[Exclusive] "The Stronger the Labor Union, the More Companies Move Overseas" ... 1.5 Times Increase

If Union Power Increases, Overseas Expansion Likelihood Rises 1.5 Times
Adversarial Labor Relations Increase It 1.6 Times
Corporate Overseas Investment Surges Since Moon Jae-in Administration in 2017

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The stronger the power of labor unions and the worse the labor-management relations, the more our companies' overseas investments increase by 1.4 to 1.6 times, according to a study. Overseas investment by our companies surged particularly during the Moon Jae-in administration, when union power strengthened and the minimum wage rose significantly due to income-led growth policies. The worse the labor environment faced by a company, the more it seeks overseas expansion, which can ultimately lead to a decline in national competitiveness, highlighting the need to enhance labor market flexibility.

Overseas Expansion Increases 1.5 Times When Agreement with Labor Union on HR and Organization Is Required

According to a paper titled "Analysis of the Impact of Labor Market Rigidity on Corporate Overseas Expansion," published in the Korean Economic Association journal on the 1st, South Korea has grown based on manufacturing, but over the past decade, overseas investment in manufacturing has increased more than 3.6 times compared to domestic facility investment, raising concerns about weakening national competitiveness.

Such overseas investment by domestic companies can have positive spillover effects in terms of technological advancement and productivity improvement. However, it can also lead to negative outcomes such as domestic industrial hollowing-out, reduced investment buildup effects, decreased exports, and job losses.

Based on this background, the paper analyzed the determinants of overseas expansion decisions by domestic manufacturing companies, considering company characteristics, investment regions, labor-management relations, product demand, and the degree of corporate innovation. The empirical analysis utilized data from the Human Capital Corporate Panel (HCCP) survey by the Korea Research Institute for Vocational Education and Training, along with companies’ financial data, per capita labor costs, and the number of union members.

The analysis showed that when labor-management relations within a company were confrontational, the likelihood of overseas expansion increased. Companies with confrontational labor relations had about 1.6 times higher chances of overseas expansion as the number of union members increased, compared to companies without such confrontations. Companies without confrontational labor relations did not show a significant increase in overseas expansion likelihood even as union membership rose.

The greater the power of labor unions, the overseas expansion likelihood increased by about 1.5 times. Regarding union power, the study focused on whether companies needed to reach agreement or consultation with unions on organizational changes and employment adjustments. The results showed that companies required to negotiate or consult with unions on organizational changes and personnel orders had clearly higher chances of overseas expansion.

Additionally, as the number of union members within a company increased, the likelihood of overseas investment also rose. The probability of overseas expansion by domestic manufacturing companies increased up to 1.4 times compared to companies without such increases in union membership. Furthermore, companies with higher per capita labor costs were more likely to consider overseas expansion. Per capita labor costs raised the probability of overseas expansion by about 1.5 times.

When companies were categorized by characteristics, the impact of union membership on overseas expansion was more pronounced in labor-intensive companies. In the analysis by investment region, union influence was stronger when investing in Asia rather than North America. There was little correlation between union membership and overseas expansion in North America. This is interpreted as reflecting Asia’s relatively lower wage levels compared to North America.

Labor Market Rigidity Strengthened by Moon Jae-in Government’s Income-Led Growth

The paper notes that South Korea’s foreign direct investment sharply increased starting in 2017. In 2017, the Moon Jae-in administration introduced and revised labor regulations such as rapid minimum wage hikes, the 52-hour workweek system, and policies to increase unionization rates based on income-led growth theory, which further expanded labor market rigidity and led to a significant increase in overseas investment by Korean companies. The annual foreign direct investment by Korean companies, which was around $40 billion in 2016, rose to $81.5 billion by 2022.

Due to income-led growth, the cumulative minimum wage increase over five years from 2017 reached 54%, and about 45% when adjusted for inflation, which is an unprecedentedly high level globally. Ultimately, the government policies at the time influenced the surge in corporate overseas investment.

The paper argues that since 2017, labor market rigidity in Korea has greatly expanded, and such rigidity not only hinders corporate innovation activities but also increases cost burdens, thereby raising the likelihood of domestic companies expanding overseas.

Song Yena, a doctoral researcher in the Department of Economics at Sungkyunkwan University and co-author of the paper, diagnosed, "Domestic manufacturing companies seriously consider labor environment factors such as labor costs and union membership when deciding on overseas investment." She added, "High corporate tax rates and labor market rigidity are cited as the main reasons why Korea is losing attractiveness as an investment destination. In particular, labor market rigidity has long been a challenge the Korean government has tried to resolve but remains unresolved."

She emphasized, "To make Korea an optimal investment location and increase efficient production activities by companies, it is necessary to improve wages, unionization rates, and labor-management confrontations to enhance labor market flexibility." The paper was co-authored by researcher Han Sumin from the Korea Institute for Small and Medium Enterprises and Professor Kim Seonghyun of the Department of Economics at Sungkyunkwan University.