Second Only to the U.S. in Both Speed and Scale of Increase
Economic Downturn Hits Small and Medium Enterprises Harder
"Domestic Slump Coupled with Trump Risk"
Among listed companies in Korea, the proportion of 'zombie firms' has shown a significant increase, particularly among KOSDAQ-listed companies. This trend is attributed to the prolonged economic downturn, which has worsened corporate profitability.
The Korea Economic Association announced on the 6th that, based on an analysis of the trends of zombie firms among listed companies in major countries (G5) including the United States, Japan, Germany, the United Kingdom, France, and Korea, the rate of increase in zombie firms in Korea is the second fastest after the United States.
Zombie firms are defined as companies with an interest coverage ratio (operating profit/interest expense) below 1 for three consecutive years, while temporary zombie firms have a ratio below 1 for the current year. A high number of zombie firms indicates weakened industrial competitiveness.
As of the third quarter of last year, the proportion of zombie firms in Korea was 19.5%, the second highest after the United States (25.0%). Korea's proportion of zombie firms increased by 12.3 percentage points from 7.2% in 2016 to the third quarter of last year. This increase was the second largest after the United States (15.8 percentage points). During the same period, the United Kingdom (6.7%→13.6%), France (14.0%→19.4%), Japan (1.7%→4.0%), and Germany (17.1%→18.7%) showed relatively lower growth rates of 1 to 6 percentage points.
The Korea Economic Association analyzed that the rapid increase in zombie firms in Korea compared to major countries is due to significantly worsened corporate profitability caused by prolonged economic stagnation, resulting in sluggish sales and increased inventory.
Temporary zombie firms showed a similar pattern, with Korea ranking second at 36.4%, following the United States at 37.3%.
Notably, as of the third quarter of last year, the proportion of zombie firms in KOSDAQ was 23.7%, which is 12.8% higher than KOSPI's 10.9%. Looking at the trend, KOSPI increased by 2.5% since 2016, whereas KOSDAQ rose by 17.1% during the same period. This suggests that small and medium-sized enterprises are more severely affected by the prolonged economic downturn.
Similarly, as of the third quarter of last year, the industry-wise analysis showed the highest proportions of zombie firms in the following order: real estate (33.3%), professional, scientific and technical services (24.7%), wholesale and retail trade (24.6%), and information and communication (24.2%). Since 2016, industries with significant increases in zombie firms include professional, scientific and technical services (4.0%→24.7%), information and communication (4.5%→24.2%), manufacturing (7.4%→18.1%), and wholesale and retail trade (15.0%→24.6%).
Lee Sang-ho, head of the Economic and Industrial Division at the Korea Economic Association, diagnosed, "Recently, domestic companies are under severe management pressure due to extreme domestic demand slump and export uncertainties following the inauguration of Trump's second term." He added, "Institutional support must be strengthened to help companies overcome the challenges they face and secure future global competitiveness," emphasizing, "Discussions on revising the Commercial Act that do not align with global standards should be avoided."
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