Domestic facility investment has continued to decline in recent months, while overseas investment by the nation’s manufacturers is on a steep rise.

Facility investment in South Korea contracted 1.4 percent on-month in August, marking the sixth consecutive month of downward movement, according to data released last week by Statistics Korea. It was the longest streak of decline in facility investment in Asia’s fourth-largest economy in nearly two decades. The figure fell for 10 months in a row from September 1997 amid a devastating foreign exchange crisis.

In sharp contrast, Korea’s manufacturing companies are rapidly increasing spending to build or expand production facilities abroad.

In the first half of this year, overseas direct investment by Korean manufacturers reached $7.4 billion, far higher than the $2.9 billion recorded a year earlier, according to figures from the Export-Import Bank of Korea. The amount marked the highest figure for the six-month period since compilation of relevant data began in 1980.

The country’s total corporate investments abroad, including those made by financial and services companies, amounted to $22.7 billion for January-June, compared with the $10.1 billion invested by foreign businesses here during the same period.

Economists say the widening gulf between falling domestic investment and rising overseas investment reflects deteriorating business conditions in the country.

Since its launch in May last year, President Moon Jae-in’s administration has implemented a set of pro-labor measures, imposing heavier burdens on local firms and making the labor market more rigid. The administration has raised corporate taxes and made little progress on regulatory reforms.

“Korea is pursing policies that contradict the global trend of going all-out to promote corporate investments,” said Kim Tae-gi, an economics professor at Dankook University.

In terms of corporate efficiency, Korea ranked 43rd among 63 nations surveyed by Switzerland’s International Institute for Management Development earlier this year to evaluate national competitiveness. Its ranking fell by seven notches over the past decade.

The high-cost, low-efficiency structure of the Korean economy, in combination with mounting trade protectionism around the globe, is apparently pushing domestic manufacturers to transfer production abroad.

Kim said Korea’s profit-generating manufacturing exporters have spent their earnings on production facilities abroad rather than at home.

The decline in domestic facility investment has resulted in a reduction in manufacturing jobs. The number of manufacturing workers decreased by 105,000 in August from the year before.

Economists say that to achieve a turnaround in the nation’s worsening job situation, it is essential to encourage investment and hiring on the part of domestic manufacturers and other companies in the private sector.

According to figures from the state statistics office, Korea’s unemployment rate rose 0.4 percentage point from a year earlier to 4 percent in August, with the number of employed people increasing by a meager 3,000 over the cited period. The job increase for the month was the smallest since January 2010, when 10,000 jobs were lost in the aftermath of a global financial crisis.

Finance Minister Kim Dong-yeon, who doubles as deputy prime minister for economic affairs, suggested last week that employment numbers for September might prove even worse.

“We are not ruling out the possibility of negative growth (in the number of employed people) in September,” Kim said in a parliamentary interpellation session.

Later in the week, President Moon emphasized the role of private companies in creating more jobs.

“The government should be a supporter that alleviates difficulties (facing companies) and promotes corporate activity,” Moon said in a meeting of a presidential commission on job creation, which followed a ceremony marking the completion of a new factory for the chipmaker SK hynix in a provincial city. He then renewed his pledge to accelerate deregulation to help foster new industries.

His remarks prompted speculation that the Moon administration might shift the focus of its policy away from expanding the government’s fiscal role toward letting companies take the lead in promoting employment and growth.

But the business community remains cautious on whether Moon’s pledge will translate into concrete action, considering the objections he is facing from various interest groups and what many see as his anti-business political base.

More corporate-friendly policies are also needed to encourage Korean manufacturers running factories abroad to return home, experts say.

According to data submitted last week by the Korea Trade-Investment Promotion Agency to a lawmaker, just 50 firms have chosen to move production back to the country over the past five years since a law designed to facilitate manufacturing reshoring took effect in 2013. Only 28 of them have actually begun running factories here.

By Kim Kyung-ho
(khkim@heraldcorp.com)