Release of medium-to-long term outlook on respective agenda based
on the analysis of pending macroeconomic issues



Diminishing Role of Young Manufacturing Plants as Drivers of Growth

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  • Author KIM. Minho
  • Date 2018/08/21
  • Series No. KDI FOCUS No. 92, eng.
  • Language English
SUMMARY □ Korea’s aggregate productivity growth in the manufacturing industry is on the decline, considerably influenced by the slowing productivity growth of young plants. A particularly sharp decline has been observed in the high-tech industry over the past three years. As such, government support programs need to aim at promoting growth and driving innovation and the numerous targets for support programs should be streamlined towards young innovative firms. The criteria for such firms should involve private sector investment in order to enhance the effectiveness of the programs.

- Advanced countries are making renewed efforts to enhance innovation and competitiveness in manufacturing while concerns are growing in Korea over the industry’s waning competitiveness.

- This study analyzed the changes in the productivity growth of young manufacturing plants and proposed measures to improve the government’s entrepreneurship support policy.

- Young firms serve as a driving force for job creation and economic growth.

- The share of young plants in the manufacturing industry has continued to decline, pointing to a weakening of Korea’s economic dynamism.

- The manufacturing industry’s aggregate productivity growth has declined, particularly over the past three years.

- Young plants account for nearly half of the aggregate productivity growth on average in manufacturing while their value-added share is only 13%.

- The productivity growth of young plants has decreased over the past decade, diminishing its role as a growth engine.

- The stagnating growth of young plants is a bigger factor to their declining productivity growth than the falling number of new entries.

- The productivity growth of young plants in the high-tech industry, which has the highest R&D intensity, posted sharp decreases.

- Industries with high R&D intensity have been the driving force behind the productivity growth of the manufacturing industry for two decades. But, the last three years have seen a steep decline in the productivity growth of the high-tech industry.

- Although the average productivity of young plants is high, their contribution to aggregate productivity growth has declined due to their shrinking share of the industry.

- While streamling the targets for the support programs towards innovative firms, the government should refrain from selecting and supporting firms directly and reform regulations that hinder entrepreneurship and the growth of innovative firms.

- The government’s verification process should be abolished and innovative firms should be defined as young venture capital firms or R&D firms.

- Restructuring government programs should be based on objective project evaluations.
KDI VOD Report
In order to foster future growth engines, major countries around the globe are formulating strategies to integrate cutting-edge technology with the manufacturing industry.

And, at the center of the strategies are creative and innovative young firms.

Young plants have played a key role in production and job creation in Korea’s manufacturing.

However, the industry is now aging with the share of young plants dropping by almost 50% in the last 20 years.

So, is this to blame for the industry’s shrinking competitiveness?

KDI conducted an analysis to examine the impact of young plants
on the productivity growth of manufacturing.

After dividing manufacturing plants into young plants under
5 years old and old plants over 6,

it was found that although young plants created less value-added
than their older counterparts,

their contribution to aggregate productivity growth was the same.

Unfortunately, the growth in Korea’s manufacturing productivity is on a downward spiral, and the diminishing productivity growth of young plants, in particular, is a major factor.

To identify the sectors that are facing lower productivity growth, plants were classified according to their technology intensity.

It was found that, in the past 3 years,
young plants in the high-tech group had the fastest decline in
productivity growth.

Then, why is the productivity growth of young plants continuing to decline?

When the average productivity of old plants over 11 years was set at 100,
the analysis revealed that the average productivity of young plants had, in fact, increased,

but, their share of value-added declined.

The sluggish entry and growth of young plants has
reduced their share of the value-added, particularly those that
have been in operation for 3 to 5 years.

The decline in the share of value added of highly productive
young plants implies that resources are being inefficiently allocated to plants with low productivity.

And, it has become difficult to establish and grow in manufacturing in Korea’s economic environment.

Then, what is needed to promote the growth of young plants?

(Interview with the author)
Because the entry and growth of young firms affect future growth, we need to examine whether the current government entrepreneurship programs are providing practical support.

When we consider that innovative and high-growth firms lead economic growth, programs must focus on promoting growth and driving innovation of young firms.

The selection process of innovative firms should shift away from being government-certified. Instead, the criteria for young innovative firms should involve private sector investment. Young innovative firms can refer to firms under a certain age who received investments from venture capital or those whose R&D investment ratio exceeds a certain level.

However, this does not mean that it is effective for the government to select and support. Rather, it should focus its capabilities on reforming regulations that hinder the establishment and growth of innovative firms.
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