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Industry Report

Industry reports, briefs and video-clips issued by Samsung Economic Research Institute

Task of Companies and Government for Development of Service Industry

Task of Companies and Government for Development of Service Industry

KIM Jin-Hyuk

June 1, 2009


Welcome to our video program. I'm Jin-Hyuk Kim from the Technology & Industry Department.

Currently, there is considerable discussion about the need to develop and cultivate the service sector. Service industries create twice as many jobs as the manufacturing sector. In other words, the cultivation of the service sector is a key to resolving unemployment.

Demand for services rises in terms of scale and scope as incomes climb. From this perspective, the service sector has the most promise for the economy. Most of service industries, including finance and logistics, are related directly to improving the competitiveness of the manufacturing sector.

In early May, the government unveiled a service sector development plan that stressed nine promising service areas, including design and logistics, and presented a blueprint to develop and improve them.

The plan's focus is regulation rationalization and the removal of discrimination between service and manufacturing industries. In a nutshell, the government policy is based on removing obstacles. Thanks to this move, the regulations of the service sector, excluding medical and educational areas, have already been alleviated greatly or will be alleviated. However, deregulation alone will not turn the service sector into a national growth engine. What is needed most is a “growth support policy” in which the government gives direction and support to the sector's development.

The service sector accounts for 58% of Korea's GDP, the lowest among the 30 OECD countries. Nine out of 10 service companies in Korea have less than five employees. The share of such companies in the Japanese service sector is estimated at about 60%. Korea's service sector is characterized by small markets and businesses. That means small businesses have to fight tooth and nail for a larger share in the small domestic demand market.

Another problem facing the Korean service sector is low productivity. The per-capita added value of the service sector is only 50% of that in the manufacturing sector, much lower than the 90% in the United States and 85% in Japan. The development of the service sector depends on the capability to increase the number of competitive service companies. To this end, it needs to expand the market size, as well as, improve overall productivity.

To improve the productivity, more service R&D is needed. The world's major service companies are adopting the innovation technologies of the manufacturing sector like the Six Sigma. Ritz Carlton Hotel, for example, improved the service quality by setting up a database of information on the habits of clients, e.g., what types of pillows they like and how they use the pillows when they sleep.

The crux of service is how to read the minds of consumers. Neurology and psychology are a fundamental to understanding consumer thinking. Today major service industries in industrialized countries are combining the knowledge of academic areas, including humanities and natural science, with actual services. This trend, called “service science,” aims at improving service quality and performance. Since Korea lags in this area, the government needs to expand R&D support for it.

To expand markets, three strategies are worth exploring. First, business opportunities can be found in potential demand that accompanies changes in demographics and income. Major service companies of the industrialized countries are adept at seizing opportunities amid such changes. Benesse Corporation of Japan, for example, began as a publisher of educational material. Amid a change in demographic structure, Benesse expanded its business to preschooler education, nursery magazines, and nursing care services for the elderly people, becoming a service provider from cradle to the grave. Thus, it evolved into a provider of comprehensive life cycle services.

Second, efforts are needed to create new markets and new business models. Internet shopping, which combines retail/wholesale business and IT, has mushroomed into virtual department stores within a relatively short period of 10 years. Another example is playing golf indoors with a screen simulator. The increasingly popular product combines golf clubs with new sensing and simulation technologies. Just like Scotland is a mother country of golf, Korea has become a mother country of screen golf.

Third, attention should be turned toward overseas demand. The Hungarian town of Sopron, for example, was famous only for its castles of the Middle Ages. Now it is known as a center for dental implant surgery. Many dental hospitals occupy the ancient surroundings of Sopron and the area has about 1,500 of the nation's 4,000 dentists. Intense competition among the dentists led to a sharp improvement in the quality of service and facilities. About 200,000 foreigners flock to the city annually for dental treatment. The small city with a population of about 50,000 people now accounts for 10% of Hungary's total GDP, indicating that the city's medical services have added significantly to the large number of tourists who visit Soporn.

The government's role is to support these kinds of corporate efforts. Companies may feel it is too risky to invest in new ventures, even if the potential reward could be high. For those who hope to enter the promising future industries, the government needs to reduce the risk by providing them with incentives to encourage corporate investment and to promote the establishment of new businesses.

We have examined the tasks ahead for businesses and government to further develop the service sector. However, the responsibility in raising competitiveness lies primarily with companies themselves.

Thank you for watching. I'm Jin-Hyuk Kim.

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