Delayed exit of struggling firms slows Korean economy

An analysis suggests South Korea’s gross domestic product could have grown 0.4 to 0.5 percent if struggling, high-risk companies had been properly allowed to exit the market. The study said weak firms survived past economic crises with government financial support, which restrained private investment.

On Nov. 12, the Bank of Korea said in a report titled “Why Has Our Growth Been Structurally Low After Economic Crises?” that low-productivity firms should be allowed to exit the market naturally to help ease structural growth slowdowns. The report also stressed the need for smooth entry of new firms.

The central bank analyzed about 2,200 companies and found that since the 2008 global financial crisis, most firms either stagnated or cut investment. It noted that weak investment is closely linked to declining profitability. The Bank of Korea concluded that South Korea’s growth has slowed following multiple crises, including the 1997-1998 IMF financial crisis, the 2008 global financial crisis, and the 2020 pandemic, largely because of reductions in private consumption and investment. Delays in the exit of struggling firms during these crises prevented new entrants from entering the market and limited investment, contributing to slower overall growth.

The report shows that high-risk companies accounted for about 4 percent of the market between 2014 and 2019, but only 2 percent actually exited. After the COVID-19 pandemic, from 2022 to 2024, high-risk companies made up 3.8 percent of the market, yet only 0.4 percent exited, a sharp decline from earlier periods. The central bank estimated that if high-risk firms had been properly restructured and replaced by normal companies, domestic investment would have risen 3.3 percent from 2014 to 2019 and 2.8 percent from 2022 to 2024. Gross domestic product would have increased 0.5 percent and 0.4 percent in each period, respectively.

The analysis attributed the outcome to high-risk companies investing far less than healthy firms. The report suggested that smoother market entry and exit could have generated substantial investment growth. That growth could also produce secondary effects. The Bank of Korea said increased investment could boost employment, raise household incomes, and stimulate consumption. In particular, research and development investment could strengthen growth potential through technological innovation and higher productivity.

Experts emphasized that restructuring high-risk firms should be selective and supplemental, aimed at protecting the broader industrial ecosystem rather than individual companies. “The exit of weak firms should focus on protecting the industrial ecosystem rather than individual companies," said Lee Jong-woong, deputy head of the Bank of Korea’s research team. "It is important to continuously strengthen the economy’s future growth engine by promoting investment in new industries through regulatory reforms, supporting core sectors such as semiconductors and automobiles, and creating demand for new products and services.”


이호 기자 number2@donga.com