A state-run think tank has proposed shifting the focus of industrial policy to strengthening support for local companies that move production abroad, sparking a debate over whether the current policy of promoting domestic manufacturing is still appropriate.

In its report submitted to the government last month, the Korea Development Institute suggested changing the nation’s policy paradigm from “Made in Korea” to “Made by Korea.” Economic policymakers have so far given no consideration to helping manufacturers transfer production overseas, worrying about job losses and the possibility of cutting-edge technologies being stolen.
 

However, rising labor costs and bothersome regulations have pushed an increasing number of Korean companies to move their factories abroad in recent years to stay globally competitive.

Against this backdrop, corporate officials and economists increasingly say that adherence to a policy centered on keeping production bases in Korea may be outdated.

“Our industrial policy framework needs to be restructured in the direction of helping Korean companies operating abroad earn more money and ensuring the profits flow back home,” said Kim Joo-hoon, executive director of the Economic Information and Education Center affiliated with the KDI.

The report from the research institute suggested the focus should shift from gross domestic product growth to gross national income, which is a country’s GDP combined with its net income from abroad.

A recent string of figures released by government agencies shed light on the fading vitality of Korea’s economy.

According to data from the government’s statistics office, total sales of Korean companies suffered their first ever annual decline last year, mainly due to the weakening of the manufacturing sector. Manufacturing firms recorded a combined turnover of 1.726 quadrillion won ($1.49 trillion) in 2014, down 10 trillion won from the previous year.

A separate report by Statistics Korea showed the country’s industrial output fell by 1.4 percent on-month and 1.3 percent from a year earlier in October, largely affected by declining exports.

The Ministry of Trade, Industry and Energy said Tuesday that Korea’s exports decreased for the 11th consecutive month in November, though the pace of on-year contraction decelerated to 4.7 percent from 15.9 percent in the previous month.

Data released by the Bank of Korea on Wednesday showed the country’s current account surplus shrank from a month earlier in October, with overseas shipments tumbling and the deficit in the service sector widening. The surplus amounted to $8.96 billion in that month, down from $10.54 billion in September.

These lackluster figures may strengthen the case for a new industrial policy as suggested by the KDI. The institute advised government policymakers to encourage companies to move manufacturing to countries with cheaper and more productive labor forces, while keeping the core fields of research and development and industrial design at home.

The rapid reduction of the technology gap between Korea and China is also prompting economists here to call for a shift in industrial policy.

According to a recent report by the Korea Institute for Industrial Economics and Trade, Korean manufacturers have seen their lead in technology over Chinese competitors narrow from an average 3.7 years in 2011 to 3.3 years in 2015. Experts say the gap has been reduced to slightly over 1 year in key strategic industrial technologies that both countries are focusing on as future growth engines.

This narrowing gap has eaten into exports of intermediary goods from Korea to China. Furthermore, China has eroded or caught up with Korea’s global market shares of key export items. For instance, Chinese shipbuilders accounted for 26.7 percent of global orders in 2012, surpassing Korean shipyards’ 26.0 percent.

But some critics argue it does not make sense to help local manufacturing firms move production abroad when youth unemployment is continuing to rise.

They also express skepticism that a rise in GNI on the back of increased production overseas will translate into more income for local households. Government data showed the corporate share of GNI had increased from 16.1 percent to 23.5 percent over the past two decades, while the corresponding numbers for households slipped from 71.5 percent to 62.3 percent over the same period.

Additionally, the U.S., Japan and other advanced economies are moving in the opposite direction, offering tax incentives and financial support to manufacturing firms operating overseas that move their factories back to their home countries.

Government policymakers seem to find it difficult to accept the KDI proposal, which contradicts the priority President Park Geun-hye has put on creating more jobs, particularly for young people. An official at the Ministry of Strategy and Finance said shifting to the “Made by Korea” policy would entail many problems, downplaying the KDI’s suggestion as “nothing more than a theme of discourse.”

But economists and corporate officials indicate the proposal should set the stage for a more serious discussion on how to enhance the competitiveness and productivity of Korea’s manufacturing firms.

“We have certainly lacked a pertinent industrial policy in recent years,” said a corporate executive who asked not to be named.

They raise the need to work out a better conceived and more balanced policy to improve local business conditions and extend substantial support to selected marginal manufacturers judged to have no choice but to move abroad.

By Kim Kyung-ho (khkim@heraldcorp.com)