Concerns growing over manufacturing exodus

By Lee Kyung-min

Mauro F. Guillen, director of the Lauder Institute at the University of Pennsylvania's Wharton School

There are growing concerns that major Korean manufacturers will accelerate the relocation of their factories and operations overseas amid the worsening business environment here.

Global experts have said that the government's “anti-business” and “pro-labor” policies compounded by the prolonged U.S.-China trade war is forcing out not only foreign investors but local businesses, further adding strain to Asia's fourth largest economy.

The rapid minimum wage hike and heavy regulations, they noted, could further undermine the country's growth prospects amid weakening economic fundamentals. The nation's GDP contracted 0.3 percent in the first quarter from the last three months of 2018, the worst performance in 41 quarters.

“Public sentiment against business is running high, and this will continue to be driven high by the current administration's railroading,” said Yun Chang-hyun, a business professor at the University of Seoul.

“Not only foreign investors but local businesses are the first to notice signs that are sure to become a sobering reality soon because they are highly sensitive to a business environment that could in any way hurt profits,” he added.

The view comes in response to recent economic data that showed Korea's overseas direct investment reached a record $14.1 billion (16.5 trillion won) in the first three months of 2019, up 45 percent from a year earlier.

This was led mostly by local manufactures inking deals with foreign firms or expanding operations in the U.S. amid the Trump administration's trade protectionism.

In contrast, foreign direct investment into Korea stood at only $2.6 billion, down 15.9 percent from the year before.

Xu Xiao Chun of Moody's Analytics

Worse yet, Korea's current account recorded a deficit in April for the first time in seven years due to falling exports and an increase in foreign dividend payments.

According to the Ministry of Trade, Industry and Energy, Monday, exports shrank 13.5 percent in June from a year ago, the seventh consecutive month of declines. It was the largest fall in 41 months since January, 2016.

Xu Xiao Chun of Moody's Analytics said Korea must brace itself for a worsening business environment following a mixture of toxic negatives.

“The relatively high minimum wage is pushing production overseas to emerging markets such as Vietnam where labor costs are lower. For example China's production has been undergoing similar outsourcing,” he said.

Also working against Korea is the decline of the tech cycle and China's economic growth rate, which is impacting on exports markets.

The Moody's economist said that further compounding the situation is the ongoing trade dispute between the world's two largest economies.

“The U.S.-China trade war is delaying investment decisions. The U.S. protectionist policies may hit Korea directly, in particular its automobile industry, which will further deteriorate the investment environment,” he added.

These factors, he pointed out, cloud the growth prospects for Korea despite a highly educated workforce, a stable political system with good governance, and a highly developed business environment with easy access to credit.

Unfavorable tax environment

Accelerating the exodus is Korea's 25 percent corporate tax rate, the seventh-highest among the 36 members of the Organization for Economic Cooperation and Development (OECD).

“The figure shows how the country is moving backwards against the global trend leaning toward cutting corporate taxes, a measure to help foster corporate competitiveness,” Yun said.

The average corporate income tax rate among OECD countries dropped to 23.9 percent in 2018, down 8.6 percent from 2000.

The average corporate tax rate imposed among countries with export-reliant economies stood at 20.3 percent, much lower than Korea.

Mauro F. Guillen, director of the Lauder Institute at the University of Pennsylvania's Wharton School said Korea is headed for a rocky path in the coming years as the rising outbound investment comes amid weakening economic fundamentals.

Sohn Sung-won, a finance and economics professor at Loyola Marymount University in Los Angeles

“It is very disappointing to see Korea growing at less than 2 percent. It is also sobering to think that the birthrate is less than 1.2 per woman,” he said.

Korea is highly likely to experience the same kind of prolonged agony that Japan has suffered, he added.

“It's important now to monitor private indebtedness which is running higher than Japan's ― and real estate prices, which should stabilize,” he said.Sohn Sung-won, a finance and economics professor at Loyola Marymount University in Los Angeles said given no policy shift is immediate from the Moon Administration, fiscal and monetary policy should be conducted with clear objectives.

“Government spending should be increased to boost economic activity. The additional expenditures should go to subsidize SMEs including loans not creating government jobs,” he said.

Should the Bank of Korea (BOK) lower key interest rate in the coming rate-setting policy meetings in the latter half of 2019, the value of the Korean won would depreciate making Korean exports more competitive.

“This could in turn induce foreign firms to invest more in Korea since it would be cheaper to buy Korean assets with foreign currencies,” he added.