Korean media: Decline in production efficiency, companies only increase overseas investment Korea follows Japan's footsteps

KDI: "Afraid of following Japan's 'lost 30 years'" ... Production efficiency drops 0.1%, GDP decreases 0.15%

In South Korea, the phenomenon where companies and investors invest more overseas than domestically is becoming increasingly severe. On the 4th, the Korea Development Institute (KDI) stated that the root cause of this phenomenon is a decline in domestic production efficiency, warning that if this continues, the vitality of the South Korean economy may be severely damaged like Japan.

On that day, KDI researcher Kim Joon-hyung and senior researcher Jeong Gwi-jak released a report titled "Macroeconomic Background and Implications of Increased Overseas Investment." The report pointed out that during the period from 2000 to 2008, the share of overseas investment in total investment averaged only 0.7%, but from 2015 to 2024, it averaged 4.1%, increasing by about six times.

"Investing in South Korea isn't profitable"

The reason why companies are turning their eyes to overseas is simple; the returns on investing in South Korea are not as good as before. The report explained, "Investment flows to places where more money can be made," "the return on domestic investment has been consistently lower than the return on overseas investment, and business development is shifting overseas."

Indeed, since the mid-2000s of the 21st century, the return on domestic investment in South Korea has always been lower than the return on overseas investment. With the same amount of investment, more money can be earned overseas, so for companies, going overseas is a reasonable choice.

Regarding the background of why it's not profitable to invest in South Korea, the report pointed out that the primary reason is a significant slowdown in the growth of production efficiency. The same labor used to produce more and earn more; now, with the same effort, output is decreasing.

Even a slight decline in production efficiency can have a major impact on the economy. According to the report, a 0.1% decrease in production efficiency leads to reduced domestic investment by companies, ultimately resulting in a 0.15% reduction in domestic capital (approximately 18 trillion won, about 89.1 billion yuan, based on 2024). A direct decrease in production efficiency (0.1%p) plus the impact of reduced investment (0.05%p) results in a total reduction of 0.15% in the domestic economy. The report explains, "A slowdown in production efficiency not only directly causes the domestic economy to shrink, but the negative effects caused by the reduction in domestic capital are magnified 1.5 times."

The impact of declining production efficiency is particularly severe for salaried workers. Capital owners can still compensate for the decline in domestic investment returns through overseas investment gains, while those who live on wages will see their wages fall when production efficiency declines. The report points out, "Economic entities with a high reliance on labor income are more negatively affected by the slowdown in production efficiency."

The KDI report analyzed that the situation may further deteriorate. Low birth rates lead to a shrinking working-age population, making it increasingly difficult to make money domestically. The report warns, "The slowdown in labor input due to a reduction in the working-age population is likely to become an additional factor further lowering domestic investment returns in the future."

South Korea follows Japan's footsteps ... Change has already begun

The bigger issue is that South Korea is taking a path almost identical to Japan's "lost 30 years." The report warns, "With an interval of about 20 years, South Korea and Japan are showing similar trends in population structure and production efficiency."

In 1965, Japan's working-age population (aged 15-64) grew at a rate of 2%, but by 2004 it had dropped to -0.5%; while South Korea showed the same trend from 1985 to 2024. Similarly, the growth rate of production efficiency. Japan's production efficiency growth rate fell from 3% in 1965 to 0% in 2004, while South Korea also showed a similar downward trend from 1985 to 2024.

Since the early 1980s, Japan began to see that overseas investments were more profitable than domestic investments, leading to capital outflows. Japan's economy lost its vitality, and a considerable portion of national income relied on the returns from overseas investments. Currently, Japan's overseas investment returns account for 6% of the domestic economy. After the 2010s of the 21st century, money spent domestically exceeded the wealth created domestically, leading to a trade deficit, but thanks to massive overseas investment returns, the current account balance remained in surplus.

The KDI report explains that South Korea has already experienced the same shift as Japan. In 2000, the net gain from overseas investments minus the money taken out by foreign investors accounted for -0.7% of national income, but by 2024, it had risen to 1.2%. The proportion of wealth created domestically accordingly decreased.

The continuous accumulation of money invested overseas has led to South Korea's overseas net assets reaching 60% of the domestic economy's scale in 2024. The proportion of net overseas investment returns in national income has increased from -0.7% in 2000 to 1.2% in 2024, while Japan's proportion is as high as 6%. South Korea, like Japan, is gradually transforming into a structure dependent on overseas investment returns.

Improving production efficiency is the only solution

The report emphasized, "To revitalize the domestic economy, the economic structure must be changed to improve production efficiency." Create an environment where new innovative companies can easily enter the market, and less competitive companies naturally exit. The report also recommends flexible adjustments to the labor market, enabling people to quickly retrain and switch jobs, thus improving the overall economic production efficiency.

The report explained, "Stopping overseas investment itself is not appropriate," "the shift of domestic investment to overseas investment is both a result of the decline in domestic production efficiency and a temporary measure to alleviate the decline in national income." The core measure is not to restrict overseas investment, but to create an environment where investing in South Korea can also yield significant profits.

The report also pointed out, "An expanding current account surplus is not necessarily a good thing." A current account surplus ultimately represents an increase in overseas investment, which is precisely a signal of a reduction in domestic opportunities to make money.

Source: Chosun Ilbo

Original: www.toutiao.com/article/1847910249081856/

Statement: This article represents the views of the author himself