Around the world, governments are again using the tools of industrial policy -- subsidies, tax incentives, public finance, trade measures, and strategic regulation -- to shape their economies. South Korea is no exception.
President Lee Jae-myung's government has launched an ambitious strategy to promote semiconductors, AI infrastructure, robotics, and other frontier industries, with the goal of bolstering future growth and competitiveness. But the path ahead is littered with obstacles.
The return of industrial policy is not simply a policy trend. Markets often underinvest in new technologies because of coordination failures, learning externalities, and economies of scale. But at a time when technological leadership and supply-chain resilience have moved to the centre of national-security agendas, governments cannot afford to wait. They are now asking not whether they should pursue industrial policy, but what kind is right for them.
South Korea has been here before. In the 1970s -- amid persistent threats from North Korea and rising security concerns stemming from the Nixon Doctrine and the partial withdrawal of US troops from Korea -- it launched the Heavy and Chemical Industry (HCI) drive, aimed at accelerating industrial upgrading and creating new comparative advantages.
Inspired partly by Japan's successful industrialisation, the HCI drive sought to transform the country's industrial structure, promote exports, and reduce its dependence on imported machinery and defence equipment. To this end, the government used targeted credit, tax incentives, foreign borrowing guarantees, and industrial complexes to accelerate private investment in six strategic industries: steel, machinery, petrochemicals, shipbuilding, electronics, and nonferrous metals.
Underpinning the strategy's success was a capable economic bureaucracy -- which coordinated finance, infrastructure, and export promotion -- and sustained political commitment, with then-President Park Chung-hee's long tenure (1963–79) providing the policy continuity that long-term industrial transformation requires. Equally important, South Korea's growing cohort of skilled engineers, managers, and technicians absorbed and improved upon foreign technologies.
The combination of government support and exposure to international competition fostered learning-by-doing and capability accumulation, enabling South Korean firms to ascend global value chains rapidly. In the 1980s, favourable external conditions -- including cheaper oil, lower interest rates, a weaker Korean won, and growing global demand -- provided an additional boost, enabling South Korea's heavy industries to become major export engines.
Such conditions cannot be taken for granted today. Nonetheless, South Korea has little choice but to embark on another state-led technological transformation, this time focused on AI and advanced manufacturing.
The government has announced a national strategy aimed at making the country one of the world's top three AI powers and reinforcing its global leadership in semiconductors. The Special Act on Semiconductors provides infrastructure and regulatory support to accelerate new investment. The Three Mega Projects for a Great Leap Forward aim to develop regional hubs for cutting-edge industries through public-private investment in semiconductors, AI data centres, and robotics.
Together, the government and major firms have announced plans for new investment exceeding 1.5 quadrillion won (US$1 trillion or 33.5 trillion baht) -- roughly two-thirds of Korea's GDP -- marking the country's largest industrial initiative since the HCI drive. Samsung Electronics and SK Hynix plan to invest 911 trillion won in new semiconductor manufacturing hubs, while other leading firms are investing heavily in AI data centres. For its part, the government is offering new financing vehicles -- including a Future Response Fund and a National Growth Fund -- to mobilise long-term capital for strategic industries and innovation ecosystems.
As in the 1970s, South Korea's government is identifying strategic industries, mobilising capital, and framing industrial transformation as essential for economic growth and national security. But unlike the HCI drive, which sought to absorb and build on foreign technologies, South Korea's new strategy aims to compete at the global technological frontier, where uncertainty is heightened, and firms are often better positioned than states to identify the most promising innovations.
The practical challenges are also substantial. Semiconductor fabrication plants and AI infrastructure require enormous capital investment, highly specialised engineers, and massive, reliable supplies of electricity and water. The process of securing these resources, as well as land and permits, could delay projects for years, and it could take years more to get a new semiconductor fabrication facility up and running, making investment decisions highly vulnerable to semiconductor cycles. Today's AI-driven chip shortages could easily become tomorrow's oversupply if demand weakens before new capacity comes online.
Moreover, private firms operate within a much denser regulatory regime today than they did in the 1970s, making private investment less responsive to government initiatives. It does not help that today's democratic politics inevitably produce short policy horizons, making credibility over decades considerably harder than it was under Park.
These challenges are compounded by intensifying competition from China, which is a far more formidable rival today than it was in the 1970s. China has already emerged as a leader in AI and many advanced manufacturing industries, and is rapidly closing the gap in semiconductors, partly owing to sustained state support.
In confronting the challenges ahead, South Korea -- and other countries rediscovering industrial policy -- must recognise the limits of a strategy focused on "picking winners" and directing capital towards them. Only competitive markets and innovators themselves can determine which technologies and firms will ultimately prevail. What governments can and must do is build effective innovation ecosystems by investing in public goods where markets fall short: world-class universities, basic research, reliable energy infrastructure, and efficient regulation.
The HCI drive was not perfect. It encouraged excessive borrowing, investment duplication, and significant overcapacity, creating structural vulnerabilities that would contribute to the 1997 financial crisis. Nonetheless, it transformed South Korea's economy into a capital-intensive technological powerhouse thanks to a rare combination of capable institutions, disciplined implementation, and favourable external conditions.
While those conditions cannot be recreated today, governments can mobilise knowledge, talent, and institutions to compete at the technological frontier, so long as they recognise that uncertainty is pervasive there -- and success much harder to engineer than it was in the past. ©2026 Project Syndicate
Lee Jong-Wha, Professor of Economics at Korea University, is a former chief economist at the Asian Development Bank and a former senior adviser for international economic affairs to the president of South Korea.
