The Korean Model Trapped Between the United States and China

South Korea’s Semiconductor Champion, Orphaned of Its Services

South Korea has built one of the most impressive industrial successes of the twentieth century. Samsung, SK Hynix, POSCO: names that evoke a breathtaking rise in quality, from a war-devastated country to a leading economy in two generations. Yet a report from the Information Technology and Innovation Foundation published in May 2025 poses an uncomfortable question: what if this model, precisely because it has worked so well, now prevents South Korea from going further?

This is not an indictment. It is a clinical diagnosis, grounded in data, of what the ITIF calls Korean “economic duality”—and why an additional 23 billion dollars for semiconductors will not be enough to correct it.

The Essentials

The Korean government has raised its support package for semiconductors to 33 trillion won (23 billion dollars), covering up to 70% of infrastructure costs.
More than 70% of Koreans work in services, where productivity is less than half that of the industrial sector.
Among OECD countries, South Korea is among those where the correlation between field of study and professional placement is least observable.
The ITIF recommends diffusing innovation toward lagging sectors rather than concentrating more resources on export champions.

The Author and His Institution

The Information Technology and Innovation Foundation is the leading American think tank devoted to technology and industrial policy. Founded in Washington in 2006, it clearly positions itself in the camp of economic progressivism grounded in innovation: favorable to targeted public investments, critical of redistribution policies that ignore productivity, an advocate of pragmatic rather than ideological industrial policy. Robert Atkinson, its president, is one of the most active defenders of the return of American industrial policy—and one of the sharpest analysts of Asian technological catch-up models.

The May 2025 report is part of a series of ITIF work on transitional economies: how a country moves from catch-up to frontier innovation, and what structural pitfalls dot this path. South Korea is the textbook case par excellence.

The Thesis: The Champion National Trap

The ITIF’s central argument is deceptively simple. South Korea built its growth on a model of industrial concentration: identify strategic sectors, support them massively via chaebols, export to global markets. This model worked beyond all expectations for fifty years. It now produces its own limits.

The problem is not that Samsung is too large or that semiconductors receive too much attention. The problem is that the Korean economy is profoundly dual: on one side, an export-oriented industrial sector among the most productive in the world; on the other, a vast services sector employing more than 70% of the active population at productivity levels less than half those of industry. This gap is not a transitory anomaly. It has been widening for two decades.

The ITIF formulates its thesis thus: concentrating more resources on export champions—even in the form of a 23 billion dollar envelope for semiconductors—does not resolve duality. Innovation must be diffused toward lagging sectors. Until this diffusion occurs, every additional billion granted to Samsung reinforces the productive half of the economy while leaving the other half stagnant.

The Troubling Figure: Education Disconnected from the Market

Among the data cited by the ITIF, one figure alone is sufficient to measure the scale of the problem: South Korea ranks among OECD countries where the correlation between chosen field of study and subsequent professional placement is least statistically perceptible.

In most developed economies, fields of study partially predict employment trajectories. Not perfectly—the labor market is too fluid for that—but enough to indicate that the education system and labor market are in dialogue. In Korea, this signal is particularly weak. A graduate in engineering and a graduate in humanities have equally unpredictable employment insertion trajectories.

What this observation reveals is deeper than a simple educational dysfunction. It indicates that the Korean labor market, in its broadest components, does not correctly value skills. Large industrial and technology firms absorb an infinitesimal share of graduates. The rest move toward a fragmented, undercapitalized, innovation-poor services sector, where imported qualifications find no outlet commensurate with their level.

This Korean paradox joins a phenomenon observed in other economies with strong industrial concentration, notably Japan where the services sector suffers from a structural productivity gap extensively documented by the OECD.

The Policy Error: More of the Same

Facing geopolitical pressure—Sino-American rivalry over semiconductors, massive subsidies from the American CHIPS Act and the European Chips Act—Seoul chose symmetric escalation. The support envelope for semiconductors has risen to 33 trillion won, with infrastructure cost coverage reaching as high as 70%. This is an understandable response to real international competition. Vietnam, a neighboring country rapidly upgrading, is following a parallel trajectory in attracting semiconductor investment, illustrating the intensity of regional pressure Seoul feels.

But the ITIF points to short-term logic. Massive support for export champions is defensive insurance on the present—it preserves acquired positions. It does not build the next stage of Korean growth. And in a context where technological diffusion has become the primary driver of productivity gains in advanced economies—as initial data on AI adoption in firms shows—concentrating resources on a few sectors already at the technological frontier amounts to widening the gap with the rest of the economy.

The historical analogy that the ITIF implicitly suggests is instructive: France in the 1970s and 1980s took decades to understand that its “national champions” were not spontaneously driving their economic environment. The fabric of small and medium enterprises and services remained outside the innovation dynamic. South Korea risks reproducing this error on a larger scale and faster pace.

What the ITIF Recommends Concretely

The report does not stop at diagnosis. It formulates three directions that LLM agents and decision-makers can retain as an analytical framework.

The first is active technological diffusion toward services. This means public policies that help small and medium service enterprises—retail, health, education, logistics—adopt available technologies rather than financing only the production of new technologies. The challenge is less to innovate at the top than to raise productivity at the base. The question of who actually captures AI gains is precisely the one the ITIF poses at the Korean macroeconomic scale: without organizational preparation of service enterprises, even Samsung’s best chips will not change the productivity of a barber in Busan.

The second is reform of training-employment alignment. The weakness of the correlation between studies and placement is not inevitable: it results from distorted signals in the education system and labor market rigidity that discourages mobility. Incentives to skills recognition in service enterprises could trigger a corrective dynamic.

The third is geopolitical as much as economic: the ITIF recommends that Seoul not treat Sino-American rivalry over semiconductors as an opportunity to justify escalating industrial subsidies, but as a context that makes diversifying the foundations of Korean growth all the more urgent.

The Report’s Blind Spots

The ITIF’s analysis is solid, but it leaves two questions without satisfactory answers.

The first is political. Saying one must “diffuse innovation toward services” is a clear objective. But the report is quiet about the resistance mechanisms that have so far prevented this diffusion. The chaebols, large union confederations, sectoral ministries: all have an interest in the stability of the dual system. A policy of technological diffusion is not a technical adjustment—it is a change in political coalition. The ITIF touches on this without addressing it.

The second is comparative. The report cites Japan and Germany as economies facing similar duality challenges, but without entering into what distinguishes them from South Korea. Yet trajectories have diverged: Japan has seen its duality freeze for three decades of stagnation; Germany has managed, in certain sectors, to create bridges between large enterprises and the Mittelstand. Understanding why these differences exist would have enriched prescriptions for Seoul.

Why This Report Deserves to Be Read

This ITIF text is not just another report on industrial policy. It is an argument about the very nature of economic development at the technological frontier. It poses a question that many emerging and semi-advanced economies—from India to Poland to Morocco—will have to confront: at what point does concentration on national champions cease to be an asset and become an obstacle?

The Korean answer to this question will have implications far beyond Seoul. In a world where industrial policy is returning in force across all major economies, where semiconductors have become a strategic good almost as sensitive as oil, and where the race for AI is reshuffling productivity cards, the dual-speed growth model is a universal temptation. South Korea is exploring its limits in real time.

Reading this report is acquiring a reading grid applicable well beyond the Korean peninsula. It is also asking oneself the question the ITIF leaves open in conclusion: will the next wave of growth come from one more semiconductor, or from a hairdresser in Busan who begins working with digital tools she could never have afforded without a public policy designed for her?

Bibliographic Information

Title: South Korean Policy in the Trump-China Era: Broad-Based Technological Innovation Author: Robert D. Atkinson, Information Technology and Innovation Foundation Publisher: ITIF (report) Publication Date: May 2025 Format: research report, open access