How to encourage companies to make investment

Companies do not invest even though they make profits. The cash equivalents of Korea’s 10 conglomerates hit a record high of 124 trillion won (111.6 billion U.S. dollars) at the end of last year. Their retained earnings ratio (retained earnings/shareholders’ equity) were 1,442 percent and their financial profile is getting better year after year. As they fail to find the right place for investment, 47 trillion won (42.3 billion dollars) out of their cash equivalents are in short-term financial instruments.

It is only a short-sighted perspective to blame the sluggish global economy or delayed domestic economic recovery for the lackluster investment. Excessively small investment is becoming a strong trend regardless of economic conditions. Capital expenditure, which used to grow by 10 to 20 percent in the 1970s and 80s, decreased every year in the 2000s and eventually plummeted by 6.5 percent last year. If any, companies invest abroad. Korean companies’ direct investment outside Korea grew 17.2 percent between 2003 and 2012. It is natural to be concerned about the Korean economy’s path toward low growth.

Investment is not something that can be forced by the government or the public. When the previous Lee Myung-bak administration pushed for it, companies did not make investment. As they cannot find a place for investment, it is urgent to find a new growth engine.

The government calls for a creative economy but companies say that they have no idea what it wants to do. The policy (for creative economy) should be further made into details since the notion is too broad to make a focus and selection. The government should ease old-fashioned regulations in the value-added service sector including medicine, education, and tourism. It also should come up with policies that encourage investment in new growth businesses such as bio and new material industry. It is a step in the right direction that 14 ministries and five economic associations have decided to form a task force to review regulations on the Seoul metropolitan area, locations, and the environment.

Privileged labor unions are blocking investments in some conglomerates. In case of Hyundai Motors, it takes 31.3 hours in Ulsan factory, 14.6 hours in Alabama, and 19.5 hours in Beijing to build a car but the production process cannot be rationalized due to the backlash from the union. The company cannot even reassign a union worker who tightened nuts for a Grandeur to work on nuts on the assembly line for a Sonata. The government may have to be grateful for companies not off-shore their facilities, not to mention further investment.

The government`s policy direction is still vague and regulations are hindering from approaches to the profitable businesses. The privileged unions are not willing to give up their vested rights. These are the reasons that companies are reluctant to invest despite their huge pile of cash.