Investment Bust in Post-Crisis Korea - Am MIT spezialisierte KI-Forschung

Investment Bust in Post-Crisis Korea
Investment Bust in Post-Crisis Korea

Kyung-Mook Lim
Department of
Macroeconomic and Financial
Policies
Korea Development Institute
(KDI)
P.O. Kasten 113
Cheongnyang, Seoul 130-012
Korea
limk@kdi.re.kr

Wonhyuk Lim
Brookings Institution
1775 Massachusetts Avenue,
NW
Washington, Gleichstrom 20036
USA
wlim@brookings.edu
Und
Korea Development Institute
wlim@kdi.re.kr

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

Abstrakt
In post-crisis Korea, Einrichtung (Ausrüstung) 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 Und 2004 did lead to
lower investments in automobiles, hence dragging down total in-
vestment growth in these years; (B) rejects the claim that invest-
ment 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 Und 2004, whereas ag-
gregate investment in the national account showed anemic
Wachstum); (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 bankrupt-
cies); Und (D) supports the “hollowing-out” hypothesis, welche
holds that outward foreign direct investment has reduced domes-
tic 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.

1. Einführung

A slowdown in facility investment (or equipment invest-
ment) has been the subject of intense policy debate in
Korea since the economic crisis of 1997–98. As Figure 1
zeigt an, after recording an impressive recovery from the
impact of the economic crisis, facility investment has
shown anemic growth since 2001. More signiªcant than
the slowdown in investment growth has been a noticeable

Asian Economic Papers 5:3

Institute of Technology

D
Ö
w
N
Ö
A
D
e
D

F
R
Ö
M
H

T
T

:
/
/

D
ich
R
e
C
T
.

ich
T
.

e
D
u
A
S
e
P
A
R
T
ich
C
e
–
P
D

F
/

5
3
1
1
6
8
2
2
8
2
A
S
e
P
2
0
0
6
5
3
1
P
D

B
j
G
u
e
S
T

Ö
N
0
8
S
e
P
e
M
B
e
R
2
0
2
3

Investment Bust in Post-Crisis Korea

Figur 1. Growth in Korea’s facility investment (1996–2004) (Prozent)

Quelle: Bank of Korea.

drop in investment propensity as measured by the ratio of nominal facility invest-
ment to nominal GDP. Figur 2 shows that Korea’s facility investment propensity
has declined, from approximately 14 percent in the pre-crisis period to 10 Prozent in
the post-crisis period.1 These two developments have caused a great deal of concern
in a country so used to the idea of robust investment leading to rapid economic
growth.2

Four hypotheses have emerged to explain the investment slowdown. The ªrst
hypothesis attributes these trends in facility investment to changes in risk assess-
ment in the aftermath of large-scale bankruptcies during the economic crisis.
According to this ªrst hypothesis, based on the idea of “moral hazard,” the weaken-
ing of implicit government guarantees against large-scale bankruptcies has led to
more prudent investment behavior among large business groups, which had
beneªted from such government guarantees in the pre-crisis period.3

The second hypothesis blames antibusiness sentiments, onerous regulations, Und
takeover threats, especially in regard to the chaebol, Korea’s large family-based busi-
ness groups. Insbesondere, it alleges that the Roh Moo-hyun government’s hostile

1 The IMF has noted a similar decline in investment propensity in other Asian countries that
were affected by the economic crisis of 1997–98. See International Monetary Fund (2005).

2 On the relationship between investment and economic growth, see De Long and Summers

(1991) and Jones (1994).

3 For a historical perspective on this problem, see Lim (2003).

Asian Economic Papers

D
Ö
w
N
Ö
A
D
e
D

F
R
Ö
M
H

T
T

:
/
/

D
ich
R
e
C
T
.

ich
T
.

e
D
u
A
S
e
P
A
R
T
ich
C
e
–
P
D

F
/

5
3
1
1
6
8
2
2
8
2
A
S
e
P
2
0
0
6
5
3
1
P
D

B
j
G
u
e
S
T

Ö
N
0
8
S
e
P
e
M
B
e
R
2
0
2
3

Investment Bust in Post-Crisis Korea

Figur 2. Nominal facility investment as a percentage of nominal GDP (1990–2004)

Quelle: Bank of Korea.

policy toward the chaebol has led to a slowdown in investment growth and a decline
in investment propensity.4

The third hypothesis sees “hollowing out” caused by increasing outward foreign
direct investment (FDI), with China being the primary destination. In this view, out-
ward FDI is a substitute for domestic facility investment.

The fourth hypothesis cites cyclical factors such as stagnant domestic consumption
as the main culprit for the slowdown in investment growth.

In diesem Papier, we test each of the hypotheses outlined above. Insbesondere, we note
that the ªrst two hypotheses have different implications for ªrms of different sizes,
as the weakening of implicit government guarantees and the adoption of an anti-
chaebol policy would predominantly affect only the large business groups. Auch, Wir
observe that the moral hazard hypothesis posits a change in the investment behav-
ior of the chaebol in the post-crisis period, whereas the “anti-chaebol environment”
hypothesis focuses on a later period starting in 2003, with the inauguration of the

4 Zum Beispiel, at a National Assembly hearing on Korea’s fair trade law in July 2004, a repre-
sentative from the Federation of Korean Industries (FKI) argued that chaebol reform should
be left to the market and that government regulation was depressing investment. Auch, Die
conservative Chosun Ilbo set investment as one of the top 10 items on Korea’s economic
agenda at the end of 2004 and asserted that the government’s prolabor orientation discour-
aged entrepreneurs from undertaking facility investment. These pro-chaebol voices typically
pointed to weak aggregate investment in 2003 Und 2004 as their evidence, apparently assum-
ing that weak aggregate investment implied weak investment by large family-based business
groups. See Lee (2005) and Hong (2005).

Asian Economic Papers

D
Ö
w
N
Ö
A
D
e
D

F
R
Ö
M
H

T
T

:
/
/

D
ich
R
e
C
T
.

ich
T
.

e
D
u
A
S
e
P
A
R
T
ich
C
e
–
P
D

F
/

5
3
1
1
6
8
2
2
8
2
A
S
e
P
2
0
0
6
5
3
1
P
D

B
j
G
u
e
S
T

Ö
N
0
8
S
e
P
e
M
B
e
R
2
0
2
3

Investment Bust in Post-Crisis Korea

Roh government. As for the hollowing-out hypothesis, the critical question is
whether outward FDI and domestic facility investment are substitutes or comple-
gen. Endlich, we note that the “business cycle” hypothesis has more to do with
trends in investment growth than with investment propensity.

2. Data and methodology

To test the four hypotheses outlined above, we use ªve sets of data: (1) National
account; (2) ªnancial statement analysis data compiled by the Bank of Korea;
(3) ªnancial data of externally audited companies; (4) ªnancial statements and
disclosure data set of listed companies; Und (5) FDI data collected by the Korea
Export-Import Bank.5

The national account allows us to track aggregate trends in facility investment,
which consists of investment in machinery and transportation equipment, einschließlich
Automobile. Among the ªve data sets, it has the most comprehensive coverage, Aber
its level of aggregation is such that it is not conducive to detailed analysis of facility
investment by ªrm size or by industry.

The ªnancial statement analysis data make it possible to put recent trends in histori-
cal perspective because they cover corporate performance in Korea’s manufacturing
sector since the 1960s. This data set is an interesting mixture in terms of coverage.
On an annual basis, the Bank of Korea analyzes the ªnancial statements submitted
by a sample of approximately 3,000 ªrms out of approximately 37,000 nonªnancial
taxpaying corporations with an annual sales of at least 2 billion won. The sample
includes all publicly listed ªrms, all ªrms with an annual sales of at least 70 Milliarde
won, and all top-ªve ªrms based on sales in each industry as well as representative
smaller ªrms from each industry. (We note that there are more than 4 million com-
panies in Korea.)

The micro data set tracking the performance of externally audited or listed compa-
nies allows us to take a detailed look at the investment behavior of ªrms based on
their size and other characteristics. For externally audited ªrms, with an asset size of
7 billion won or more, we use a data set compiled by the National Information and
Credit Evaluation, Inc. (NICE), a credit-rating agency. The number of ªrms included
in the data set varies from year to year because NICE does not collect ªnancial infor-
mation on all externally audited ªrms but rather focuses on the ªrms whose credit it
evaluates in a given year. This data set covers more than 7,000 ªrms, including some

5 Our methodology is similar to that used in Becker et al. (2006).

Asian Economic Papers

D
Ö
w
N
Ö
A
D
e
D

F
R
Ö
M
H

T
T

:
/
/

D
ich
R
e
C
T
.

ich
T
.

e
D
u
A
S
e
P
A
R
T
ich
C
e
–
P
D

F
/

5
3
1
1
6
8
2
2
8
2
A
S
e
P
2
0
0
6
5
3
1
P
D

B
j
G
u
e
S
T

Ö
N
0
8
S
e
P
e
M
B
e
R
2
0
2
3

Investment Bust in Post-Crisis Korea

Tisch 1. Trends in facility investment (1995–2004—Nominal) (trillions of won)

Facility investment

Transportation equipment

Automobiles
Other transportation equipment

Machinery

General machinery
Electrical and electronic

machinery
Precision tools
Other machinery

Quelle: Bank of Korea.

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

71
18
14
3
52
34
10

5
2

77
19
15
4
57
37
12

5
2

70
17
14
2
52
31
13

5
2

40
8
7
1
31
14
11

3
1

55
14
12
2
41
17
17

4
1

74
17
13
3
56
23
24

6
1

67
15
14
1
51
20
23

5
1

72
17
5
1
55
22
24

6
1

71
15
12
2
56
23
22

8
1

74
13
10
3
60
26
22

10
1

small and medium-sized enterprises (SMEs) with no more than 300 employees, Aber
with an asset size of 7 billion won or more. Im Gegensatz, the data set of listed compa-
nies is more consistent and reliable but is much narrower in coverage, as it contains
etwa 1,000 Firmen.

To analyze facility investment trends by ªrm size and other characteristics, wir gebrauchen
cash ºow statement data and deªne facility investment as the difference between
the cash outºow from acquisition of machinery and equipment and the cash inºow
from disposal of machinery and equipment. Land and property transactions are
excluded.

3. Recent trends in Korea’s facility investment: A closer look

3.1 Aggregate trends
In the national account, facility investment consists of investment in machinery
and transportation equipment. Tisch 1 shows trends in facility investment by com-
ponent.

Figur 3 shows the growth rate of facility investment before and after investment in
Automobile, the most important component of transportation equipment, is in-
eingeschlossen. We can see that the depressed facility investment in 2003 Und 2004 is partly
due to a sharp decline in the purchase of automobiles for business use. Tatsächlich, Die
growth rate of facility investment excluding automobiles is 3.1 Prozent in 2003 Und
8.5 Prozent in 2004, whereas the growth rate drops to 21.2 percent and 3.8 Prozent,
jeweils, when automobiles are included. Investment in automobiles appears
quite volatile.

The service sector, which is sensitive to ºuctuations in private consumption, ac-
counts for most of the investment in automobiles. This suggests that investment in

Asian Economic Papers

D
Ö
w
N
Ö
A
D
e
D

F
R
Ö
M
H

T
T

:
/
/

D
ich
R
e
C
T
.

ich
T
.

e
D
u
A
S
e
P
A
R
T
ich
C
e
–
P
D

F
/

5
3
1
1
6
8
2
2
8
2
A
S
e
P
2
0
0
6
5
3
1
P
D

B
j
G
u
e
S
T

Ö
N
0
8
S
e
P
e
M
B
e
R
2
0
2
3

Investment Bust in Post-Crisis Korea

Figur 3. Growth rate of facility investment including and excluding automobiles (Prozent)

Quelle: Bank of Korea.

automobiles would be sensitive to ºuctuations in private consumption, and this is
indeed the case: Depressed private consumption in 2003 Und 2004 led to low invest-
ment in automobiles for business use, which in turn accounted for a slowdown in
facility investment growth, at least in part.6

Jedoch, cyclical factors provide a rather incomplete solution to the investment
puzzle. Insbesondere, they cannot account for the decline in investment propensity
in the post-crisis period. Figur 4 shows changes in the facility investment ratio and
machinery investment ratio over the past decade. While the facility investment ratio
has dropped from 14 percent in the pre-crisis period to 10 percent in the post-crisis
Zeitraum, the machinery investment ratio has declined from 11 Prozent zu 9 Prozent.
We can deduce that nominal investment in transportation equipment as a percent-
age of nominal GDP has declined from 3 Prozent zu 1 Prozent. This structural change
should be explained.

3.2 Investment patterns by ªrm characteristics
By using the national account data in conjunction with ªnancial data from listed
Firmen, we can see whether listed companies have exhibited an investment
behavior distinct from the rest of the economy. Figur 5 compares the growth rate
of facility investment in the national economy as a whole with that among listed
companies only.

Tisch 2 places facility investment growth in a comparative perspective. Aus
Figur 5 und Tisch 2, we can see that there are four periods in which listed compa-

6 For details, see Lim (2005, 20–24).

Asian Economic Papers

D
Ö
w
N
Ö
A
D
e
D

F
R
Ö
M
H

T
T

:
/
/

D
ich
R
e
C
T
.

ich
T
.

e
D
u
A
S
e
P
A
R
T
ich
C
e
–
P
D

F
/

5
3
1
1
6
8
2
2
8
2
A
S
e
P
2
0
0
6
5
3
1
P
D

B
j
G
u
e
S
T

Ö
N
0
8
S
e
P
e
M
B
e
R
2
0
2
3

Investment Bust in Post-Crisis Korea

Figur 4. Nominal facility investment and machinery investment as a percentage of nominal
BIP (1995–2004)

Quelle: Bank of Korea.

Figur 5. Facility investment growth: National economy versus listed companies (Prozent)

D
Ö
w
N
Ö
A
D
e
D

F
R
Ö
M
H

T
T

:
/
/

D
ich
R
e
C
T
.

ich
T
.

e
D
u
A
S
e
P
A
R
T
ich
C
e
–
P
D

F
/

5
3
1
1
6
8
2
2
8
2
A
S
e
P
2
0
0
6
5
3
1
P
D

B
j
G
u
e
S
T

Ö
N
0
8
S
e
P
e
M
B
e
R
2
0
2
3

Quelle: Bank of Korea, WiseFn.

Asian Economic Papers

Investment Bust in Post-Crisis Korea

Tisch 2. Facility investment growth: A comparison (year on year, Prozent)

1996

12.1
24.4
(cid:2)3.2

1997
(cid:2)4.8
(cid:2)1.7
(cid:2)9.7

1998
(cid:2)32.5
(cid:2)26.9
(cid:2)42.3

1999

34.2
(cid:2)5.9
123.1

2000

36.3
25.8
46.1

2001
(cid:2)8.1
(cid:2)25.7
6.1

2002

4.5
(cid:2)12.8
14.3

2003
(cid:2)2.7
34.8
(cid:2)18.8

2004

3.7
31.4
(cid:2)16.1

National economy

Listed companies only
Excluding listed
Firmen

Quelle: Bank of Korea, WiseFn.

nies exhibited a rather different investment behavior from the rest of the economy.
To the extent that listed companies tend to be large, well-established, and interna-
tional in outlook, this divergence in investment behavior reºects structural condi-
tions that affected ªrms with different characteristics in different ways.7

Aus 1994 Zu 1996, listed companies increased their facility investment at a much
higher rate than the rest of the economy. This period coincided with a boom in the
global economy, and large Korean companies invested aggressively, expecting that
the government would come to their rescue should they get into trouble—an exam-
ple of moral hazard.8 In the aftermath of large-scale bankruptcies during the 1997–
98 economic crisis, Jedoch, large companies began to hunker down and undergo
painful corporate restructuring. Tatsächlich, the next few years saw facility investment
undertaken by listed companies growing at a lower rate than the rest of the econ-
omy. In 1999 Und 2000, although facility investment by listed companies showed a
strong recovery, it was overshadowed by robust investment by the rest of the econ-
omy, as new venture ªrms in particular took advantage of the information technol-
ogy boom in this period. In 2001 Und 2002, listed companies bore the brunt of a
slowdown in the global economy, whereas the rest of the economy did much better,
thanks to a consumer credit boom.

The tide began to turn in 2003, as measures taken to curb the growth of credit card
debt led to a consumption bust. Financially healthier than ever after years of corpo-
rate restructuring and encouraged by a recovery in the global economy, listed com-
panies rapidly increased their facility investment in 2003 Und 2004, after the Roh
government took ofªce. While growth in facility investment for the national econ-
omy as a whole was anemic, facility investment by listed companies soared in this
Zeitraum. As shown in Table 2, this turnaround in facility investment by listed compa-

7 For a more detailed discussion of economic conditions in Korea, see the OECD’s annual Eco-

nomic Survey of Korea, particularly from the years 1998 durch 2004.

8 See Hahn (2000). Using ªrm-level data in the pre-crisis period, Hahn shows that, verglichen
with other ªrms, top-ranking business groups tended to maintain higher investment rates
and increase investment when uncertainty rose. This investment pattern is consistent with
moral hazard.

Asian Economic Papers

D
Ö
w
N
Ö
A
D
e
D

F
R
Ö
M
H

T
T

:
/
/

D
ich
R
e
C
T
.

ich
T
.

e
D
u
A
S
e
P
A
R
T
ich
C
e
–
P
D

F
/

5
3
1
1
6
8
2
2
8
2
A
S
e
P
2
0
0
6
5
3
1
P
D

B
j
G
u
e
S
T

Ö
N
0
8
S
e
P
e
M
B
e
R
2
0
2
3

Investment Bust in Post-Crisis Korea

nies suggests that the anti-chaebol environment hypothesis is unlikely to be valid.
After all, listed companies tend to be large and well-established ªrms, many of
which belong to the chaebol, and the hypothesis focuses on 2003 Und 2004, a period
of robust investment by listed companies.

Tatsächlich, the anti-chaebol environment hypothesis advanced by big business interests
suffers from some fundamental problems, both on the explanatory-variable side
and the dependent-variable side. Although many analysts have claimed that the
unleashing of anti-chaebol policy and sentiment in 2003 Und 2004 had a depressing
effect on facility investment, they have provided little evidence for such a shift in
policy or sentiment. This is actually understandable, because government policy to-
ward the chaebol changed very little in these years. Darüber hinaus, although designing an
appropriate metric for anti-chaebol sentiment is not a trivial matter, opinion surveys
taken in 2001 Und 2004 indicate that, if anything, the public perception of large com-
panies in Korea had improved over the period.9

As for the dependent variable, although pro-chaebol voices typically assume that the
anemic aggregate investment growth in 2003 Und 2004 ((cid:2)2.7 percent and 3.7 Prozent,
jeweils) implies weak investment by large companies in the same period, Die
numbers tell a rather different story. Tisch 2 shows that facility investment by listed
companies actually increased by more than 30 percent in each of these two years. In
theory, an ardent supporter of big business could argue that facility investment by
listed companies in these two years would have increased by, sagen, 50 oder 60 percent if
not for the dampening effect of the anti-chaebol environment; Jedoch, no one has
taken such an extreme position.

Using ªnancial data from listed companies, Figuren 6, 7, Und 8 show how these
companies changed their investment behavior in the wake of the economic crisis.
Figur 6 shows that the cash ºow of listed companies due to ªnancial activities was
positive in the pre-crisis period, primarily as a result of a massive increase in debt,
which rose by tens of trillions of won each year. In the aftermath of the crisis, Wie-
immer, listed companies issued new stocks to reduce the debt overhang. Tatsächlich, Die
cash ºow of listed companies due to ªnancial activities has been negative since 1999
thanks to their aggressive efforts to improve their ªnancial stability. Their dividend
payouts have also increased, with a greater focus on shareholder value.

9 An opinion survey conducted by the Korea Development Institute (KDI) in November 2001

showed that only 36.1 percent of respondents had a favorable view of large companies in Ko-
rea. By comparison, an opinion survey by the Federation of Korean Industries (FKI) in No-
vember 2004 showed that 57.4 percent of respondents had a favorable view of large compa-
nies. See KDI (2001) and FKI (2004).

Asian Economic Papers

D
Ö
w
N
Ö
A
D
e
D

F
R
Ö
M
H

T
T

:
/
/

D
ich
R
e
C
T
.

ich
T
.

e
D
u
A
S
e
P
A
R
T
ich
C
e
–
P
D

F
/

5
3
1
1
6
8
2
2
8
2
A
S
e
P
2
0
0
6
5
3
1
P
D

B
j
G
u
e
S
T

Ö
N
0
8
S
e
P
e
M
B
e
R
2
0
2
3

Investment Bust in Post-Crisis Korea

Figur 6. Cash ºow of listed companies due to ªnancial activities (trillions of won)

Quelle: WiseFn.

Notiz: The category “Capital change, stock repurchase” refers to the change in stockholders’ equity due to stock issue, equity write-down,

and stock buyback. Companies repurchase their shares to cope with a hostile takeover bid or to increase the value of ºoating shares in the

Markt.

Figur 7. Proªtability and investment propensity of listed companies (Prozent)

D
Ö
w
N
Ö
A
D
e
D

F
R
Ö
M
H

T
T

:
/
/

D
ich
R
e
C
T
.

ich
T
.

e
D
u
A
S
e
P
A
R
T
ich
C
e
–
P
D

F
/

5
3
1
1
6
8
2
2
8
2
A
S
e
P
2
0
0
6
5
3
1
P
D

B
j
G
u
e
S
T

Ö
N
0
8
S
e
P
e
M
B
e
R
2
0
2
3

Quelle: WiseFn.

Figur 7 shows that although listed companies have become more proªtable, Sie
have tended to be more conservative in their investment behavior in the post-crisis
Zeitraum. Operating income as a percentage of assets (proªtability) has increased
signiªcantly, but facility investment as a percentage of operating income (invest-
ment propensity) has exhibited a downward trend.

Figur 8 shows the improved liquidity position of listed companies since the eco-
nomic crisis. Apparently to shield themselves from a credit crunch, these companies

Asian Economic Papers

Investment Bust in Post-Crisis Korea

Figur 8. Improved liquidity of listed companies

Quelle: WiseFn.

have greatly increased their cash holdings and raised the proportion of liquid assets
in their overall asset portfolio.

To test the moral hazard hypothesis, we look at how investment propensity, as mea-
sured by the ratio of facility investment to total assets, has changed for the chaebol in
the post-crisis period.10 Table 3 summarizes the regression results. While the
coefªcient on the chaebol dummy is positive and signiªcant in the pre-crisis period,
it is not statistically signiªcant in the post-crisis period. Mit anderen Worten, in the pre-
crisis period, a chaebol tended to have a much higher investment propensity than
other ªrms. The chaebol discounted the downside risks because it apparently ex-
pected the government to come to its rescue should it get into trouble. Jedoch, af-
ter as many as 16 of the top 30 business groups went bankrupt in the wake of the
crisis, a chaebol clearly had to change its assumptions about the government’s im-
plicit guarantees. As a result of this change in risk assessment, the chaebol’s invest-
ment propensity in the post-crisis period is not statistically different from other
companies’, after such factors as proªtability and sales growth are controlled for.
This result is consistent with the moral hazard hypothesis.

These changes in investment behavior are also evident from ªnancial statement
analysis data collected by the Bank of Korea, which include not only listed compa-

10 Note that the dependent variable is the ratio of facility investment to total assets, not the ra-
tio of facility investment to operating income (or some other measure of “value-added,”
equivalent in concept to GDP at the aggregate level). This particular choice for “investment
propensity” at the ªrm level is informed by the fact that disaggregated operating income (oder
some other measure of “value-added”) tends to be quite volatile, whereas facility invest-
ment is characterized by multiyear planning and implementation.

Asian Economic Papers

D
Ö
w
N
Ö
A
D
e
D

F
R
Ö
M
H

T
T

:
/
/

D
ich
R
e
C
T
.

ich
T
.

e
D
u
A
S
e
P
A
R
T
ich
C
e
–
P
D

F
/

5
3
1
1
6
8
2
2
8
2
A
S
e
P
2
0
0
6
5
3
1
P
D

B
j
G
u
e
S
T

Ö
N
0
8
S
e
P
e
M
B
e
R
2
0
2
3

Investment Bust in Post-Crisis Korea

Tisch 3. Investment propensity of the chaebol before and after the crisis

1990–96 facility
investment/assets

1999–2003 facility
investment/assets

Operating income/assets

Operating income/assets (T (cid:2) 1)

Net sales growth

Chaebol dummy

Number of employees

Number of observations

Quelle: Berechnungen der Autoren.

***Statistically significant at 10 Prozent.

**Statistically significant at 5 Prozent.

*Statistically significant at 1 Prozent.

0.026
(1.74)*
0.044
(3.42)***
0.003
(1.99)**
0.029
(11.43)***
(cid:2)4E(cid:2)04
((cid:2)0.20)
3,772

0.030
(2.96)***
0.045
(4.35)***
0.009
(3.82)***
0.002
(0.94)
(cid:2)0.008
((cid:2)3.58)***
2,906

nies, but also all ªrms with an annual sales of at least 70 billion won and all top-ªve
ªrms based on sales in each industry as well as representative smaller ªrms from
each industry.

With regard to ªnancial stability, the average debt-to-equity ratio has seen a remark-
able decline in the post-crisis period. As Figure 9 zeigt an, the decline in the debt-
to-equity ratio in the post-crisis period has been nothing short of dramatic. Tatsächlich,
the debt-to-equity ratio of 104.2 Prozent in 2004 is lower than comparable ªgures
in the United States in 2004 and Japan in 2003, as indicated in Table 4.

The current ratio of liquid assets to short-term debts also has improved much in
comparison with the pre-crisis average, rising to 117.0 Prozent in 2004. This ªgure is
comparable to the level in the United States and Japan. It suggests that concerns
about Korean companies’ overaccumulating cash reserves may be exaggerated.

Trends in the interest coverage ratio (measured here as the ratio of operating
income–to–interest expenses) also show the extent of improvement in the long-term
ªnancial stability of Korean ªrms. The ability of Korean ªrms to generate cash ºow
relative to their debt service obligations has improved a great deal since 1998. Aus
the pre-crisis average of 123.5 Prozent, the interest coverage ratio for the Korean
manufacturing sector soared to 575.8 Prozent in 2004.

If we look at economic value added (EVA), we can see a signiªcant change in the
investment behavior of Korean companies. As Table 4 zeigt an, during the 1992–96
Zeitraum, the weighted average cost of capital for the Korean manufacturing sector

Asian Economic Papers

D
Ö
w
N
Ö
A
D
e
D

F
R
Ö
M
H

T
T

:
/
/

D
ich
R
e
C
T
.

ich
T
.

e
D
u
A
S
e
P
A
R
T
ich
C
e
–
P
D

F
/

5
3
1
1
6
8
2
2
8
2
A
S
e
P
2
0
0
6
5
3
1
P
D

B
j
G
u
e
S
T

Ö
N
0
8
S
e
P
e
M
B
e
R
2
0
2
3

Investment Bust in Post-Crisis Korea

Figur 9. Average debt-to-equity ratio for the Korean manufacturing sector

Quelle: Bank of Korea.

Tisch 4. Performance indicators for the Korean manufacturing sector (1990–2004) (Prozent)

D
Ö
w
N
Ö
A
D
e
D

F
R
Ö
M
H

T
T

:
/
/

D
ich
R
e
C
T
.

ich
T
.

e
D
u
A
S
e
P
A
R
T
ich
C
e
–
P
D

F
/

5
3
1
1
6
8
2
2
8
2
A
S
e
P
2
0
0
6
5
3
1
P
D

B
j
G
u
e
S
T

Ö
N
0
8
S
e
P
e
M
B
e
R
2
0
2
3

1990–96
average 1997 1998 1999 2000 2001 2002 2003 2004

Japan
(2003)

Financial stability indicators

Debt-to-equity ratio
IBD-to-assets ratio
Current ratio

Profitability indicators

Operating income-to-sales ratio
Ordinary income-to-sales ratio
ROIC
WACC
Financial expenses-to-sales ratio
Interest coverage ratio

Growth indicators

Sales growth rate
Tangible asset growth rate

301.7
45.7
94.8

7.1
2.1
9.0
10.1
5.7
123.5

15.1
16.3

396.3
54.2
91.8

303.0
50.8
89.8

214.7
42.8
92.0

8.3

6.1
(cid:2)0.3 (cid:2)1.8
10.3
14.0
9.0
68.3

7.6
9.2
6.4
129.1

6.6
1.7
6.4
7.9
6.9
96.1

210.6
41.2
83.2

7.4
1.3
8.7
8.6
4.7
157.2

182.2
39.8
97.9

135.4
31.7
106.1

123.4
28.3
109.8

104.2
24.0
117.0

145.8
28.7
131.8

5.5
0.4
7.3 —
6.9 —
2.6
132.6

2.6
260.3

6.7
4.7

6.9
4.7

7.6
7.8

3.9
3.9

—
—

1.9
367.1

1.3
575.8

0.7
578.2

11.0
13.7

0.7
8.0
17.2 (cid:2)0.0

15.2
8.3
1.7
2.4 (cid:2)1.5 (cid:2)2.2

6.1
1.7

17.1
2.0
4.8 (cid:2)2.7

Vereinigt
Zustände
(2004)

141.2
22.9
128.6

6.6
9.0

—
—

1.7
397.1

12.5
(cid:2)0.2

Quelle: Bank of Korea, Financial Statements Analysis, various years.

Notiz: IBD (interest-bearing debt); current ratio

liquid assets/short-term debt; ROIC (return on invested capital); WACC (weighted

average cost of capital); interest coverage ratio

operating income/interest expenses. The pre-crisis averages for ROIC and WACC are

für die 1992:H1–1996:H1 period. The post-crisis figures for the two financial variables are also first-half figures. — not available.

Asian Economic Papers

Investment Bust in Post-Crisis Korea

Tisch 5. Composition of externally audited companies and their facility investment

Groß

Small and medium-sized

Quelle: Korea Information Service.

Manufacturing

656 ªrms
3.2 billion won (45.1 Prozent)
4,889 ªrms
0.7 billion won (9.3 Prozent)

Nonmanufacturing

479 ªrms
1.7 billion won (23.9 percnet)
1,351 ªrms
0.2 billion won (3.2 Prozent)

exceeded its return on invested capital. Mit anderen Worten, EVA in this period was neg-
ative. In the wake of massive corporate failures, Jedoch, ªrms apparently came to
reassess the opportunity cost of capital relative to return on investment. This change
in risk assessment has helped to improve the total EVA for the manufacturing sector.
Tatsächlich, EVA has turned positive since 2000. The performance of ªrms listed on the
Korea Stock Exchange also shows a similar trend. Approximately 70 percent of pub-
licly listed ªrms had a negative EVA during the 1992–96 period. After reaching a
peak of 80 Prozent in 1997, Jedoch, the proportion of listed ªrms with a negative
EVA began to decline and reached 54 Prozent in 2001. Although the Korean corpo-
rate sector still has some room to improve, it is moving in the right direction.

As for growth indicators, the post-crisis period has seen a dramatic reduction in the
growth rate of tangible assets. As Table 4 zeigt an, on average, tangible assets grew
at an annual rate of 16.3 percent during the 1990–96 period as Korean ªrms carried
out massive investment projects. Since the crisis years of 1997–98, Jedoch, tangible
asset growth has been anemic. Although this slowdown in investment in the post-
crisis period has caused some concern among policymakers preoccupied with
Korea’s growth prospects, it may be interpreted as a natural consequence of reduced
moral hazard. To the extent that companies included in the ªnancial statement anal-
ysis data tend to be large and well-established, changes in their investment behavior
reºect structural changes in the post-crisis period.

3.3 Investment patterns by ªrm size and industry characteristics
In diesem Abschnitt, we use ªnancial data from externally audited companies to analyze
investment patterns by ªrm size and industry characteristics. Our data set consists
von 7,375 ªrms. Their total facility investment, amounting to 5.9 billion won, accounts
für 82 percent of the aggregate facility investment in the national account. Tisch 5
shows the composition of the data set.11

11 In Korea, the cutoff point between large enterprises and SMEs is 300 employees. Obwohl
there is no clear economic reasoning behind this cutoff point, SMEs get favorable govern-
ment support of various kinds.

Asian Economic Papers

D
Ö
w
N
Ö
A
D
e
D

F
R
Ö
M
H

T
T

:
/
/

D
ich
R
e
C
T
.

ich
T
.

e
D
u
A
S
e
P
A
R
T
ich
C
e
–
P
D

F
/

5
3
1
1
6
8
2
2
8
2
A
S
e
P
2
0
0
6
5
3
1
P
D

B
j
G
u
e
S
T

Ö
N
0
8
S
e
P
e
M
B
e
R
2
0
2
3

Investment Bust in Post-Crisis Korea

Figur 10. Proªtability versus facility investment growth: Large companies, 2002–04
(Prozent)

D
Ö
w
N
Ö
A
D
e
D

F
R
Ö
M
H

T
T

:
/
/

D
ich
R
e
C
T
.

ich
T
.

e
D
u
A
S
e
P
A
R
T
ich
C
e
–
P
D

F
/

5
3
1
1
6
8
2
2
8
2
A
S
e
P
2
0
0
6
5
3
1
P
D

B
j
G
u
e
S
T

Ö
N
0
8
S
e
P
e
M
B
e
R
2
0
2
3

Quelle: Korea Information Service.

Figuren 10 Und 11 show that a positive correlation exists between proªtability and
facility investment growth. We note that in some sectors such as electrical and elec-
tronic machinery, large companies and SMEs have exhibited different investment
patterns.

3.4 Impact of FDI
Figur 12 shows outward FDI by large companies and SMEs in the manufacturing
sector. A rapid increase in FDI by SMEs since 2002 is unmistakable. To examine the
hollowing-out hypothesis, we combine FDI data from the Export-Import Bank of
Korea with ªnancial data from externally audited companies. We divide the sample
into ªrms with outward FDI experience and ªrms without such experience and then
anschauen (domestic) facility investment as a percentage of ªxed assets. For large com-
panies, it turns out that facility investment is 12 percent of ªxed assets for those
with FDI experience while it is only 9 percent for those without such experience. Für
SMEs, Jedoch, the relationship is reversed, bei 11 percent and 13 Prozent, bzw-

Asian Economic Papers

Investment Bust in Post-Crisis Korea

Figur 11. Proªtability versus facility investment growth: Small and medium-sized
enterprises, 2002–04 (Prozent)

D
Ö
w
N
Ö
A
D
e
D

F
R
Ö
M
H

T
T

:
/
/

D
ich
R
e
C
T
.

ich
T
.

e
D
u
A
S
e
P
A
R
T
ich
C
e
–
P
D

F
/

5
3
1
1
6
8
2
2
8
2
A
S
e
P
2
0
0
6
5
3
1
P
D

B
j
G
u
e
S
T

Ö
N
0
8
S
e
P
e
M
B
e
R
2
0
2
3

Quelle: Korea Information Service.

aktiv. Tatsächlich, most industries seem to exhibit some crowding-out effects, except for
the large ªrms in the electrical and electronic machinery sectors.

4. Abschluss

In diesem Papier, we have taken a close look at recent trends in Korea’s facility invest-
ment and have tested alternative hypotheses regarding the slowdown in investment
growth and decline in investment propensity. We summarize our ªndings below.

The recent slowdown in Korea’s facility investment growth is partly due to cyclical
factors. Insbesondere, the depressed facility investment in 2003 Und 2004 is in part
due to a sharp decline in the purchase of motor vehicles for business purposes.
Depressed private consumption in 2003 Und 2004 led to low investment in automo-
biles, while investment in machinery was robust, especially in 2004. Jedoch, cycli-
cal factors provide a rather incomplete solution to the investment puzzle, Weil

Asian Economic Papers

Investment Bust in Post-Crisis Korea

Figur 12. Outward foreign direct investment by large ªrms and small and medium-sized
enterprises (trillion won)

D
Ö
w
N
Ö
A
D
e
D

F
R
Ö
M
H

T
T

:
/
/

D
ich
R
e
C
T
.

ich
T
.

e
D
u
A
S
e
P
A
R
T
ich
C
e
–
P
D

F
/

5
3
1
1
6
8
2
2
8
2
A
S
e
P
2
0
0
6
5
3
1
P
D

B
j
G
u
e
S
T

Ö
N
0
8
S
e
P
e
M
B
e
R
2
0
2
3

Quelle: Export-Import Bank of Korea.

they cannot account for the decline in investment propensity in the post-crisis
Zeitraum.

To examine this structural change, we focused on the investment behavior of large
Firmen. We found evidence in support of the moral hazard hypothesis. A series
of large-scale bankruptcies during the 1997–98 crisis apparently shattered the notion
of implicit government guarantees and affected the risk perception of the chaebol. A
regression analysis on investment propensity showed that the coefªcient on the
chaebol dummy was no longer statistically signiªcant in the post-crisis period. Wann
we looked at ªnancial data sets predominantly containing large companies, we saw
important changes in ªnancial indicators suggesting more prudent investment be-
havior.

Gleichzeitig, we found evidence rejecting the anti-chaebol environment
Hypothese. Facility investment by large ªrms actually increased by a great deal in
2003 and 2004—a rather odd phenomenon in a period supposedly marked by the
unleashing of anti-chaebol sentiments. Although business leaders, representing
the interests of large ªrms, have tended to argue that business-friendly policies
should be adopted if investment is to be revived, their investment has actually
shown robust growth in recent years.

Asian Economic Papers

Investment Bust in Post-Crisis Korea

Endlich, we found evidence for the hollowing-out hypothesis. Outward FDI appears
to be crowding out domestic facility investment somewhat, except in some sectors
such as electrical and electronic machinery involving large companies. Jedoch,
in a dynamic context, where the price competitiveness of ªnal assembly and other
labor-intensive segments would be eroded by the entry of late-developing countries,
outward FDI may be the only commercially viable form of investment unless com-
panies possess skills to move up the quality ladder.

Verweise

Becker, Randy, John Haltiwanger, Ron Jarmin, Shawn Klimek, and Dan Wilson. 2006. Micro
and Macro Data Integration: The Case of Capital. In A New Architecture for the U.S. National
Konto, edited by Dale Jorgenson, Steven Landefeld, and William Nordhaus, 541–609.
Chicago: University of Chicago Press.

De Long, J. Bradford, and Lawrence H. Summers. 1991. Equipment Investment and Economic
Growth. Vierteljährliches Journal of Economics 106 (2):445–502.

Federation of Korean Industries (FKI). 2004. A Survey of Public Attitude toward Business and
Entrepreneurs (in Korean). Seoul: FKI.

Hahn, Chin Hee. 2000. Implicit Loss-Protection and the Investment Behavior of Korean
Chaebols. In The Korean Crisis: Before and After, edited by Inseok Shin, 215–51. Seoul: Korea
Development Institute.

Hong, Jonghak. 2005. Does Government Know about Distorted Presentation of Facility Invest-
ment Data? OhmyNews. 17 Mai.

International Monetary Fund (IMF). 2005. World Economic Outlook. Washington, D.C.: Interna-
tional Monetary Fund.

Jones, Charles I. 1994. Economic Growth and the Relative Price of Capital. Journal of Monetary
Economics, 34 (3):59–82.

Korea Development Institute (KDI). 2001. A Survey of Public Attitude toward Business and Entre-
preneurs (in Korean). Seoul: KDI.

Lee, Sungkyu. 2005. “Leftist Policy Caused Weak Investment”—Was It Just a Rumor?
(in Korean). OhmyNews. April 23.

Lim, Kyung-Mook. 2005. An Analysis of Changes in Corporate Facility Investment Behavior
(in Korean). Seoul: Korea Development Institute.

Lim, Wonhyuk. 2003. The Emergence of the Chaebol and the Origins of the Chaebol Problem. In
Economic Crisis and Corporate Restructuring in Korea: Reforming the Chaebol, edited by Stephan
Haggard, Wonhyuk Lim, and Euysung Kim, 35–52. Cambridge: Cambridge University Press.

Organisation for Economic Co-operation and Development (OECD). Various years. Economic
Survey of Korea. Paris: OECD.

Asian Economic Papers

D
Ö
w
N
Ö
A
D
e
D

F
R
Ö
M
H

T
T

:
/
/

D
ich
R
e
C
T
.

ich
T
.

e
D
u
A
S
e
P
A
R
T
ich
C
e
–
P
D

F
/

5
3
1
1
6
8
2
2
8
2
A
S
e
P
2
0
0
6
5
3
1
P
D

B
j
G
u
e
S
T

Ö
N
0
8
S
e
P
e
M
B
e
R
2
0
2
3
PDF Herunterladen