South Korea faces a grim economic outlook unless it can significantly boost productivity. (Image courtesy of Yonhap)
SEOUL, Jun. 11 (Korea Bizwire) – South Korea faces a grim economic outlook unless it can significantly boost productivity, according to a recent report by the Bank of Korea.
The nation’s economic growth is at risk due to a combination of ultra-low birth rates, rapid aging, and stagnating productivity, which together could lead to economic stagnation or even contraction within the next decade.
Despite substantial investments in research and development (R&D), productivity growth in South Korea has faltered. In 2022, South Korea’s R&D expenditure reached 4.1% of GDP, the second highest globally, and the country ranked fourth in U.S. patent filings in 2020.
However, productivity growth rates have plummeted, from an annual average of 6.1% between 2001 and 2010 to just 0.5% from 2011 to 2020.
Particularly troubling is the sharp decline in productivity among “innovative firms”—those with a substantial record of patenting in the United States—which saw a drop from 8.2% to 1.3% in the same periods.
The central bank attributes this stagnation to a decline in the quality of innovation among large corporations, despite increased R&D spending and patent filings.
While major corporations have driven overall R&D investment and boosted patent applications, their citation rates—a key indicator of innovation productivity—have noticeably declined since the mid-2000s and have not recovered.
Small and medium-sized enterprises (SMEs) face additional hurdles, particularly in securing innovation funding.
The proportion of low-tenure manufacturing SMEs citing financial barriers rose from 9.9% in 2007 to 45.4% in 2021.
In the service sector, the figures jumped from 9.8% to 44.9% over the same period.
Furthermore, the share of young SMEs filing U.S. patents has fallen below 10%, highlighting a troubling decline in entrepreneurial innovation.
A fundamental issue identified by the report is the diminishing share of basic research expenditure.
Basic research, closely linked to the development of leading-edge technology and high-quality innovation, has seen its funding decline from 14% of total R&D expenditure in 2010 to 11% in 2021.
Companies have shifted their focus to applied research aimed at immediate product commercialization, driven by intensified global competition, deteriorating external conditions, and rising innovation costs.
The Bank of Korea recommends three key strategies to revitalize corporate innovation and productivity: enhancing basic research, improving the venture capital funding ecosystem, and fostering an environment conducive to innovative entrepreneurship.
Strengthening basic research through increased funding and expanded industry-academia collaboration could boost economic growth by 0.18 percentage points, according to the report.
Additionally, improving funding conditions and facilitating new firm entry could raise the growth rate by 0.07 percentage points.
Encouraging entrepreneurship is also crucial. The report suggests that reducing the risks associated with failure and incentivizing high-risk, high-return ventures could help attract “intelligent mavericks” to pursue entrepreneurship, rather than traditional employment.
Without such changes, the Bank of Korea warns, South Korea’s economic growth could turn negative by the 2040s, highlighting the urgent need for policy measures to address these challenges.
M. H. Lee (mhlee@koreabizwire.com)
