The purpose of this paper is to analysis the sources of economic growth and the role the industrial policy in Korea.  By the application of the translog production model for the period of 1967-1996, total factor productivity(TFP) is estimated by 28 sectors. Manufacturing grows annually by 15.68% during this period, of which 1.59% is due to the growth of TFP and the rest due to the growth of input factors.

Korean manufacturing growth shows an input-factor driven pattern, achieved mainly by the quantitative growth of factors of production, especially capital input, rather than by improved productivity. The TFP decreases during the period of Heavy and Chemical Industrialization(HCI) when the government's industrial intervention was very active. Korea made large investments in manufacturing sector during the HCI period, while it neglected the introduction of advanced technologies and management systems. The financial sector plays an important role in terms of fund allocation. Support for centralized investment of capital between 1970 and 1980 was enabled by loose financial structure. That is, loose financial control contributed to capital accumulation but did not lead to the improvement of TFP.

And using the constructed panel data on the Korean manufacturing sector, the impacts of government industrial policies are tested on the growth of TFP during 1967-1990. The empirical results show that excessive protection measures, measured by effective protection rate, had strong negative effects on TFP in Korean manufacturing. And government industrial policies, such as policy loan and tax incentives, were not correlated with growth rate of TFP. As expressed by World Bank(1993), Korean economic success occurred in spite of rather than because of government interventions.

In conclusion, opening up to international markets is equally important both from the perspective of exerting competitive pressures as well as gaining from the diffusion of technical knowledge. And weakness in financial system have led directly to weaknesses in corporate governance and lack of corporate governance, in turn, reduces managers' incentives to focus on productivity. It is advisable to make efforts to maximize efficiency in business and banking sectors, such as introducing advanced managed techniques and improving the business governance system.