"Overseas investment 'sixfold' jumped..." Korea 'growth shock' a frightening warning

A decline in productivity has encouraged companies and households to invest abroad and thereby increased the shock to gross domestic product (GDP), according to an analysis. If domestic productivity falls by 0.1%, domestic investment decreases by 0.05% due to capital outflows, and as a result GDP (=productivity+labor input+capital input) falls by 0.15%.

The Korea Development Institute (KDI) released a report titled 'The Macroeconomic Background and Implications of Rising Overseas Investment' on the 4th.

The scale of overseas investment by firms and households is steadily increasing. On a 'national income' basis — GDP plus the income balance (the income from domestic residents' foreign investments minus foreign investors' domestic investment income) — the share of net overseas investment rose from 0.7% in 2000–2008 to 4.1% in 2015–2024, roughly a sixfold increase. The rise in net overseas investment is the result of declining domestic productivity. KDI analyzes that total factor productivity (TFP) slowed rapidly in the 2000s, causing domestic investment returns to fall.

From the mid-2000s, domestic investment returns began to fall below overseas investment returns. From then on, households started selling domestic stocks and bonds and buying foreign assets, and the 'Seohak Ants' craze spread. Companies also expanded overseas capital investment and cross-border mergers and acquisitions (M&A). In short, the productivity slowdown moved domestic capital abroad.

KDI found that when productivity falls by 0.1%, firms on average reduce domestic capital input by 0.05%. Productivity decline directly lowers GDP and, at the same time, the reduction in domestic capital pulls GDP down once more.

The reduction in labor input due to a declining working-age population is also eroding domestic capital profitability. Kim Jun-hyung, chief researcher for trends at KDI's Economic Outlook Office, said, "To boost the vitality of the domestic economy, economic structural reforms that improve productivity must be continued."

Reporter Kim Ik-hwan lovepen@hankyung.com