Knowledge diffusion, economic *growth, and industrialization: A study of the Korean industrialization process

For economic activity, there are important traditional factor inputs such as capital and labor. For economic development, however, the simple accumulation of these factors is not as feasible as is observed in many under-developed countries, because an economy cannot accumulate these factor inputs for its own sake. Other indispensable complementary factors are needed in economic development such as human capital and technical knowledge. In this study, the accumulation of expertise in an economy with ‘learning by doing’ in past periods and diffusion of knowledge is regarded as indispensable, complementary inputs for economic development. Knowledge diffusion is a part of the externality that affects the long-term performance of productivity enhancement. The externality effect also includes ‘demand externality’ where the linkage between industries through supply and demand of intermediate goods engenders positive economic effect.;To maximize the externality effects in a market economy, the entrepreneurial activity should be open to individuals who have creative ideas and acute minds to find profitable business opportunities. Then, the business opportunity regenerates itself through the external effects such as the linkage of industries and knowledge diffusion. This multiplier effect is an essential factor for rapid industrialization in developing countries. Entrepreneurial activity has been a significant determinant for the structural change of Korean manufacturing industries. Therefore, the policy suggestion of this study is that government industrial policy should be organized to crowd in the private entrepreneurial activity through enhancing proper mechanisms for encouraging it rather than to crowd it out due to excessive government intervention into private economic activity.