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Policy Study

Policy Study

Influence of Global Investment Sluggishness on Value Added Inducement in Korea

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  • Author JUNG. Kyuchul
  • Date 2016/12/31
  • Series No. Policy Study 2016-05
  • Language Korean
SUMMARY A major driver of the downturn in world trade volume relative to global GDP, this study analyzes the impact of the slump in global investment following the global financial crisis on Korea’s economy. Accordingly, efforts were made to quantitative analyze the possibility that the global economy may be adversely affecting the Korean economy through the export path, as more heavily export-dependent value added is created.

The analysis reveals that the slump in global investment after the global financial crisis has had a particularly negative effect on the growth of the Korean economy than other economies. This is because the creation of value added is more dependent on global investment. Simulation results show that the decline in Korea’s economic growth rate is spurred not only by the slowdown in global economic growth but also by the decreased proportion of the investment sector in the global final demand. Indeed, the share of global investment in the global final demand diminished in the wake of the global financial crisis, causing the Korean economy's annual growth rate to decline by 0.21%p annually during 2008-14. An examination into the impact of the global investment slump by industry found that Korea’s major industries were dealt a particularly harsh blow, including electrical and electronic products, machinery, metals and transportation equipment.

Sluggish global investment can be attributed to both short-term and structural factors. The accelerating momentum of global aging and slowing productivity will likely continue to weaken global investment demand. And the fact that China, Korea’s biggest exporting partner, is reorganizing demand from investment to consumption, could also negatively affect global investment demand for a considerable period of time.

In order to tackle the problem, efforts must be made to create a malleable industrial structure capable of flexibly responding to the changes in the external environment. If Korea’s industrial structure is overly rigid, production resources will be continuously injected into a declining industry, and thus, promising industries may lose the opportunity to grow soundly. Therefore, policy efforts are required so that limited resources can be efficiently utilized by actively promoting the restructuring of insolvent companies and flexibility of the labor market. In addition, inroads for consumer goods exports should be aggressively pursued in major export markets like China, whose demand structure is shifting toward consumption.
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