President Park Geun-hye has reiterated that Korea’s future lies in building a creative economy, and the biopharmaceutical industry is often cited as a key pillar in such an economy.

Out of the local conglomerates, Samsung Group has been showing the most conspicuous progress in the area, but whether it can replicate the legacy of its success in semiconductors and smartphones remains a big question.

This is mostly due to the way chaebol operate.

Their rigid, top-to-bottom structure of command and control has worked well in the area of traditional manufacturing, but it may not work the same kind of magic for knowledge-intensive and creativity-driven industries such as biopharmaceuticals.

This can be explained through what Oliver E. Williamson, a U.S. economist, has said about corporate activities ― that they can be categorized into markets and hierarchies depending on their governance structures.

No doubt about it, Korea’s chaebol structure is a hierarchy that has been quite useful in manufacturing.

A corporate leader instructs his subordinates on what needs to be produced. The order then goes down through a chain of command. The product is developed, and the results are reported from the bottom up. Specifications for product quality and the delivery timelines are checked at each level of the hierarchy. Those who cannot meet the specifications are held accountable at each level of the chain of command. Over time, the leader raises the target and the rest of the organizations work to deliver and achieve incremental improvements. This is how Korea’s largest businesses have moved up the ladder.

Now, can such a formula be applied to industries such as biopharmaceuticals? For now, I believe the answer is no when considering how global biopharmaceutical firms operate. Most of them are market-driven, rather than based on hierarchies.

Furthermore, biopharmaceutical innovations usually happen when there are large pools of innovators. Some of these ideas are picked up by angel investors who are mindful of the risks. At the end of the day, only a fraction of the initial proposals are left, which is when global pharmaceutical companies step in. Unfortunately, these opportunities ― which can help shape the future of the companies involved ― are very few and far between.

As can be seen, the way biopharmaceutical firms achieve these rare innovations is fundamentally different from the way chaebol operate.

In a hierarchy, one cannot undertake such risks. A target is set, and progress must be reported. The problem is, nobody really has a clue about the big picture because most of the work involves micromanagement. When the vision is so unclear, how can the company and its executives continue to tread on that path and channel the necessary resources?

This is why we have no choice but to believe that the chaebol governance structure ― which has been so successful in manufacturing ― may be incapable of tackling the new game of biopharmaceuticals, which depends on knowledge, creativity and, most of all, a vision for the future.

This dilemma over governance is why Samsung seems to be focusing on biosimilars and medical equipment for now. The biosimilar industry operates much like traditional manufacturing. Innovation has already happened, and the risks have been eliminated. Samsung only needs to produce the end product that meets the specifications. Its medical equipment business also is not too different from electronics or automobiles ― all games that the chaebol is familiar with.

But the bigger question is whether such governance styles can carry Korea’s largest businesses into the future. In the past, it may have been enough to be an original equipment manufacturer, but as we all know by now, if the ideas and innovations are not ours, the profit cannot be sustained.

So we are back to square one. If Korea wants to succeed in biopharmaceuticals, innovation is a must. But the fire that has fueled Korean conglomerates’ progress up to this point is not enough. Some way or another, we must move on from being a hierarchy to becoming a market. That much we know.

By Kim Byoung-joo, Head of strategic consulting firm KL&P