Dividend Income
The trade surplus of US$2.44 billion in the first half of this year is largely attributed to a substantial inflow of dividend income from abroad, amounting to US$1.59 billion. This analysis points to the expansion of overseas direct investments by companies that had previously heavily relied on key exports like semiconductors and automobiles. This strategic shift has contributed to bolstering the economy’s underlying strength and resilience.
Based on the preliminary balance of payments data for the first half of 2023 released by the Bank of Korea (BOK) on Aug. 8, the goods account, which had been a pillar for the trade surplus, posted a deficit of US$3.47 billion. Exports saw a decline of 12.5 percent compared to the same period the previous year, while imports decreased by 5.9 percent during the corresponding period. Regarding the services account, excluding the construction account, all segments including processed services, transportation, and travel recorded deficits.
Amid these circumstances, the substantial increase in dividend income resulting from “Increased Dividends from Overseas Direct Investment” played a significant role in driving the trade surplus for the first half of the year. Dividend earnings saw a remarkable increase from US$1.32 billion last year to US$15.9 billion this year. Consequently, the surplus in the primary income account also expanded by over US$10 billion within the span of a year.
The surge in net foreign financial assets due to increased overseas direct investment has played a significant role in contributing to the achievement of a trade surplus, as these funds flow back as income. This phenomenon is evident in the way income from these investments has helped boost the surplus in the current account. With the implementation of corporate tax relief measures in January, companies repatriated previously accumulated retained earnings from their foreign subsidiaries back into the domestic economy. This repatriation of funds has significantly contributed to shoring up the trade balance.
Excluding dividend income and overseas workers’ wage payments, the surplus in the primary income account reached US$19.487 billion for the first half of the year, which is approximately eight times larger than the trade surplus in the current account.
The accumulated reserves of Korean companies’ overseas subsidiaries saw reductions of US$1.0672 billion in January and US$244 million in April. Dividends sent by overseas subsidiaries to their Korean headquarters during the period from January to April totaled US$15.3595 billion, marking a substantial increase of 5.3 times compared to US$2.9185 billion at the same period last year. Japan is also implementing a tax-exempt system for dividends repatriated from overseas subsidiaries to their parent companies.
An official from the BOK said, “Currently, South Korea falls in an intermediate stage between Japan, which maintains a surplus primarily centered around primary income, and Germany, which still relies heavily on a goods surplus.” This characterization reflects a position where South Korea has moved beyond the stage of accumulating funds through exports and has transitioned to investing and generating income from dividends, similar to advanced economies. However, it also acknowledges that South Korea’s economic structure lies between countries that primarily rely on exports supported by a strong manufacturing sector and those with a surplus primarily driven by income generated from investments.
Furthermore, the scale of overseas direct investment, which serves as the foundation for dividend income, continues to grow.
Korea’s overseas direct investment showed a gradual growth trajectory of US$20 billion to US$30 billion annually after the global financial crisis until it was dampened by the impact of the COVID-19 pandemic in 2020. However, a notable surge occurred in 2021 with a total investment of US$49.4 billion, followed by a historic peak of US$50.2 billion in 2022. The BOK’s International Department explained in a blog post last June that the expansion of overseas direct investment is driven by factors such as the expansion of alternative investments abroad, responses to the U.S.-China economic rivalry, and efforts to secure critical technologies.
When examining by sector, there has been a notable increase in industries such as finance and insurance, as well as manufacturing. Investments in the North American region, including the United States, have seen a significant upsurge.
There can be some drawbacks to foreign direct investment. In the short term, it might lead to an increase in foreign exchange outflows. Moreover, the establishment of overseas factories by major corporations could potentially result in a disruption of job creation within the domestic market.