IMF Working Papers

We study how one-time subsidies for adoption of modern technology drove Korea's industrialization in the 1970s. Leveraging unique historical data, we provide causal evidence consistent with coordination failures: adoption improved adopters' performance and generated local spillovers, with firms more likely to adopt when other local firms had already adopted. We incorporate these findings into a quantitative model, where the potential for multiple steady states depends on parameters mapped to the causal estimates. In our calibrated model, Korea's one-time subsidies shifted its economy to a more industrialized steady state, increasing heavy manufacturing's GDP share by 8.6% and export intensity by 16.2%. Larger market access amplifies the effects of these subsidies, as the gains from adoption increase with firms' scale.