New business births and deaths have slowed markedly over the past years in a worrying sign of weakening economic dynamism, a local think tank said Monday.

In a report, the Sustainable Growth Initiative, which is affiliated with the Korea Chamber of Commerce and Industry, warned the ebbing dynamism could cut the country’s potential growth rate.

Citing figures from Statistics Korea, the think tank said the rate of new company formation overall declined from 17.9 percent in 2007 to 15.3 percent in 2019. The rate of company closures also went down from 13 percent to 11 percent from 2007 to 2018.

It also pointed to degrading growth rates of companies, as the ratio of firms achieving 20 percent net sales growth rate has gone down from 13.1 percent in 2009 to 8.6 percent in 2019. This means it has become harder for small and medium-sized companies to grow bigger.

Trends in enterprise formations, dissolutions and their growth rates offer a way to gauge the level of dynamism of Korean industries, the SGI said, which is linked to the economy’s potential growth.

According to the institution, Korea has seen its potential growth rate go down, from 2.7 percent in the years 2015-2019, to a projected 2.3 percent for 2020-2024.

The SGI warned that with a corporate sector losing vibrancy will ultimately weaken the growth potential of the country’s economy and job creation, and also deepen social conflict.

“When there are not enough new companies with high productivity, it is likely to discourage competition among companies for technology development,” SGI said, adding that it could then lead to a decrease in technological investment.

The slow exiting of companies with low productivity also leads to misallocation of resources and damages the country’s potential for growth, according to the report. 

The think tank explained that the ratio of marginal firms in the manufacturing sector has grown from 7.4 percent in 2010 to 9.5 percent in 2018, and the productivity of these companies is only 48 percent of normal enterprises.

“To resolve existing economic and social problems, the country needs to create dynamism in the economy,” the SGI said.

To do that, the government should encourage the starting of new businesses, take a lead in restructuring of companies and also support innovation and provide appropriate policies to back industry paradigm shifts.

“To revitalize the economy, all three actions should take place. More innovative companies should emerge, companies should show effective growth and marginal firms should be eliminated,” said Kim Cheon-koo, the SGI research fellow who authored the report.

“Companies should pursue ‘creative destruction’ to break down the old and make new, with technological innovation.”