Illicit Trade and the Korean Economy

1. Introduction

1.1. Setting the scene: Innovation and IP infringement

Across the globe, the nurturing of innovation through the protection of intellectual property (IP) represents a catalytic force that propels economic expansion, the creation of well-remunerated employment opportunities and economic competitiveness, while providing avenues for the realisation of imaginative ideas. Innovation also furnishes the impetus for the genesis, investment, and commercialization of novel inventions, commodities, and services, simultaneously buttressing artisans and authors in the diffusion of their creative outputs.

Innovation, however, is undermined when the ideas and achievements of companies, inventors and artistic creators are unlawfully appropriated by infringers of IP. Acquiring an understanding of the impact of IP infringement requires analysis at the macro level, encompassing knowledge of the global magnitude and scope, and at the micro level, through an understanding of the intricate stratagems employed by illicit actors to orchestrate large-scale IP theft for financial gain. Without this understanding, and a grasp of the barriers that impede the effective enforcement of IP rights (IPR), the formulation and execution of effective strategies to address the adverse effects of IP infringement will be difficult.

OECD studies confirm that the magnitude and scope of counterfeiting and piracy affects a multitude of industries that rely on trademarks as integral components of their business strategies. Counterfeit goods affect many sectors, including commonplace consumer articles (such as garments and footwear), business materials (such as spare parts and pesticides), and luxury goods (such as designer attire and premium timepieces). Moreover, counterfeit products raise substantial concerns regarding the health, safety, and environmental hazard risks posed by counterfeit items. Foremost among these are counterfeit pharmaceuticals, but there are also serious concerns with comestibles, cosmetics, toys, medical apparatus, and chemicals.

The OECD studies corroborate the enormous volume of trade in counterfeit goods. Drawing upon data from 2019, the studies estimate that counterfeit products accounted for about USD 464 billion during that year, which represented approximately 2.5% of global trade. This magnitude is on par with the Gross Domestic Product (GDP) of many economies.

1.2. Korean economy: Leading in innovation, but vulnerable to counterfeiting

1.2.1. Korea is an innovation leader

Korea is one of the most innovative economies in the world. Korea’s innovative ecosystem has been made possible due to significant government support as well as private investment activities in research and development (R&D). According to recent OECD statistics, Korea is the second largest R&D spender among OECD countries (Figure 1.1), investing almost 5% of its GDP on R&D in 2019. At the corporate level, Korea is home both to huge tech companies and start-ups working on innovative products. High technology industries such as robotics, artificial intelligence, biotechnology, and clean energy have developed.

Figure 1.1. Gross domestic spending on R&D as % of GDP, 2019

Note: Latest data available for all OECD countries.

Source: OECD (2024[1]), accessed on 10 August 2023.

Another quantitative indicator that highlights the innovative character of the Korean economy is the Global Innovation Index (GII) which ranks world economies according to their innovation capabilities. In GII Korea ranks 6^th among the 132 economies included in the index. Korea ranked first of the 17 economies in Southeast Asia, East Asia, and Oceania. Korea is also considered an innovation leader since relative to its GDP, the country’s innovation performance is above expectations when its level of development is considered.

Korea’s performance is reflected in the number of patent applications, which have been increasing since the 1980s. Figure 1.2 and Figure 1.3 present indices which track Korea's strong patenting activity.

Figure 1.2. Resident patent applications per USD 100 billion GDP for the top 10 origins, 2022

Source: WIPO Statistics Database and World Bank.

Figure 1.3. Resident patent applications per million persons for the top 10 patent countries, 2021

Source: WIPO Statistics Database and World Bank.

1.2.2. Korea is an open economy with high contribution to GVCs (Global Value Chains)

Korea is well integrated in the global economy, with high participation in global value chains (GVCs). Such integration enhances competitiveness and lowers production costs, thereby allowing Korea to increase its productivity. Figure 1.4 shows that forward participation predominates in Korea like in higher income countries, which tend to export technically sophisticated intermediate inputs for use in the final assembly.

Figure 1.4. GVC participation among countries, 2019

As % of gross exports

Note: Backward participation in GVCs refers to the foreign value-added share of gross exports, by value added origin country. Forward participation in GVCs refers to the domestic value-added in foreign exports as a share of gross exports, by foreign exporting country.

Source: OECD TiVA (Trade in Value Added) database, Principal Indicators.

The data presented above clearly demonstrate the strong integration of the Korean economy in global value chains. Korean products are thus playing a pivotal role as inputs in various stages of production for international industries. It also underscores the interdependence of Korea's economy with inputs sourced from other countries, reflecting the nation's adaptability, strategic positioning in global markets and export-oriented approach.

Furthermore, the Korean economy demonstrates a high level of sophistication by actively participating in the production of goods with intense IP components. These innovative and modern products contribute significant value to the Korean economy.

The sophistication and globalisation of Korea’s economy also makes it vulnerable to counterfeiting, as IP embodied in these products can be subject to theft. Counterfeiters can exploit opportunities by strategically targeting weak points in IP governance across different countries. They carefully select entry points into global supply chains for their counterfeit products to minimise the risks associated with their illicit activities. Thus, the complexity of global value chains presents a favourable environment for criminals seeking to infringe IPRs by engaging in counterfeiting.