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Research Digest
Why is the Competitiveness of Korea’s Manufacturing Industry Weakening?

April 1, 2019


Korea’s competitiveness in manufacturing has exhibited a decline in recent years, causing growing concern. Using Statistics Korea’s Mining and Manufacturing Survey, this study measured the aggregate productivity growth in Korean manufacturing during the past two decades and analyzed the source of this growth. The results show that a decline in the productivity growth of young plants caused the productivity slowdown in the Korean manufacturing industry. However, this leads to the question of  what caused the decline in productivity growth of young plants.

According to the study, young plants accounted for mere annual averages of 20% and 12% of manufacturing employment and production, respectively. However, their contribution rates for job creation and growth out of gross output were found to be high at 44% and 27%. With the potential to accelerate innovation based on new techniques and manpower, they have served as a driving force behind economic growth and job creation. In contrast to their critical role, the share of young plants in Korea’s manufacturing industry has decreased continuously over the past twenty years. Similar downward trends were seen in the number of employees and the value-added outcomes.
 

 
Over the past two decades, the impact of young plants on the aggregate productivity growth in manufacturing did not differ much from that of older plants (6+ years). Young plants accounted for nearly half of the aggregate productivity growth on average in manufacturing, while their value-added share is only 13%. This finding implies that young plants play an essential role not only in production and employment growth but also in productivity growth. However, the productivity growth of young plants has decreased over the past decade, diminishing the role of these plants as a growth engine. In particular, the productivity growth of young plants in the high-tech industry, which has the highest R&D intensity, posted sharp decreases.

A decline in young plants has increased the average age of manufacturing plants, leading to the aging of industry.

This leads to the question of what could have caused the decline in the productivity growth of young plants: weakened technical efficiency or a smaller share in the industry. The analysis showed that the average productivity rates of young plants have become even higher than that of older plants (11+ years) during the past two decades. Despite their high average productivity in recent years, their value-added share has declined. This result appeared stronger among infant plants (3-5 years) than among start-ups (0-2 years).

The decline in the share of young manufacturing plants indicates that it has become increasingly difficult to establish and grow in manufacturing in Korea’s economic environment. The receding proportion of highly productive young plants implies that resources are not allocated efficiently to them. As such, conditions must be monitored to check whether firms are facing obstacles when they attempt to enter the market and expand.
 
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Office of Global Economy
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The Department of Macroeconomics is conducting researches on the macro economy and macroeconomic policy, particularly focusing on suggesting the analysis of macroeconomic trends and current status of the economy at home and abroad, the economic forecast, and the policy direction of the macro economy. The Department is also in charge of establishing, sustaining and maintaining various econometric models, based on which it analyses policy effects and develops a long-term economic forecast.

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