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Korea’s Deepened High Cost Structure Drives Out Korean SMEs Abroad
Following Large Companies
Korea’s Deepened High Cost Structure Drives Out Korean SMEs Abroad
  • By Michael Herh
  • October 12, 2017, 12:30
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Korean companies’ foreign direct investment (FDI) surpassed US$10 billion in the first quarter of this year.
Korean companies’ foreign direct investment (FDI) surpassed US$10 billion in the first quarter of this year.


According to the Organization for Economic Cooperation and Development (OECD) on October 11, Korean companies’ foreign direct investment (FDI) which had been US$6.159 billion in the first quarter of 2013 and shrunken to even US$5 billion, surpassed US$10 billion in the first quarter of this year.

Even on an annual basis, their FDI clearly shot up. According to the Export-Import Bank of Korea, in terms of reported amounts, last year, their FDI topped US$49.24 billion, the highest since the bank’s statistics data collection. The actual amount of money Korean companies sent abroad reached US$35.25 billion, the largest ever.

On the other hand, foreign investments in Korea have been on the skids this year. According to the Ministry of Trade, Industry and Energy, FDI in Korea lost 9.1% year on year to US$9.596 billion in the second quarter.

The new government's policy trend of income-led growth can further deepen this phenomenon. First, a minimum wage raise can drive out small- and medium-sized enterprises (SMEs) of Korea that have planned to expand production facilities in Korea abroad. According to a demand survey of 1,639 manufacturing companies which went abroad conducted by North Jeolla Province in 2013, which was before the enactment of the U-Turn Company Support Act, 43%, the most of the companies said that Korea’s overall high cost structure was an obstacle to their returning to Korea.

In fact, in order to raise the brand value of “Made in Korea,” a manufacturing company produced 80% of its total production volume at the Gaeseong Industrial Complex. But after the shutdown of the industrial complex, the company decided to relocate its production base to Vietnam without constructing a factory in South Korea. "Our products will lose their competitiveness as they will be non-made-in-Korea products as we make products in Vietnam but our business environments are super good compared with those in Korea such as labor costs,” the CEO of the company said. “I will concentrate on slashing our labor force at our factory in Korea and giving a boost to the productivity of Vietnamese workers."

An increment in the maximum rate of the corporate tax can also provoke Korean SMEs’ exodus to overseas countries. If large companies move their production bases abroad for tax burdens, suppliers will have no choice but to follow them. According to the demand survey of North Jeolla Province, 42.9% of the respondents said that they have entered overseas markets to supply their products to large enterprises. The percentage more than twice as many as those (21.0%) who said, "We moved our production facilities abroad to secure cost competitiveness."

This is none other than the dilemma of an innovation growth plan that the Moon Jae-in administration laid out. This is because the Moon Jae-in administration has to keep Korean companies from going overseas while income-driven growth makes Korea's corporate environment tougher to them. Indeed, according to data which the Ministry of Trade, Industry and Energy submitted to Kim Do-eup, a lawmaker of the Liberty Korea Party, only five or 0.4% of 1,299 Korean manufacturing companies that entered overseas markets are considering coming back to and investing in Korea. The Ministry of Trade, Industry and Energy conducted a survey and analysis of 3,377 manufacturing companies of all sizes whose parent companies are in Korea regarding U turns of Korean companies from overseas countries from January to September of this year. This means that, on the contrary, income-driven growth hinders innovation-powered growth.

"Due to China’s retaliation against Korean firms for the deployment of the THAAD System in Korea, Korean companies are leaving China not for Korea but for Southeast Asia," said a senior official of the KBIZ. "The Ministry of Trade, Industry and Energy’s support for returning Korean companies is far from being enough. Only if investment environments are improved so that Korean companies stand high-cost structures, companies outside the country will return to Korea and companies in Korea will not go abroad."