A recent analysis indicates that South Korean companies are shifting their investment decision-making from a focus on efficiency to include security considerations. This means that even in a favorable economic climate, companies may refrain from building factories, while they might proceed with investments during downturns. The Bank of Korea has warned that as the global paradigm of "economic security" rises, it is crucial to ensure that the domestic manufacturing and export base does not weaken.
According to a report released by the Bank of Korea's Economic Research Institute on May 31, the criteria for corporate investment decisions have fundamentally changed since 2017, influenced by the U.S.-China power struggle, pandemic-related supply chain disruptions, and the Russia-Ukraine war.
Traditionally, factors such as operating rates, interest rates, and exports dictated capital investment. However, uncertainties in trade policy and geopolitical risks have now become significant variables. The contribution of security and global factors to fluctuations in capital investment has increased from an average of 29.6% before 2020 to 43.9% afterward, a rise of 14.3 percentage points.
In particular, for South Korea's key industries, such as semiconductor and automotive manufacturing, the contribution of security and global factors to investment fluctuations rose from an average of 33.1% between 2016 and 2019 to 48.7% after 2020, nearly matching market and economic factors.
The automotive sector has seen even more dramatic changes, with the proportion of security and global factors jumping from 25.9% to 50.9% during the same period. This trend is reflected in the decisions of domestic automakers and battery companies to prioritize building factories in the U.S. over domestic investments following the implementation of the Inflation Reduction Act and the CHIPS Act.
The concern is that this structural shift may impose burdens on the domestic macroeconomy. As foreign direct investment increases rapidly, the link between rising exports and domestic capital investment is weakening.
The sensitivity of capital investment to exports has shown a gradual decline, and the domestic value-added effect per unit of private investment has also been decreasing since 2020. The traditional cycle of rising exports, expanding domestic investment, and increasing employment and income is now under threat.
However, the Bank of Korea argues that the expansion of foreign direct investment should not be viewed merely as capital outflow. It should also be seen as a strategic move to enter the "inner circle" of global technological hegemony.
Companies are securing benefits from domestic protectionist subsidies through large-scale investments in advanced economies while effectively circumventing rising non-tariff trade barriers. This is also seen as an unavoidable strategic choice to access critical parts of the global supply chain, including advanced technology ecosystems.
Moreover, the increase in foreign direct investment could contribute to enhancing the country's credibility by accumulating net foreign assets. A high level of net foreign assets relative to GDP can stabilize the nation's credit rating.
The Bank of Korea emphasized that to prevent the paradigm shift from weakening the domestic manufacturing and export base, policies must be implemented to enhance the incentives for core manufacturing processes and research and development to remain in the country. As the grammar of investment changes, so too must the grammar of policy.
As major countries, including the U.S., European Union, China, and Japan, competitively expand direct support for strategic industries such as semiconductors and batteries, South Korea is also ramping up its support system for advanced industries through tax incentives, cluster development, financial support, and technology protection.
The Bank of Korea has analyzed that the current indirect support methods have limitations in preventing investment hollowing. Compared to the direct subsidies of $39 billion from the U.S. CHIPS Act and 10.7 trillion won from Japan for attracting TSMC, South Korea's support is constrained in terms of immediacy and scale.
* This article has been translated by AI.
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