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Changes in proportion of facility investment compared to GDP for G7 countries and S. Korea

While South Korea has boasted the highest rate of facility investment relative to economic scale compared to the G7 countries over the past 15 years, the country has become increasingly dependent on machinery imports rather than domestic shipments, although machinery is one of the main capital goods for facility investment, a study shows.

On July 19, Hyundai Research Institute (HRI) published an empirical analysis of the South Korean economy from 2005 to 2019 in a report titled, “The Effects of Uncertainty on Facility Investment.” A comparison with the G7 countries’ average annual facility investment as a percentage of gross domestic product (GDP) for the periods 2010-2014 and 2015-2019 showed changes of 9.2% to 8.8% for South Korea, 4.6% to 4.2% for Canada, 6.8% to 6.7% for the US, 3.4% to 3.9% for the UK, 6.2% to 6.5% for Italy, 7.7% to 8.0% for Japan, and 4.8% to 5.0% for France, with Germany’s rate remaining in place at 6.9%. At around 9%, South Korea ranked highest for facility investment as a percentage of economic scale.

But in the area of machinery -- which accounts for the bulk of facility investment goods at 72% -- South Korea was found to be increasingly reliant on imports rather than domestically produced shipments. In terms of the machinery index (where “100” represents 2005 levels,” the import index rose all the way to 223.5 for 2017, while the domestic shipment index showed a low rate of increase at 136.8. For 2019, the import index stood at 194.5 and the domestic demand index at 116.7. The report said, “In the area of machinery, imports have continued to increase without any significant expansion in domestic shipments, which has functioned as a constraint on domestic investment demand.”

An observation of trends in facility investment involving overseas markets, the percentage of overseas market sales in the area of manufacturing (sales from overseas branches among total sales for domestic and overseas manufacturing corporations) rose from 13.9% in 2009 to 18.4% in 2016 (16.1% as of 2018). In contrast, the average operation rate for domestic manufacturing slid from 80.5% in 2011 to 73.2% in 2019. HRI explained, “The decline in average domestic manufacturing operation rates and the increased percentage of overseas market sales will function as factors inhibiting domestic facility investment.”

Proportion of overseas sales in manufacturing sector

Seven indicators -- including real GDP, real interest rates, and expanded foreign direct investment – were also analyzed for their effects on investment over the period from the first quarter of 2005 to the fourth quarter of 2019. The results showed an estimated 0.51-percentage point rise in the rate of increase in facility investment with each percentage point increase in the economic growth rate (with a ripple effect from the third quarter afterward on average), with an estimated 0.38-percentage point rise with each percentage point increase in the Business Survey Index (BSI).

Changes in the real interest rate and net investment capital outflows (foreign direct investment minus direct domestic investment by foreign investors) were not found to have a significant effect on the rate of increase in facility investment. This suggests that facility investment decisions by South Korean manufacturing businesses are mainly reliant on the growth rate and business fluctuation indicators rather than interest rates or overseas investment factors.

By Cho Kye-wan, staff reporter

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