"Korea's Domestic Facility Investment Growth Slows Compared to China and Japan... Overseas Direct Investment Remains Active"

[Asia Economy Reporter Jeong Hyunjin] It has been revealed that South Korea's domestic facility investment growth rate over the past decade was lower compared to China and Japan, while its overseas direct investment growth rate was higher. There is a claim that related regulations need to be improved to revitalize domestic investments, which are concentrated in semiconductors, and to foster new growth engines.

On the 26th, the Federation of Korean Industries (FKI) compared and analyzed the trends of domestic facility investment and overseas direct investment in South Korea, China, and Japan from 2011 to 2020. The results showed that South Korea's average annual growth rate of domestic facility investment was 2.5%, lower than China's 4.3% and Japan's 3.9%. During the same period, the average annual growth rate of overseas direct investment was estimated by FKI to be 7.1% for South Korea, 6.6% for China, and 5.2% for Japan, with South Korea being the highest.

FKI analyzed that South Korea's relatively low domestic facility investment growth rate was due to "China continuously increasing investments in new growth sectors such as healthcare and e-commerce, and Japan's active private innovation investment driven by corporate tax cuts and proactive industrial policies, whereas South Korea showed poor investment in new growth engines outside of semiconductors."

(Data provided by the Federation of Korean Industries)

In particular, FKI pointed out that the contribution of private sector investment to economic growth in South Korea recorded a negative value for two consecutive years in 2018 and 2019. From 2018, due to the global trade disputes causing domestic and international economic downturns, continued inefficiencies from delayed industrial restructuring in some sectors, and the resulting reduction in corporate investment capacity, South Korea's facility investment decreased, leading to a decline in the private sector investment's contribution to economic growth. However, last year, with the recovery of semiconductor investment, overall facility investment increased, and although the overall growth rate was -1.0%, the private sector investment's contribution to economic growth was recorded as positive (0.6 percentage points).

Excluding semiconductors, which account for the largest share of domestic facility investment, investments in traditional manufacturing industries such as automobiles, steel, and shipbuilding have decreased, showing an overall contraction since 2017. The share of semiconductors in manufacturing facility investment expanded by 21.9 percentage points from 23.4% in 2011 to 45.3% last year. FKI emphasized, "Considering that the transportation machinery sector, the top manufacturing facility investment sector in Japan last year, accounts for about 21% of manufacturing facility investment, South Korea's facility investment structure is excessively concentrated in semiconductors, making it very vulnerable."

Regarding overseas direct investment, FKI evaluated that South Korea's increase was due to large-scale global mergers and acquisitions (M&A) by Korean companies, such as SK Hynix's acquisition of Intel's NAND flash business in the United States, which was valued at $9 billion last year, as well as continued facility investments in electric vehicles and semiconductors. In contrast, China has seen a reduction in overseas direct investment since 2017 due to indiscriminate restrictions on overseas M&A and strengthened capital outflow controls, while Japan experienced a significant decrease in investments in Europe and Southeast Asia last year due to COVID-19.

Kim Bongman, Director of International Cooperation at FKI, said, "Since companies face difficulties in increasing investments domestically, the government and the National Assembly should encourage the revitalization of domestic investment by promptly improving related regulations that hinder corporate investments in new growth sectors, such as licensing regulations, environmental regulations, and restrictions on business activities."

This content was produced with the assistance of AI translation services.