[R&D Current Status] Super-gap Technology Is Important... But Korea's R&D Share Is Decreasing

Sales Surge but R&D Investment Fails to Keep Up
Current Status: R&D Ratio to Sales Decreasing Annually
Intensifying Global Competition in Advanced Industries...Urgent Need for Government Infrastructure Support

[Asia Economy Reporters Sunmi Park and Pyeonghwa Kim] It took eight years for Samsung Electronics, the world’s number one memory semiconductor company, to establish a new research and development (R&D) complex in South Korea. Although South Korea has emphasized cutting-edge, gap-leading technology, most global companies, including Samsung, have had to be cautious about R&D investments due to insufficient government support for R&D. Despite rapidly increasing sales, R&D investment has not kept pace, resulting in a declining ratio of R&D expenditure to sales each year. As the global competition in advanced industries intensifies, experts point out that urgent government infrastructure support is necessary to maintain market leadership.

◆Even with increased R&D investment, sales growth outpaces it= Samsung Electronics, the world’s top memory semiconductor company and a leading global IT and home appliance firm, poured an unprecedented amount of funds into R&D in the first half of this year, emphasizing securing gap-leading technology. R&D expenditure reached 12.1779 trillion KRW, surpassing last year’s first half figure of 10.9941 trillion KRW, mainly focused on semiconductors and smartphones. Through this investment exceeding 12 trillion KRW, Samsung registered 4,630 domestic patents and 4,170 U.S. patents. However, despite record-breaking sales, R&D investment did not keep pace. The ratio of R&D costs to sales in the first half was 7.9%, down from 8.5% at the end of June last year. After peaking at 9.8% in 2020, it has declined for two consecutive years. This contrasts with the rising trend from 7.4% in 2018-2020 to 9.8%.

The situation is similar for SK Hynix, another leading domestic semiconductor company. SK Hynix’s R&D ratio to sales in the first half of this year was 9.3%, remaining in the single digits. This is lower than 10.8% in the first half of 2020 and 10.7% in the same period last year.

Industry insiders view this phenomenon not as a problem limited to semiconductors but as a common characteristic and challenge across key industries driving the Korean economy. LG Electronics, which overtook Whirlpool to become the world’s number one home appliance company by sales, saw its R&D ratio to sales rise slightly to 4.9% in the first half, up 0.1 percentage points from 4.8% in the same period last year, but it remains 2.4 percentage points lower than 7.3% in 2020. Hyundai Motor Company, a leading automobile manufacturer, recorded an R&D ratio of 2.1% during this period, similar to last year but down 0.9 percentage points from 3.0% in 2019. Kia Motors also showed a declining trend, with an R&D ratio of 2.3% this year, down from 2.8% in the first half of 2019.

◆Government ‘priming water’ insufficient... urgent need for bold support= Experts unanimously agree that expanding government support is essential to incentivize corporate R&D investment effectively. Regardless of company size or sector, R&D requires a long-term commitment and carries a high risk due to low success probability. Since private sector autonomy alone struggles to ensure sufficient investment, there is a common view that the government must step in.

According to the Federation of Korean Industries, R&D investment by domestic large corporations rapidly increased until the early 2010s but has significantly slowed since the mid-2010s. The average annual growth rate of large corporations’ R&D investment collected every five years was ▲12.4% from 2001 to 2005 ▲10.6% from 2006 to 2010 ▲10% from 2011 to 2015 ▲3% from 2016 to 2020, showing a sharp decline.

The background includes insufficient government support in South Korea. As of the end of last year, the government support rate for corporate R&D investment in Korea was 7.4%, lower than major countries such as France (37%), Germany (19%), Japan (17.2%), and the UK (15.5%). It was 11.7 percentage points lower than the G5 average of 19.1%. The government support rate for R&D measures the extent of government assistance through tax credits, exemptions, and subsidies for R&D investment.

In particular, domestic R&D tax support levels are low. While the R&D tax credit rate for small and medium-sized enterprises remains around 25%, the rate for large corporations has decreased from 3-6% in 2013 to 0-2% in 2021. The recently enacted Semiconductor Special Act (National Advanced Strategic Industry Special Act), effective this month, plans to expand the R&D tax credit rate to 30-40% for large corporations, which is seen as a relief, but experts say this should be extended to all industries.

Lee Sang-ho, head of the economic policy team at the Federation of Korean Industries, explained, "While it is important for the government to announce national strategic technologies and new growth and foundational technologies and expand tax support, since tax support is generally lower than in major countries, expanding support for general industrial sectors is essential to strengthen technological competitiveness."

With many companies focusing on exports, some experts suggest that tax credits may be more effective than direct R&D support to avoid legal risks through the World Trade Organization (WTO) and others. Professor Hwang Yong-sik of Sejong University’s Business Administration Department advised, "For export companies with high market share or influence, export countries may scrutinize R&D support funds received from their home governments to protect their domestic markets. Expanding the scope of corporate activities through R&D tax credits could be a rational approach within a free trade economic system."