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

Kyung-Mook Lim and Wonhyuk Lim
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Kyung-Mook Lim: Department of Macroeconomic and Financial Policies, Korea Development Institute (KDI), P.O. Box 113, Cheongnyang, Seoul 130-012, Korea
Wonhyuk Lim: Brookings Institution, 1775 Massachusetts Avenue, NW Washington, DC 20036 USA and Korea Development Institute

Asian Economic Papers, 2006, vol. 5, issue 3, 1-18

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. (c) 2007 The Earth Institute at Columbia University and the Massachusetts Institute of Technology.

Date: 2006
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