Losing Competitiveness
The Hyundai Research Institute said in its report on August 1 that the added value ratio of the business service sector of South Korea stands at 7.3%, much lower than those of France (12.7%), Britain (11.9%), the United States (11.7%), Germany (10.5%) and Italy (9.2%).
The business service sector can be roughly divided into professional scientific and technological services and facility and equipment management services. The first type includes those related to legal matters, accounting, design, R&D and the like and the second type includes cleaning, security and so on. The real added value of the business service sector of South Korea increased from 61.2 trillion won (US$55 billion) to 97.7 trillion won (US87 billion) between 2005 and last year. However, its ratio to the total added value remained below 8% during the period.
Besides, the labor productivity of the sector is on the decline. The professional services’ labor productivity index on a value added basis fell from 102.1 to 96.6 between 2013 and last year. That of the daily services was as low as 89.1 in 2016. Based on purchasing power parity (PPP), the sector’s labor productivity is US$49,000, equivalent to 39% of that of the same sector of the U.S. In 2014, the South Korean business service sector posted a trade deficit of US$8.87 billion.
According to the institute, the lack of competitiveness is because of a closed corporate culture above all. South Korean companies tend not to entrust R&D, design, planning and so on to outside organizations and tend to prefer working with public institutions when they do so.
Undervaluation is a reason as well. Most of those working in the design industry and the like receive a small salary in view of the importance of their work. This is because intellectual property rights are less protected in South Korea than in other countries. According to the World Economic Forum, South Korea ranks 49th with a score of 4.4 when it comes to this matter.
The Hyundai Research Institute explained that professional legal and accounting services in South Korea have high entry barriers exceeding the OECD average and the barriers are reducing the competitiveness of the services. For example, the entry regulation in the South Korean legal service market is 4.0 with the OECD average standing at 3.8. In the United States, one lawyer has only to cover approximately 250 people. The number is 450 and 500 in Britain and Germany, respectively. However, it amounts to 2,770 in South Korea.
“External professional business service providers should be allowed to take part in innovation, intellectual property rights should be better protected, and R&D investment in the business service sector should be boosted,” the research institute advised, adding, “Deregulation and encouragement of competition are required for the professional service market to grow.”