Korean companies’ facility investment surged in 2010 after sharply dropping for two years due to the global financial crisis. As overseas demand for their products soared, they rushed to invest in plant and equipment to ramp up production. The government’s plan to terminate a tax credit program for corporate investment starting 2011 also prompted many companies to make investment in strategic areas ahead of schedule.
Consequently, corporate investment was expected to cool off in 2011 as export growth was projected to slow and companies had already executed some of their investment projects in advance in anticipation of the discontinued tax break. In December, for example, the state-run Korea Finance Corp. forecast, based on a survey of some 3,600 firms, corporate capital spending in 2011 would reach 115.7 trillion won, an increase of a mere 0.9 percent from an estimated total in 2010 of 114.6 trillion won.
But this forecast is likely to be surpassed. Corporate investment is expected to be brisk this year, if not to the same degree as last year, as major business groups pledge to spend a record amount of capital on facilities and R&D. For instance, Samsung Group announced it would invest 43.1 trillion won in 2011, the largest amount ever, and an 18 percent increase from 2010. LG, Hyundai-Kia and SK groups also committed to record investment.
These and other groups’ aggressive investment plans are notable given the considerable degree of uncertainty hanging over the global economy. Their key markets, including the United States and the European Union, are still in a woeful state. China is also expected to shift into monetary tightening this year to tame inflation. Furthermore, the international prices of raw materials keep rising, squeezing their profits.
Despite the downside risks, the groups have decided to go on the offensive. Where does the impetus for investment come? They feel in their bones that this year is a crucial year for them as the free trade agreements with the United States and EU are likely to take effect. They are rushing to enhance competitiveness in order to take full advantage of the expanded access to the world’s two largest markets. They are also determined to cement the dominance of their mainstay products in the global markets.
At the same time, they are keen to establish leadership in the targeted future growth engine sectors. Samsung chairman Lee Kun-hee emphasized the importance of new growth engines by saying, “In 10 years, Samsung Electronics’ current flagship products will all become obsolete.” Thus the group is moving to make preemptive investment in such new growth sectors as solar batteries, car batteries, light-emitting diodes, bio-pharmaceuticals and medical equipment.
The business groups’ bold approach to investment is encouraging as it would help ensure the continued strong presence of Korean companies in the global manufacturing scene. Since the Korean economy’s future depends very much on the performance of its corporations in the world arena, the government needs to make sure that they can execute their investment schemes as planned.
Their massive investment will also help the government attain its goal of 5 percent economic growth this year. On Monday, President Lee Myung-bak is to meet with the heads of the top 30 business groups to ask them to further expand investment, create more jobs and help the government to curb inflation.
For his part, Lee needs to make the government more efficient and business-friendly. According to the 2010 Global Competitiveness Index compiled by the World Economic Forum, Korea ranked 111th in “transparency of government policymaking,” 108th in “burden of government regulation,” 84th in “favoritism in decisions of government officials,” and 71st in “wastefulness of government spending.” These rankings are much lower compared with three years ago. Lee has a lot of work to do himself.