up, the significance of continuous learning and innovation as a determinant of competitiveness never diminishes. As our case study shows, firms frequently fail to sustain their positions once achieving catching-up, and fall behind again. In general, the failure results from under-development

28

of mechanism that supports continuous innovation and learning. If such mechanism is not established, subsequent development of products or processes cannot be undertaken. Missha, for example, lost competitiveness in the market due to its neglect of R&D after catching-up. In contrast, The Face Shop, a later entrant who had emulated Missha, increased the expenditure on updating with cosmetic technology available outside and, consequently, outran its benchmark. In addition to continuous innovation and learning (from others), firms may want to build their own entry barriers to strengthen their post-catching up positions. The nature of entry barriers varies, however, we have observed that the building blocks of entry barriers are more likely to be tacit knowledge rather than codifiable knowledge. Cuckoo, for example, consumed 4,000 tons of rice in order to find an optimal pressure for ricecooking; HJC Helmet also repeated countless experiments to identify the best alloying ratio between two different plastics materials; Shimro Musical Instruments, after a long struggle, finally developed new urethane mould that overcomes weaknesses of both wooden and iron moulds; Rock&Rock experimented innumerably to find a new plastic glassware cap that satisfies pliability, hardness, and durability. The cases demonstrate that the most important type of technical knowledge is obtained through learning-by-doing rather than a priori scientific research. The field expertise, once acquired, becomes formidable entry barrier that others cannot easily overcome. In fact, industries of high entry barriers are largely of two types: (a) high technology-oriented or (b) tacit knowledge-based industries. Overcoming entry barriers in the high-tech industries requires acquisition of excellent human resources or construction of cutting-edge research labs. Thus, given the financial constraint that small

29

and medium-sized firms face, it appears that entering (a) type industries is beyond their capacity. Further, engineering scientifically elaborated technologies is sometimes dangerous for small and medium-sized firms because the strategy always runs a risk of win-it-all-or-nothing. Accordingly, for small and medium-sized firms, entering (b) type industries seems to be a less risky choice. Simply put, it is practically more feasible for small and medium-sized firms to develop proprietary knowledge from experiencing trials-and-errors rather than to create frontier technologies based on the rigorous scientific experiments. With the former approach, the firms can leapfrog into the target business at low expense. Further, the new tacit knowledge does not only constitute core technology but also mints idiosyncrasy of a firm.

5.4. Branding, Corporate-Image Building, and Standardization

Tacit knowledge, once patented, becomes disclosed to competitors and no longer serves core technology. While filing a patent application means defining a set of claims concerning the concretization or application of an idea, in exchange for patent rights the inventor must publicly divulge technical details on the new knowledge (Foray, 2004). Hence, patenting often presents numerous situations in which the effort to protect ones tacit knowledge results in jeopardizing free and public access to it. Therefore, by avoiding patenting, firms sometimes can better protect tacit knowledge and can maintain sustainable market positions plus reputation in the industry. Once tacit knowledge turns into explicit knowledge, like patenting an optimal level of

30

temperature or pressure, the trade secret loses its proprietary nature. Tacit knowledge, in this regard, is recommended to keep confidential in the form of product brands rather than patents. This notion has been supported by many cases. Aurora World, Hankook Chinaware, Rock&Rock, and Shimro Musical Instruments covered up their possession of tacit knowledge when moving from the OEM into the OBM status. With the strategy, their post-catching up positions were not threatened at all albeit the fast followership by the Chinese firms. Corporate image (CI), similarly to the branding strategy, constitutes entry barriers. The cosmetic business is a typical example that shows how important it is to build a good corporate image for sales and pricing. Amore Pacific, for example, upgraded its oriental herbal cosmetics to the premium market after refinement of its image. Likewise, The Face Shop, despite its moderate cosmetic prices, linked its image to the natural skincare by promoting the botanical ingredients. In contrast, Missha, appealing only with price, did not concentrate on building corporate image. As a result, it fell behind in the low-end cosmetic market. Finally, the experiences of Shimro Musical Instruments, HJC Helmet, and Cuckoo suggest that early product standardization be a powerful strategy in building entry barriers against others. As we observe the safety standards for helmets (snell standard) or the size standards for violins (based on Stradivari), meeting the required safety standards or functional specification has been extremely hard for later entrants. In this light, the markets which strongly require product standardization are less likely to be intimidated

31

by new entrants. A corollary of this perspective is that firms can strengthen their postcatching up positions more easily in these markets.

5.5. Globalization

In the age of global business, upgrading to the OBM status is always accompanied with going offshore. The Korean OBM firms conduct R&D in Korea (home country) and operate overseas subsidiaries for production and distribution. By going global, the firms have enhanced price competitiveness as an entry barrier. Aurora World, for example, established factories in both Indonesia and China. When the local wages in China increased and the government policy was uncertain, the firm flexibly re-allocated production volume from China to Indonesia. As a result, Aurora World continued to maintain price competitiveness. How come did these small and medium-sized firms become capable of doing global business so efficiently? We argue that it is because they are category killers. More specifically, they are specialized in particular businesses; at the same time, they operate on a global scale the entire logistics until the products finally reach customers. The Korean firms have favored two types of globalization strategies en route to the category killer destination. One strategy is product segmentation. Low-end products are manufactured and sell in the Southeast Asian countries; in contrast, high-end products are developed and produced in advanced economies. Shimro Musical Instrument, for example, produces Saint Antonio (a low-end violin product) in China and sells in the

32

local market. However, the firm produces Karl Heinlich (a high-end violin brand) in Germany and supplies it to the local market. 1 The other strategy is market segmentation. Even for an identical product, firms often adopt different marketing strategies in emerging markets vis--vis in advanced economies. Amore Pacific, for example, has never highlighted country-of-origin to the consumers in advanced economies; in contrast, in emerging markets, the firm has accentuated the country-of-origin as a selling point for local marketing. In the case of Rock&Rock, all glassware products manufactured in China are exported to the United States, based on the observation that the American consumers do not care whether a glassware product is made-in-China or made-in-Korea. However, noting that the Chinese consumers think the opposite, Rock&Rock imports from Korea and is focusing on madein-Korea for the China promotion. Finally, Aurora World has been manufacturing in China since 1990s but it does not promote local sales because of the fledging legal institutions and the low purchasing power in China.

5.6. Sectoral Differences in Catching-up

Our investigation of catching-up cases is based on the framework of sectoral system of innovation, a perspective that the layout of competition among firms is shaped by the characteristics of an industry where competition occurs. We posit that traits of knowledge, technology, and market structure within an industry affect aspects of competition as well as the possibility (or difficulty) of catching-up.

In Korea, Shimro Musical Instrument is posed with a gray-area strategy.

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There are several prior studies that addressed sectoral differences in catching-up. For example, in the information and technology industry, the productivity of the Korean firms outgrew that of the Japanese firms but, in the automobile industry, the Korean outgrowth in productivity curved or the productivity gap between two countries still remained constant (Jung and Lee, 2008); in the information and technology industry, Samsung has advanced technological progress up to Sony. 2 In contrast, in the steelmaking industry, technological gap between Posco and Shin Nippon Steel still substantially exists in terms of technical quality and total factor productivity (Jung, Lee, Fukao, 2008). The catching-up differentials across industries can be illustrated by the sectoral differences in knowledge and technology (Lee, 2007; Park and Lee, 2006). More specifically, knowledge transfer and learning is difficult where core technical knowledge is tacit. In such industries, catching-up is less likely to happen. We argue that it is the reason why catching-up is very rare in the automobile or the machinery industries. On the other hand, catching-up occurs more frequently in the industries of shorter technology life-cycle (TLC). TLC is regarded as technological maturity of a product, and measured with age of the oldest patent cited for a new patent application (UNIDO, 1996). Shorter TLC means a lesser need to master the previous technologies for successful product development. From the viewpoint of the existing firms, shorter TLC is a considerable disadvantage because catching-up does not require a thorough understanding of the older technologies. Notably, the electronics and the telecommunication industries have shorter TLC, which means that innovation in the
2

Measured with the number of registered patents or with patent quality. For more details, see Jung and Lee (2008).

34

industries is based primarily on the recent technologies. We thus argue that the shorter TLC is attributed to presence of more catching-up cases in the electronics and telecommunication industries than in other industries. A subsequent question arises: how the TLC hypothesis explains accomplishment of catching-up, if any, in the automobile or ship-building industries where tacit knowledge is so important? Our answer is that a substantial part of tacit knowledge in the industries is associated with operation of equipment and production facilities. Therefore, if an automobile assembler builds up-to-date production lines, it may be able to produce vehicle better than the forerunners. 3 However, even with state-of-the-art equipment and facilities, catching-up has been baffled because of difficulty in acquiring tacit knowledge and in developing a capability to integrate tacit knowledge. We propose that overcoming the obstacles utterly depends on process renovation and the size of human resources. As the Korean shipbuilding industry illustrates, the Korean firms continued to renovate process by securing an excellent pool of design engineers, and eventually became capable of keeping pace with the Japanese firms in both design and construction capacity. It may be difficult for small and medium-sized firms in the automobile or shipbuilding industries to invest in process innovation or to enlarge human resource pool. However, our perspective does not exclude any possibility of catching-up by small and medium-sized firms. In the automobile or ship-building industries, the small and medium-sized firms, who usually supply to large conglomerates, tend to develop tacit knowledge and integration capability through close collaboration with their customers.

Parts and components are another issue and we dont discuss supplies in this study.

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The collaborative network has generated multiple combinations of tacit knowledge over time. Technological upgrading (followed by market success) at supplier level has been achieved via assembler-suppler relationship, as the Japanese automobile industry suggest. Vice versa, Toyota has also benefited from the close supplier relationship, which helps the firm keep its productivity always above that of Hyundai Motors. The TLC hypothesis that a shorter technology life-cycle provides followers with more opportunities of catching-up corresponds to the leapfrogging hypothesis that followers are more likely to catch up when technological paradigm changes. Both views stress on the same strategic implication for catching-up: followers should make the best use of the windows of opportunities opening up when paradigms change. Whereas pathcreating catching-up is a strategic choice at firm level, environmental changes or emergence of new technological paradigm often occur unexpectedly, presenting later entrants a surprising opportunity of catching-up. Several cases support the perspective. As the digital television industry illustrates, the Korean firms overtook the Japanese electronics firms when technological paradigm in the home appliance industry changed from the analogue to the digital technology. Similarly, KTF, a Korean telecommunication service provider, came to outperform SK Telecom when the technological paradigm shifted to 3G, although it had been lagging behind its rival in the 2G era. Since the forerunners who have spent on the current technology tend to be reluctant to proceed to newer technology, there is a possibility that later entrants win over the market competition when technological paradigms change. If failing to adapt to the changing paradigm, even a lead firm can collapse quickly, as the Polaroid case confirms.

36

Polaroid used to be a leader in the disposable camera business but did not timely cope with emergence of the digital camera technology. The paradigm shift does not only take place in technology per se but also in its marketing. In the cosmetic industry, Missha quickly sensed the opportunity of the online sales, which was an emerging marketing channel at that time. Using the Internet, the firm attracted consumers at much less expense than the forerunners. Missha later went offline, building a brand-shop channel based on a highly simplified distribution network.

5.7. Role of Government and Policy Implications

Catching-up, a part of competition, is basically concerned with the behavior of firms. Government often intervenes because catching-up involves industrial characteristics. When foreign firms systematically stay in the way of the domestic firms with intent to reinforce their market power, government tries to protect the domestic firms. We argue that the industrial policies designed to nurture late entrants (or small and medium-sized firms) should consider sectoral differences. The sectoral differences normally include characteristics of target industries as well as technological paradigms. Without considering sectoral differences, implementation of the industrial policy will cannot achieve its goal at all. In our study, we claim that the goal of government should be to help small and medium-sized firms upgrade their industrial portfolios. By upgrading the industrial portfolio, small and medium-sized firms become transformed into the category killers (innovators). As our case study illustrates, the dynamics requires conversion of tacit

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knowledge into proprietary knowledge, which involves learning-by-doing based on innumerable times of trials and errors. Yet small and medium-sized firms tend to shun this process due to their limited capacity to cope with possible crisis. Therefore, an efficient industrial policy should help such firms small and medium-sized firms having technological capabilities challenge for developing tacit knowledge. Further, government should selectively promote small and medium-sized firms in industries that require tacit knowledge rather than randomly fund whatever R&D projects. As knowledge of a later entrant becomes more tacit and proprietary, the firm is more likely to survive from competition against lower-wage countries (such as China) or from threats imposed by the forerunners. If small and medium-sized firms are promoted category killers by the industrial policy, the governmental intervention is desirable because the new group of category killers will buttress growth of the Korean economy.

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Table 1. Antecedents: The 12 Korean Cases

Strings OEM to OBM

In-house Design improvement

Licensing; In-house R&D Design improvement

In-house Material improvement

Technical consulting New production method

Access to sales lab overseas

Use of existing channels and premium testers Target new premium market

Use of new sales channels Product upgrading

Product and market segmentation New product

Ways to Enter New Market Post-catching up Strategy Catching-up Patterns Global Strategy

Target premium nichemarket Speed (early design R&D)

Patenting

Patenting

Satisfaction of product standards Path-creating Production segmentation in emerging markets and advanced economies

Path-creating

Path-following

n.a. Manufacturing in China

Manufacturing in China and Manufacturing in Indonesia Indonesia

44

Firm Products Catching-up Performance Learning Sources

Amore Pacific Cosmetics Market share increase

Missha Cosmetics Catching-up failed

The Face Shop Cosmetics OEM to OBM

NHN Online portal Market share increase

In-house; Partially licensing; Collaboration with universities New product development

Not focused on technological learning Higher efficiency in sales and distribution Low price and reasonable quality Use of new sales channel

Technology licensing; Inhouse R&D Patents; Efficiency in and distribution Benchmarking Missha

Acquisition; In-house R&D Database; online games; Patents Diversifying services and contents Mergers and acquisition

Innovative Achievement Marketing Strategy Ways to Enter New Market Post-catching up Strategy Catching-up Patterns Global Strategy

Flagship opening at luxury spas and salons Target new premium market

Strict franchise management; free testers Building a corporate image for natural ingredients Path-following

Building a high-end corporate image Path-creating

Establishment of brand shop system n.a.

Overseas patenting; Active investments in R&D Path-creating

Overseas marketing

Outsourcing to OEM or ODM

Outsourcing to OEM or ODM

Overseas subsidiary (Japan, China, and U.S.)

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Firm Products

Jusung Engineering Embroidery machinery

Sunstar Production equipment for semiconductor and flat panels Market share increase

Cuckoo Rice cookers Helmets

HJC Helmet

Catching-up Performance Learning Sources

OBM; Market share increase In-house R&D; Collaboration with universities; Licensing Core technology development Good relationship with LG and Samsung

OEM to OBM

OEM to OBM

In-house R&D; Licensing from the Belgian firms

In-house

In-house

Innovative Achievement Marketing Strategy

New product

Product upgrading

New material development

First-use-later-pay strategy; Improvement of customer services Product quality and low price

Focus on domestic market; Branding; Local adaptation; New product

Exploit mid-end markets; Local adaptation

Ways to Enter New Market Post-catching up Strategy Catching-up Patterns Global Strategy

Focused on emerging new technologies Recruiting local marketing experts; Path-creating

Product diversification

Independent product design

Satisfaction of safety standards Path-creating

Satisfaction of product standards Path-creating

Path-following

Regional segmentation

Enter emerging markets and then expand to advanced economies

Overseas sales (Japan)

Price segmentation in emerging markets and advanced economies

46