[The Plummeting Korean Economy, Solutions]②Industrial Structural Reform Is Urgent..."For 'Real Growth,' Start with an Innovation Industry Roadmap"

In-Depth Survey of 12 Experts from Industry, Research Institutes, and Academia
A Structural Dilemma: Declining Productivity Despite the Same Input of Resources
Core Industries Are Faltering, but There Are No Next-Generation Sectors to Fill the Gap
"Reallocate Resources to New Industries... Enhance the Quality of R&D Investment"
"Foster High-Level Talent and Reform the Compensation System to Focus on Performance"

Experts commonly point to "low productivity" as the current state of the Korean economy. They note that even with the same input of labor and capital, the country is now less efficient than in the past, or produces even less, falling into a dilemma. This inefficiency, they diagnose, stems from the rigidity of the industrial structure, which is the core engine of growth. The main industries have already entered a mature phase, but the opportunity for structural reform was missed, and time has passed by without change.

Experts emphasize that the top priority for improving productivity should be the "reallocation of resources to new industries." This includes the service industry. They suggest that, in competition with already advanced powers such as the United States and China in new industries, Korea should focus on targeting niche markets. In addition, they stress the need to move away from research and development (R&D) that only increases investment costs, and instead enhance corporate productivity through high-quality outcomes. To achieve this, it is necessary to foster high-level talent and reform the compensation system to focus on performance.

Growth Limits with the Existing Industrial Structure... "Support for New Industries Must Exceed That of Competitors"

On June 25, experts from various fields, including industrial and economic research institutes and academia, agreed in a survey that there are limits to growth with the current industrial structure as the main industries have entered a mature phase.

The Korean economy achieved rapid growth in the past, centered on five major industries: steel, petrochemicals, automobiles, shipbuilding, and semiconductors. However, all of these sectors are now losing competitiveness as their global market share declines. While falling behind China’s volume offensive is one reason, these industries have also entered the maturity or decline stage of their cycles. For sectors in the mature phase, no matter how much labor and investment are increased, the potential for productivity improvement is limited.

The problem is that the restructuring of core industries was not carried out in time, and as a result, new industries to fill the growth gap have not been fostered. According to the Korea Chamber of Commerce and Industry’s Sustainable Growth Initiative (SGI), Korea’s top 10 export items have remained unchanged for 20 years. This is why experts are calling for a reallocation of capital and labor resources to new industries.

Experts point out that for the government to achieve "real growth," it is most important to change the atmosphere through generous support. Kim Jeongsik, Professor Emeritus of Economics at Yonsei University, said, "To foster new industries, the government must reestablish its policy of building the nation through science and technology," and added, "The government should restructure scientific research institutes to match the new industrial structure, and increase fiscal, tax, and financial support for new industries."

Park Yangsoo, head of SGI at the Korea Chamber of Commerce and Industry, also stressed, "The principle should be to provide support that exceeds that of competing nations, in terms of fiscal support and regulatory easing." Lee Jeongdong, Professor at the Graduate School of Engineering Practice at Seoul National University, said, "The top priority should be to support attempts at new industries," and suggested, "We need to build infrastructure hubs where ideas can be scaled up by industry and region, and reform the financial system so that funds can be supplied for innovation."

Advancing the service industry is also an essential task. Kwon Namhoon, President of the Korea Institute for Industrial Economics and Trade, said, "Without improving productivity in the service sector, it will be difficult to achieve growth, resolve imbalances, or create quality jobs," and added, "The most effective strategy is to ease regulations and help the sector break free from small-scale operations."

New Industries Already Lagging Behind the US and China: How to Find Opportunities... "Become a Global Niche Leader."

Fields such as artificial intelligence (AI) and biotech are cited as engines of future growth, and large-scale support is expected from the Lee Jaemyung administration. However, some point out that Korea inevitably lags behind the United States and China, which have already invested massive human and material resources to dominate these markets. Experts agree that instead of confronting these powers head-on, Korea should seek business opportunities in rapid commercialization and application fields.

Joo Won, Director of Economic Research at Hyundai Research Institute, noted, "It is necessary to secure the market by using rapid commercialization as a weapon." He argues that Korea should leverage its world-class manufacturing and infrastructure to pursue rapid commercialization and a regulatory test-bed strategy in terms of application, thus establishing itself as a global niche leader. Jung Heesoo, Director of Hana Institute of Finance, said, "A focused strategy on niche markets within fields like AI, semiconductors, and healthcare is needed." For example, he suggested that Korea could use its unprecedented "rapid aging" as a growth platform to develop and commercialize high-value-added solutions by integrating AI and robotics technologies into the bio-healthcare sector.

There is also advice that industries with existing global competitiveness should be strategically nurtured. Kim Kyungjin, Vice President of the Institute for International Economic Policy, said, "Korea should focus on supporting and fostering sectors where it has strengths, such as logistics, shipbuilding, beauty, and entertainment," adding, "Efforts are also needed to expand the global market share of these industries." President Kwon also pointed out, "It is important to create an environment where private companies can focus entirely on improving competitiveness and discovering new businesses, and to expand infrastructure such as human resources and R&D support." He further cautioned, "The government should avoid excessive intervention or overinvestment in specific fields, which could lead to distortions."

Combining AI and Manufacturing, High-Quality R&D Investment... The Key to Improving Corporate Productivity

Raising the productivity of companies themselves is just as important as industrial restructuring in improving the productivity that drives economic growth.

The productivity growth rate of Korean companies has slowed significantly since 2010. According to analysis by the Bank of Korea’s Economic Research Institute, the scale of domestic companies’ R&D spending reached 4.1% of GDP in 2022, ranking second in the world. However, the actual annual average growth rate of corporate productivity dropped from 6.1% in 2001-2010 to 0.5% in 2011-2020. While the quantity of innovation ranked among the world’s best, qualitative growth closely tied to productivity actually slowed. Even among "innovative companies" with strong results, such as those filing patents in the US, productivity growth fell sharply from 8.2% to 1.3% over the same period.

This issue is directly linked to national competitiveness. According to the International Institute for Management Development (IMD) in Switzerland, Korea’s national competitiveness ranking fell by seven places from 20th last year to 27th out of 69 countries. The main factor dragging down the ranking was corporate efficiency. Corporate efficiency dropped by 21 places, from 23rd last year to 44th this year. All five components that make up this category?productivity, labor market, and management practices?fell in the rankings.

Experts point out that, to reverse the slowdown in corporate productivity since the global financial crisis, technological innovation must be promoted "smartly." President Park Yangsoo said, "Efforts are needed to greatly improve productivity by combining AI with manufacturing, services, and all industries."

Continuous investment in basic research and fundamental technologies is also necessary. According to a scenario analysis by the Bank of Korea, strengthening basic research could improve the economic growth rate by 0.2%. However, experts say that more important than aggressively increasing investment is ensuring high-quality R&D. Kang Sungjin, Professor of Economics at Korea University, said, "Technology investment is not being linked to industrial production. The core problem is a structure where results cannot be achieved," and added, "The regulatory environment should be improved and R&D investment policies changed so that the outcomes of innovation investments can be commercialized and lead to real economic growth."

There are also suggestions to reform the labor market to focus on performance and expand high-level talent in order to raise corporate productivity. Kim Hakgyun, Head of Research at Shinyoung Securities, said, "While reforming the labor market to focus on performance-based compensation and greater employment flexibility, it is also necessary to establish a social safety net by making unemployment benefits more realistic," and added, "Ultimately, the national burden should increase." Lee Insil, President of the Korea Future Population Institute, said, "The top priority should be to expand autonomy centered on a market economy," and added, "Large corporations and public enterprises should shift from the traditional seniority-based system to a job- and performance-based compensation system."

Survey Participants (in alphabetical order)

▲Kang Sungjin, Professor of Economics at Korea University ▲Kwon Namhoon, President of the Korea Institute for Industrial Economics and Trade ▲Kim Kyungjin, Vice President of the Institute for International Economic Policy ▲Kim Jeongsik, Professor Emeritus of Economics at Yonsei University ▲Kim Hakgyun, Head of Research at Shinyoung Securities ▲Park Yangsoo, President of the Sustainable Growth Initiative (SGI) at the Korea Chamber of Commerce and Industry ▲Lee Jaewon, Head of the Economic Research Institute at the Bank of Korea ▲Lee Jeongdong, Professor at the Graduate School of Engineering Practice at Seoul National University ▲Lee Insil, President of the Korea Future Population Institute ▲Jang Min, Senior Research Fellow at the Korea Institute of Finance ▲Jung Heesoo, Director of Hana Institute of Finance ▲Joo Won, Director of Economic Research at Hyundai Research Institute