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Recent Equipment Investment Trends

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KDI Brief No.94 (April 13, 2017)

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Recent Equipment Investment Trends: Focusing on the Manufacturing Capacity Utilization Rate

Implications of the Rapid Increase in Pre-sale Apartments
AUTHOR
Daehee Jeong
Fellow, Department of Macroeconomic Policy, KDI
Duksang Cho
Fellow, Department of Macroeconomic Policy, KDI
 
 
Equipment investment showed improvements thanks to the recent boom in a few sectors such as semiconductors. But, the average capacity utilization rate of manufacturing sectors stagnated at a low level, limiting additional growth momentum in equipment investment.
 
   ○ The decline in the utilization rate since the global financial crisis has been mainly driven by the severe contraction in a few sectors with excess capacity from delayed restructuring.
 
   - Analysis using sectoral level micro data suggests that a low capacity utilization rate will likely to drag down future improvements in equipment investment.
 
   ○ Meanwhile, the manufacturing average capacity utilization rate was found to respond sensitively to improved projections for demand conditions. Accordingly, the recent rapid growth in equipment investment may come to an abrupt end unless it is supported by an increase in the manufacturing average capacity utilization rate through improvements in demand conditions.
 
Therefore, efforts to eliminate obstacles to equipment investment are needed. In this regard, enhancing the dynamism of the Korean economy by revitalizing firm’s entry and exit is desirable to be considered.
 
   ○ Reducing excess capacity through restructuring will not only help boost low capacity utilization rates-in certain sectors-but also positively affect, in the mid- to- long-run, the market entry and growth of firms capable of creating new demand.
 
   - Meanwhile, policies designed for short-term increases in exports and household income are not enough to improve future demand conditions, and hence they are not recommended as a fundamental means to restore investment.
 
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