The state-run Korea Development Institute on Tuesday called for a decrease in the financial support for insolvent companies as it could delay their restructuring and hamper their economic dynamism.
The KDI said in its report that increasing support for so-called “zombie companies” ― insolvent companies relying on external financial support ― would have a negative impact on the economy as a whole. The existence of the companies would keep labor costs and interest rates high, thus having a negative effect on employment and shrinking investment in normal companies.
“South Korea’s zombie companies accounted for 15.6 percent of total firms in 2013, up from 13 percent in 2010 as banks kept extending the maturity of the loans for insolvent companies,” said Jung Dae-hee, a researcher at KDI’s macroeconomics division.
The presence of such insolvent enterprises was particularly significant in the local shipbuilding and construction industries, areas that have been reluctant to undergo restructuring despite a prolonged slowdown, according to the think tank.
For instance, in the shipbuilding industry, the number of insolvent firms rose to 26.2 percent in 2013 from 7.1 percent in 2010 while those in the construction sector increased to 41.1 percent in 2013 from 26.3 percent in 2010.
“Restructuring appears to be quite urgent in the two sectors, which already have reached their limits in terms of growth,” Jung said.
KDI cited the case of Japan, which continued to support faltering companies.
In the early 1990s following its property bubble burst, Japanese commercial banks kept providing funds to insolvent companies by rolling their debt over, at the expense of cutting down on loans for normal companies.
The move eventually ended up having a negative impact on the economy as a whole.
The number of zombie companies in Japan rose to account for 14 percent of the total companies in the late 1990s, up from 4 to 6 percent in the early 1990s.
“This delayed the restructuring of Japanese companies and led to a decline in employment and investment in normal companies,” the KDI report said.
