Corporate investment hardly grew over the last five years under President Moon Jae-in government, raising alarm for sustainable growth in the South Korean economy.

According to a joint study by Maeil Business News and Korea Economic Research Institute (KERI) comparing economic performance of past governments since 1987 constitutional amendment enabling current single-term five-year presidency, the gross fixed capital formation, or simply investment, gained 0.2 percent in average from 2017 to 2021 under Moon Jae-in presidency.

The growth sharply lost steam against 14.1 percent under Roh Tae-woo, 8.6 percent under Kim Young-sam, 8.1 percent under Kim Dae-jung, 3.3 percent under Roh Moo-hyun, 1.8 percent under Lee Myung-bak, and 5 percent under Park Geun-hye.

Gross fixed capital formation consists of private and public sectors’ tangible and intangible investments in facilities, construction, and intellectual properties. It is an index that measures investment, the key driving force of economic growth.

Over the last five years, a record net $43.95 billion in investment capital flowed out of the country.

The net figure is the value of overseas direct investment by Korean capital minus foreign direct investment in Korea. A bigger figure would mean more capital went out than came into the country.

The value of net investment outflow more than doubled from $20.26 billion during Park Geun-hye presidency.

Surge in regulations and harsher business environment could be blamed.

According to World Intellectual Property Organization, Korea’s regulatory quality index under Global Innovation Index reached 68.2 this year, ranking 35th among 38 OECD countries. The index reflects the level of government regulation on the private sector. The higher the index the sounder regulatory environment of a country. The United States ranked 10th with 91 and Japan 9th with 91.4. The index for France and Germany are 88.3 and 81.1.

An OECD analysis showed that Korea’s labor productivity reached $41.8 per hour (28th), significantly lower than the U.S.’s $74.2, Germany’s $66.9, and Japan’s $48.1.

“The new government should boost autonomy, creation, innovation, challenge, and responsibility of private sector and respect market power,” said former Finance Minister Bahk Jae-wan.

The Korean economy so far has been strengthening in its global rank.

The country’s exports reached an annual record of $644.5 billion last year despite Covid-19 environment to rank as the 10th largest economy. Korea’s gross national income (GNI) per capita hit $35,168 in 2021, joining the exclusive club of the U.S., Japan, United Kingdom, France, Germany, and Italy whose GNI per capita exceeds $30,000 and has over 50 million population.

Korea may not be able to sustain the rank if corporate investment continues to sag.

“There is growing competition among major economies to nurture new industries,” said Yoo Hwan-ik, head of industry at the Federation of Korean Industries. “The government should carry out efforts to ease regulation that hamper private innovation capacity to take the lead in new industry sectors.”

Some experts call for the government to introduce policies to attract investment such as by offering tax incentives to capital inflows.

“Many of the major countries exempt taxation on overseas dividend income to secure national competitiveness amid intensifying competition to lower global corporate tax rate,” said Lee Sang-ho, head of economic survey at KERI. “Korea should also exempt tax on dividends offshore subsidiaries of Korean companies send home.”

Of 38 OECD countries, 31 exempt tax on overseas dividends. Only seven countries including Korea, Chile, Colombia, and Costa Rica impose tax credit on overseas dividends.

Korea’s finance ministry is considering offering tax benefits on overseas dividends.

“It is difficult for the government to introduce policy measures to tackle demographic changes such as low birthrate and aging society but it can attract foreign capital and boost investment through efforts,” said Lee Tae-yeol, a senior researcher at Korea Insurance Research Institute. “Korea should improve gross fixed capital formation to raise potential growth rate.”

By Kim Jung-hwan, Chun Gyung-woon, and Lee Eun-joo

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]