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Investment Bust in Post-Crisis Korea: Fact or Fiction?

Lim, Kyung-Mook / Lim, Won Hyuk

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Abstract

In post-crisis Korea, facility (equipment) investment shows the worrisome trends of a slowdown in investment growth and a decline in investment propensity. We marshal micro and macro data to examine four major explanations for these important developments. Our analysis: (a) finds that cyclical factors such as depressed private consumption in 2003 and 2004 did lead to lower investments in automobiles, hence dragging down total investment growth in these years; (b) rejects the claim that investment was lowered by an “anti-chaebol environment” created by the Roh Moo-hyun government (facility investment by large firms actually increased by a great deal in 2003 and 2004, whereas aggregate investment in the national account showed anemic growth); (c) supports the “moral hazard” hypothesis, which states that chaebol investment in the pre-crisis period was abnormally high because of implicit state guarantees (the chaebol dummy in our investment equations was no longer statistically significant in the post-crisis period, in the aftermath of large-scale bankruptcies); and (d) supports the “hollowing-out” hypothesis, which holds that outward foreign direct investment has reduced domestic facility investment because the price competitiveness of final assembly and other labor-intensive sectors in Korea has been eroded by the rise of late-developing countries such as China and Vietnam.

Issue Date
2007-02
Publisher
MIT Press
DOI
10.1162/asep.2006.5.3.1
Journal Title
Asian Economic Papers
Start Page
1
End Page
18
ISSN
1535-3516
Language
English
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