Is Korea Becoming More Dependent on Overseas Investment Like Japan? "Structural Reforms Needed to Boost Overall Productivity"

Declining Productivity Diminishes Domestic Investment Appeal
South Korea Accelerates Shift Toward Overseas Investment
Lower Productivity Could Reduce GDP by 0.15%
Negative Impact on Economic Agents Dependent on Labor Income
Japan’s Overseas Investment Surge Led to Economic Stagnation
"Structural Reforms Needed to Boost Productivity"

An analysis has revealed that as productivity in South Korea slows, overseas investment has become more attractive than domestic investment, leading to a growing share of outbound investments. Experts point out that Japan, which previously increased its reliance on overseas investment, experienced side effects such as declining economic vitality. Given that economic agents dependent on labor income could be negatively affected, they emphasize the need for structural reforms aimed at boosting overall economic productivity.

Joonhyung Kim, Head of Trends at the Economic Outlook Office of the Korea Development Institute, and Kyucheol Jung, Head of Macroeconomic and Financial Policy Research Department at the Korea Development Institute, are presenting the KDI Current Issues Analysis on the topic "Macroeconomic Background and Implications of Increased Overseas Investment" at the Government Complex Sejong on the 4th. Provided by KDI

On November 4, the Korea Development Institute (KDI) released its Current Issues Analysis titled "Macroeconomic Background and Implications of Increasing Overseas Investment." The report aims to evaluate the growth of net overseas investment from a structural perspective, compare it with the case of Japan, and draw implications for South Korea's macroeconomy, especially as domestic investment remains sluggish while overseas investment continues to rise.

From the perspective of disposable income, national income is divided into consumption and investment (domestic investment + net overseas investment). Net overseas investment is calculated by subtracting foreign investment in Korea from Korean investment abroad, representing the net outflow of capital. In accounting terms, since it is derived by subtracting consumption and domestic investment from national income, it is conceptually equivalent to the current account balance.

The report explains that while the ratio of investment to national income has remained relatively stable, there is a clear trend of investment shifting from domestic to overseas. In fact, since 2000, the investment-to-national-income ratio has remained in the mid-30% range, but the proportion of net overseas investment has increased about sixfold, from 0.7% in 2000-2008 to 4.1% in 2015-2024. Recently, this figure has surged to as high as 18%.

The report points out that the slowdown in South Korea's productivity has led to a decline in capital profitability, and as domestic investment has weakened and its returns have fallen short of those from overseas investment, the incentive to shift from domestic to overseas investment has grown. Assuming a labor income share of 0.65 (the average over the past 10 years) and a 0.1% decline in total factor productivity, the report forecasts that if these trends persist, gross domestic product (GDP) could shrink by up to 0.15%.

The impact could also be significant from an income distribution perspective. The report notes that such circumstances could have a more negative impact on labor income than on capital income. The authors, Joonhyung Kim, Head of Economic Outlook Division at KDI, and Kyucheol Jung, Director of Macroeconomic and Financial Policy Research Department at KDI, explained, "The slowdown in productivity implies that economic agents with a high dependence on labor income may be relatively more negatively affected."

In Japan, which shares many social and economic similarities with South Korea, capital profitability declined after the 1980s, and as returns on domestic and overseas investments reversed, overseas investment increased. As a result, Japan experienced a significant loss of economic vitality and became heavily dependent on investment income from abroad for a large portion of its national income.

Kim and Jung stated, "Similar to the trends observed in Japan, the slowdown in productivity growth in South Korea is a major factor behind declining capital profitability, which is prompting a shift from domestic to overseas investment. To revitalize the domestic economy, it is necessary to continue implementing structural reforms aimed at improving productivity."

They further emphasized, "If the slowdown in productivity persists, the negative impact could become more pronounced among economic agents with a high dependence on labor income. It is necessary to foster an environment where promising innovative firms can enter the market and marginal firms can exit, while also building a flexible labor market to drive overall productivity improvement in the economy."