"Industrial Dynamism Disappears"... Corporate 'Birth and Death Rates' Both Decline

KCCI SGI to Release Report on 2nd... 'Corporate Growth Ladder Disappearing'
High-Growth Company Ratio Falls by 4.5%p Over 10 Years

New Business Birth and Death Rates in All Industries (Figure 1), Proportion of High-Growth Companies and Gazelle Companies (Figure 2)

[Asia Economy Reporter Hwang Yoon-joo] As South Korea's potential economic growth rate declines, an analysis suggests that one of the causes of the long-term slowdown in growth is the decreased dynamism of domestic industries.

The Korea Chamber of Commerce and Industry's Sustainable Growth Initiative (SGI) stated in its report titled "Diagnosis of Korea's Industrial Dynamism and Establishment of Future Growth Foundations" on the 2nd, "To restore the trend of declining domestic potential growth rates, strengthening industrial dynamism is essential," adding, "It is urgent to create an environment where the birth and growth of innovative companies can actively take place to build a foundation for future growth." South Korea's potential growth rate is expected to fall from 2.7% during 2015-2019 to 2.3% in 2020-2024.

SGI identified the 'birth rate'?the proportion of newly established companies among active firms?and the 'death rate'?the proportion of companies that have disappeared?as indicators of domestic industrial dynamism. According to these birth and death rates, South Korea's industrial dynamism has declined compared to the past. According to Statistics Korea, the birth rate across all industries decreased from 17.9% in 2007 to 15.3% in 2019, and the death rate also dropped from 13.0% in 2007 to 11.1% in 2018.

The decline in growth among companies after their establishment is also problematic. The proportion of high-growth companies?those with a sales growth rate exceeding 20% over three years among active firms?fell from 13.1% in 2009 to 8.6% in 2019. This is interpreted as the gradual weakening of the growth ladder from 'small and medium enterprises → mid-sized enterprises → large corporations' after startup.

Notable Decline in Birth Rates Centered on High-Tech Manufacturing and High-Value-Added Service Industries

SGI analyzed by industry and found that the birth rate has been declining in manufacturing over the past decade. In particular, it pointed out that the decline in dynamism is especially pronounced in high-tech manufacturing sectors such as electronics, computers, telecommunications, electrical equipment, and medical and precision instruments. The birth rate in high-tech manufacturing dropped from 11.9% in 2011 to 7.7% in 2019.

In the service sector, the birth rate of high-value-added industries (information and communications, finance and insurance, professional scientific and technical services, etc.) decreased from 20.7% in 2011 to 17.1% in 2019. SGI noted, "Recently, startups in the service sector have been led by small-scale industries with low entry barriers such as wholesale and retail, food and accommodation, and real estate," adding, "While the birth rate of companies with fewer than 10 employees was maintained between 2011 and 2019, the birth rate of companies with 10 or more employees declined from 6.6% in 2011 to 5.3% in 2019."

SGI cited three impacts of the decline in domestic industrial dynamism: ① weakened growth potential, ② reduced job creation capacity, and ③ intensified social conflicts.

First, the weakening of growth potential. The report argued that if the exit of low-productivity companies that should be phased out is delayed, inefficient resource allocation damages growth potential. The proportion of marginal companies in domestic manufacturing has been increasing from 7.4% in 2010 to 9.5% in 2018, and the productivity of marginal companies is only about 48% of that of normal companies.

The reduced capacity for job creation is also a concern. In fact, about 86% of the 1.4% employment growth rate in manufacturing (companies with 10 or more employees) in 2018 was contributed by companies established within the past eight years.

There is also concern about intensified social conflicts. The report stated, "If new jobs are not created through startups, competition between generations over limited existing jobs may intensify," adding, "Young people with less experience may find it difficult to enter new jobs and remain unemployed for long periods, while older generations who find it hard to move to better jobs will try to protect their current positions."

Policy Recommendations to Enhance Industrial Dynamism ... Startup Promotion, Business Restructuring, Innovation Capacity Strengthening

SGI emphasized, "To resolve the economic and social problems appearing in the domestic economy, it is necessary to create a more dynamic economy," and proposed three major measures to enhance industrial dynamism: ① promoting startups, ② business restructuring and reorganization, and ③ strengthening innovation capabilities.

First, for 'startup promotion,' it called for improvements in laws and systems. The report urged, "The regulatory framework should shift to a comprehensive negative system that allows new technologies to enter the market first and regulates them afterward if necessary."

Additionally, SGI advised encouraging the expansion of private sector startup funding. According to data from the Korea Institute for Industrial Economics and Trade, the utilization of startup funds at the time of establishment is 35.0% from government support, 21.4% from bank loans, and 20.1% from parent company support, while private funding such as angel investors and venture capital accounts for only 8.9%.

Furthermore, it emphasized the importance of business restructuring, strengthening innovation capabilities, and supplying future core talents.

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