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Polarizing Business Competitiveness
Korea Development Institute
Polarization of industry and business and widening gaps in competitiveness and performance have been spreading across the sectors and intensifying amid the recent economic recession and slow growth. Tangible polarization, as seen in the performance differences among various economic areas (industries, sectors, business category and size, employment/income groups, etc.), is deepening into “omni-directional and individual polarization,” the gaps ever widening among individual players within the same group.
If employment and income polarization is included, the internal and external factors of polarization form a vicious circle of “achievement gaps among industries and businesses ―> gaps in income and employment ―> gaps in innovation base (human resources, investment in research and development) ―> back to the gaps among industries and businesses.”
Economic recovery is expected to partially relieve the problem, but structural factors at home and overseas will very likely continue, sustaining or intensifying polarization. The growth rate cannot be expected to rebound in the short to mid term. Besides, this is not an issue that can be resolved through economic recovery alone.
In order to tackle the widening gaps amid slow growth, a two-track strategy is required to maximize the growth potential of competitive sectors while improving the capability of struggling sectors. In other words, shared growth should be sought through market opening and policy reforms for service industries and small and medium companies.
Due to the accelerating polarization among individual players, the average performance of a specific group is not significant anymore. More specialized and differentiated approaches are required to address problems faced by individual players, for which overall restructuring of policy infrastructure is necessary.
II. Development Trend of Polarization
In a polarized economy, the widening performance gap (productivity, profit, etc.) between competitive and weak sectors (industry/business categories/companies) increases the proportion of employment in the laggards, eroding the distribution structure of the entire economy. This kind of polarization gradually emerged in the 1990s and accelerated after the 1997 currency crisis. In the early 2000s, polarization continued to intensify due to cyclical factors such as weak domestic demand.
1) Main factor in the first phase (1990 to the present): Employment in the manufacturing sector fell by 11 percentage points from 28 percent in 1989 to 17 percent in 2010, while productivity soared. Meanwhile, employment rose in the service sector in spite of stagnating productivity. Deindustrialization has proceeded much faster in Korea than in most industrialized countries, but the productivity (wages) of the nation`s service sector remains far lower than that of manufacturing. As of 2009, the service sector accounted for 60 percent of GDP and 67 percent of employment, but its productivity hovered around 40 percent of manufacturing sector`s, compared to 80 to 100 percent in industrial countries.
2) Main factor in the second phase (since the currency crisis to the present): Large conglomerates with high productivity and high growth (key manufacturing, finance and insurance, construction, etc.) reduced their workforce substantially, leading to steep increases in employment at small and medium-sized firms and subsistence-type service businesses with low productivity.
3) Main factor in the third phase (since economic recession): Amid the remarkable corporatization trend of local service providers, traditional manufacturing, service, transportation and construction businesses faced tumbling domestic demand. Recession in these already overcrowded sectors dealt a severe blow to employment and income in the middle to lower income classes, leaving numerous small-time business owners and temporary day labors jobless.
Around the mid-2000s, the overall economy began to show new structural changes amid increasing polarization among businesses as the industrial and corporate restructuring triggered by the currency crisis neared completion. The changes included decline of innovative small and medium companies, emergence of knowledge-intensive service companies, and phenomenal growth of the top 10 conglomerates into global multinational enterprises.
III. Causes and Prospects of Polarization
Polarization was caused by a combination of three structural factors (see <Figure 1>): rapid changes in the domestic and global economic environment; vulnerability of the industrial and employment structures at home; and delays and accumulated problems in policy response. Polarization is expected to continue in the mid to long term and may even intensify.
In regard to the vulnerable industrial and employment structures, the major problems are the weak core parts and material suppliers, who are considered the “backbone of industry,” and a hefty proportion of self-employed small business owners.
Due to the weakness of their suppliers, a growing number of core intermediate goods have been outsourced since the mid-1990s. Therefore, the outstanding achievements of highly productive and export-based sectors mainly led by a few large conglomerates, such as IT and automobiles, have not fully led to additional domestic demand. Added value from exports has fallen from 0.71 in 1993 to 0.63 in 2000 and again to 0.56 in 2009. Meanwhile, import dependency for intermediate goods has risen from 18.8 percent in 1990 to 24.7 percent in 2009.
The proportion of self-employed small business owners has been trending downward but still stands at the 30 percent level, the highest among the OECD member countries in both manufacturing and service industries.
It is expected that not only the majority of businesses in light industry (about 6 percent of total employment) but also small companies in heavy and chemical industries (about 5 percent of total employment) and small-scale farms (about 50 percent of farm households) will remain marginalized.
It is also forecast that the majority of subsistence-type small service firms and builders, which served as primary employment providers after the currency crisis, have recently undergone extensive restructuring driven mainly by major enterprises. These vulnerable businesses will face increasing marginalization in the years ahead.