IVAs President - Some thoughts on Picking Winners

Dear Friends of IVA,

5.6 trillion Swedish kronor. That is how much South Korean President Lee Jae-myung has pledged to invest in the domestic semiconductor and AI industry over the next 20 years. The goal is to create the world’s largest semiconductor cluster in Yongin and build a completely independent AI infrastructure and technology stack (the entire chain, from chip to cloud) without relying on foreign technology (read: the US and China). But the plans don’t stop there. South Korea is offering a “third solution” for countries that do not want to choose between, or become dependent on, the US or China. It is targeting markets in developing countries in Southeast Asia, the Middle East, and North Africa, as well as Europe. 

South Korea views the new geopolitical landscape as a major opportunity. And if anyone can benefit from this new world, it is South Korea. When Saudi Arabia faced US export controls, it instead opened the door to Korean AI companies – merely one of many examples. 

I just returned to Sweden after a very interesting visit to Seoul, where I had the opportunity to discuss the situation with representatives from government agencies, industry, and the startup sector. The government aims to make South Korea a self-sufficient world leader in AI, and it is doing everything possible to succeed. This involves setting strategic government priorities aimed at building a completely domestic AI stack. The way the government supports and drives world-leading technology companies has little in common with what we in Europe traditionally associate with state aid or industrial policy. 

While South Korea does pursue a kind of industrial policy, it revolves around government priorities for selected strategic technology areas rather than rescuing industries in decline. In South Korea, “picking winners” isn’t about keeping individual companies afloat (there is a clear understanding that the state is a poor judge of business cases), but instead it is about identifying industries and technology sectors in which the country has the potential to become a global leader. Against the backdrop of the new geopolitical reality and rapid technological development, Seoul has now shifted its focus to semiconductors, AI, batteries, the green transition, energy efficiency, and technological sovereignty. 

The government dares to prioritize. It uses a mix of targeted R&D funding, tax incentives, credit support, public procurement, regulations, and cluster policies to drive global winners in the selected technology areas. The South Korean model also involves the government fostering fierce competition among companies. Take Rebellions and FuriosaAI – two South Korean AI startups that are serious challengers to Nvidia. The competition between them—and other domestic tech companies—is fierce. This ensures that government incentives and support do not make the companies inefficient or sluggish. It keeps them on their toes. Add to that the fact that South Korea invests nearly five percent of its GDP in research and development (public and private investments combined), while the EU average barely reaches two percent. 

I believe we have a lot to learn from South Korea. As an economic historian, I have a healthy skepticism of concepts such as “active industrial policy” and state aid, especially when they hinder structural transformation, undermine market forces, or cause companies to focus on securing advantages from the state rather than sharpening their competitiveness. But I believe we need to update both our old worldview and our economic theories, and we must reflect on the state’s role in technological development and industrial transformation. 

Recently, I have observed a more nuanced and pragmatic line of reasoning among some economists and institutions. The World Bank recently published a report in which it at least partly redefines and breaks with its former, dogmatically negative, stance on state aid. The Governor of the National Bank of Belgium, Pierre Wunsch, recently questioned the free-trade fundamentalism so characteristic of Northern Europe in the Financial Times: “Openness to trade and strict state-aid rules work in a world that was rule-based. This world is gone, and if you cling too much to a world that is gone, you’re just naïve.” Wunsch argues that this dogmatic stance hinders Europe’s competitiveness in new technologies. Why should we insist on a “level playing field” when no one else does? 

Is it time to reflect on the state’s role in technological development? In many places, we now see the state taking a significantly more active role in prioritizing and driving forward global winners in strategic technologies, while allowing market forces to play out. Sweden is a very small market, and our companies are therefore entirely dependent on how the EU internal market functions. How can the Swedish government (or the EU) take a clearer role in actively prioritizing strategic capacity? 

Last fall, IVA presented an analysis mapping Sweden’s position in 48 strategic technologies, and this week we are releasing two reports in priority technology areas: one on advanced manufacturing and one on semiconductors. We invite you to register for the presentations. 

South Korea has been hit very hard by the crisis in the Middle East and the blockade of the Strait of Hormuz, as it is extremely dependent on the region for oil, gas, and raw materials such as helium and bromine. I am closely monitoring how it is handling this new crisis, but given that South Korea has many strong assets, such as a robust industrial base, a large domestic market, and world-leading research and technology, I believe it will weather this crisis as well.