Korea needs more robots to be globally competitive
By Robert D. Atkinson
For many years Korea had the honor of leading the world in industrial robot adoption (as share of industrial workers). But that lead is now in doubt, as other nations, especially China, but also Japan and the United States, saw much faster increases in robot adoption in 2021 according to the International Federation of Robotics.
Losing the race of robot adoption means relatively slower growth in Korea's living standards and reduced international competitiveness, especially against China, a country where industrial wages are about one-third of Korea's, but where robot growth was 25 times higher. At that rate, Korea will be competing against companies in China that are highly productive but have much lower wages, a deadly combination when it comes to competitiveness of Korean firms.
Korea's tax policy does encourage investment in capital equipment like robots, but the measures are pretty anemic, with large firms receiving a credit of just 1 percent on their equipment expenditures (small firms receive a 10-percent credit).
If Korea wants more robot adoption, policymakers should raise the rate for all firms ― big and small ― to 10 percent. This could be paid for several ways. First, the National Assembly should eliminate the progressivity of the corporate tax, where smaller firms pay 40 percent the tax rate that large firms pay.
Given that small firms in Korea are less productive and pay lower wages, these discriminatory policies in favor of them perpetuate lower wages and productivity. The Assembly should also abolish tax credits for increasing employment and payroll and use the money saved to fund the more generous investment tax credit.
Companies don't hire workers on the basis of tax incentives; they hire workers if they expect their sales to increase. No rational employer would hire an additional worker it did not need just because the government gave them a one-year tax cut for 25 percent of the workers' wages.
In contrast, companies, at least rational ones, base decisions to invest in machinery on the basis of expected rate of return (ROR) and an investment tax credit that cuts the after-tax cost of a robot increases the expected ROR making the firm more likely to invest in more robots.
But wait, “what about jobs?” will be the response. Don't robots kill jobs? Why would we want the tax code to encourage job elimination? These concerns are largely misguided. Many studies find no evidence for job loss from robots.
One study of industrial robots on employment in German labor markets between 1994 and 2014 found that the adoption of industrial robots had no effect on total employment. Another analysis found that while technology-based automation displaces jobs, “It has simultaneously created new jobs through increased product demand, outweighing displacement effects and resulting in net employment growth.”
One critical reason why Korea needs more robots is that without them it will be harder for companies in Korea to be globally competitive, especially with China. If that happens, the risk is not losing a few jobs to automation, but losing most or all due to loss of global market share.
In fact, studies have found that a higher share of robots help economies' manufacturing sectors gain global market share. This explains why it is countries such as Canada, the United States, and the United Kingdom ― those with low rates of manufacturing automation and robot adoption ― that have seen the highest rates of manufacturing job loss over the past two decades.
There is a second critical reason for Korea to continue to lead in robot adoption: the need for productivity growth. According to the Organization for Economic Cooperation and Development (OECD), Korea is on track to have the highest old-age dependency ratio of any OECD nation. In other words, the ratio of retired people to working-age people will be extremely high. There are only three ways to address this.
The first is to cut benefits for the elderly, clearly, neither political palatable nor humane. The second is to raise taxes on working people, again, not politically palatable. The third is to grow the Korean economic pie by boosting productivity. And more robots, spurred through a more generous investment tax credit, is a key way to do that.
Robots are already driving productivity. Investment in robots contributed to 10 percent of GDP growth per capita in OECD countries from 1993 to 2016. A study by the Institute for Employment Research in Germany found that robot adoption led to a GDP increase of 0.5 percent per person per robot from 2004 to 2014.
The new administration should set a goal for Korea to remain the international leader in robot adoption in 2030. To do that, Korea should redesign the business tax code to spur more investment in robots.
Robert D. Atkinson (@RobAtkinsonITIF) is the president of the Information Technology and Innovation Foundation (ITIF), an independent, nonpartisan research and educational institute focusing on the intersection of technological innovation and public policy. The views expressed in the above article are the author's own and do not reflect the editorial direction of The Korea Times.