A Weird Ripple Effect
The rise in foreign direct investment by domestic companies and the development of capital-intensive industries have reduced the ripple effect of exports on domestic demand.
The Bank of Korea said in an analysis that the correlation coefficient between exports and domestic demand (final consumption + total fixed capital) declined from 0.149 in the period of 1991-1997 to 0.081 in 2000-2007 and turned negative to -0.014 in 2010-2017.
The analysis was published in the June issue of the Bank of Korea’s monthly statistics report.
In general, an increase in exports leads to a rise in production, corporate investment, employment and wages, household income, and consumption. Since 2010, however, this correlation has been broken.
The report said that since 2010, equipment investment has tended to move in tandem with exports, but consumption and construction investment have not gone with exports due to the credit card crisis in 2003-2004 and the boom in the construction industry in 2015-2017, respectively.
The inverse correlation between net domestic demand (domestic demand minus imports) and exports has become stronger.
The correlation coefficient between net domestic demand and exports dropped from -0.251 in 1991-1997 to -0.832 in 2010-2017.
This suggests that imports are increasing along with exports.
The report analyzed the ripple effect of exports on domestic demand in terms of equipment investment and employment.
Exports and equipment investment moved in the same direction, but the strength of alignment gradually weakened.
The correlation coefficient between exports and equipment investment fell from 0.491 in 2000-2007 before the global financial crisis to 0.267 in 2010-2017.
The report said, "Due to the increase in foreign direct investment, overseas production has increased, and processing and transit trade has expanded. This has weakened the ripple effect of exports on domestic investment compared to the past. After the financial crisis, information technology (IT) led the increase in exports and equipment investment depended more and more on imports. So the ripple effect on domestic equipment production enterprises was reduced.”
In addition, the report said, companies are hesitant to make investment as the manufacturing industry's average plant utilization rate has been steadily declining and business uncertainties have increased since the financial crisis.
The relationship between exports and employment also seems to be weakening.
The number of jobs created directly or indirectly by a 1 billion won increase in manufacturing exports shrank from 59.9 in 1990 to 13.1 in 2000 and to 6.5 in 2014.
It is thought to be because of the change of industry structure since 1990, from labor-intensive industries such as textile products to capital-intensive (labor-saving) industries such as electricity, electronics, transportation equipment, and chemical products.
It is also due to the rapid increase in productivity from technological advancement and facility automation.
The report said, "We need to strengthen the connection between large companies and SMEs so that even when exports of the IT industry increase, equipment investment and employment can increase sufficiently. The proportion of imported equipment should be lowered through technology development.”
It added, "We must find ways to expand exports of SMEs, which have high labor-absorbing capacity but have a low trade participation rate and should find and cultivate producer service industries that provide services to producers."