🚨 Analysis of Korea's Export Structure Rigidity and Industrial Diversification Challenges
Today Korean Economic News | 2025.03.08
📌 Innovation Disappears from Korean Economy... 8 out of Top 10 Export Items Remained the Same for 20 Years
💬 Korea's industrial structure has become rigid, with 8 out of the top 10 export items remaining unchanged over the past 20 years. As dependence on specific items such as semiconductors and automobiles intensifies, the economy is becoming increasingly inflexible, and uncertainty in the Korean economy is growing due to recent semiconductor slumps and U.S. tariff regulation announcements.
1️⃣ Easy Understanding
What does it mean that Korea's major export items have barely changed over the past 20 years? What risks are involved when the Korean economy depends too heavily on specific industries? I'll explain these problems and solutions in simple terms.
Korea has achieved export-led economic growth over the past decades. While it has grown into a top 10 export powerhouse, recent analysis shows that 8 out of Korea's top 10 export items have remained unchanged over the past 20 years. This is like a restaurant that has been selling the same menu for 20 years.
Currently, Korea's main export items are semiconductors, automobiles, petrochemical products, ships, steel, displays, etc. In particular, semiconductors account for about 20% of total exports, showing a high level of dependence. This phenomenon of exports being concentrated in a few items is expressed as having a 'high export concentration.'
A representative indicator measuring export concentration is the 'Herfindahl-Hirschman Index (HHI).' This index is calculated by squaring the share of each industry and adding them up, with higher values indicating greater concentration in specific industries. Korea's export HHI is quite high compared to major advanced countries. For example, while manufacturing powerhouses like Germany or Japan have HHI levels of 500-700, Korea often exceeds 1,000.
Such excessive dependence on specific industries is risky. It's like putting all eggs in one basket. If the semiconductor industry slumps, the entire Korean economy could take a big hit. In fact, the recent semiconductor downturn has significantly affected Korea's exports and economic growth rate.
Changes in the trade environment, such as the U.S. announcing tariff impositions, are also risk factors. If Korea's main export items become subject to U.S. tariffs, the shock could quickly spread throughout the economy.
To solve these problems, 'industrial diversification' is necessary. Industrial diversification means expanding business areas into various industrial fields. Rather than relying only on traditional core industries, we need to actively foster new growth industries such as biotechnology, artificial intelligence, robotics, renewable energy, and content. This requires comprehensive government policy support, bold corporate investment and innovation, and education and talent development. Building a diverse industry portfolio is an essential task for sustainable growth of the Korean economy.
2️⃣ Economic Terms
📕 Export Concentration
Export concentration is an indicator showing the degree to which exports are concentrated in specific items or industries.
- Higher export concentration means an economic structure that depends on a few items or industries.
- It is an important indicator for assessing vulnerability to external shocks, as the impact on the overall economy is significant when specific industries slump.
📕 Herfindahl-Hirschman Index
The Herfindahl-Hirschman Index is a representative indicator measuring market concentration, used to evaluate the level of industrial diversification.
- It is calculated by squaring the market share of each item or industry and adding them up (HHI = Σ(market share)²).
- Higher index values indicate higher concentration, with values above 1,500 considered high concentration, 1,500-500 medium concentration, and below 500 low concentration.
📕 Industrial Diversification
Industrial diversification is a strategy to disperse risks and secure new growth engines by expanding business areas into various industrial fields.
- It proceeds in various ways such as horizontal diversification (expansion into similar industries), vertical diversification (value chain expansion), and conglomerate diversification (entry into completely different industries).
- It plays an important role in enhancing resilience to economic shocks and building a foundation for sustainable growth.
📕 Export Dependency
Export dependency represents the proportion of exports to GDP and shows vulnerability to external economic conditions.
- Korea's export dependency is about 40%, ranking high among OECD countries.
- High export dependency means the economy can be significantly affected by external factors such as global economic fluctuations, trade disputes, and exchange rate changes.
3️⃣ Principles and Economic Outlook
💡 Korea's Export Item Structure Rigidity Phenomenon and Causes
The fact that 8 out of Korea's top 10 export items have remained unchanged over the past 20 years clearly shows the rigidity of the export structure, and it's necessary to examine the causes and background of this phenomenon.
First, an economic structure centered on specific large corporations is a major cause of industrial rigidity. The Korean economy has the characteristic of being led by a small number of large business groups (chaebols), which are mainly concentrated in traditional core industries such as semiconductors, automobiles, shipbuilding, and petrochemicals. While this structure has been the driving force of Korean economic growth over the past decades, it has also been a factor limiting industrial structure diversification. Large corporations have focused on securing economies of scale and competitiveness in their existing core businesses, with relatively limited bold entry into completely new industrial fields.
Second, limitations in the innovation system and the immaturity of the venture ecosystem have hindered the creation of new export items. Korea's research and development (R&D) investment is among the highest in the world as a percentage of GDP, but its efficiency and innovation performance are relatively low. In particular, there has been a tendency to focus on improving existing technologies or commercialization rather than basic research, focusing on incremental improvements rather than disruptive innovation. Additionally, the venture business and startup ecosystem has only recently begun to activate, with limitations in creating new industries that can lead the global market.
Third, the factor input-centered growth strategy has reached its limits. The Korean economy has pursued 'factor input-type' growth through capital and labor input, but this growth model is facing limitations at the advanced country entry stage. In particular, the decrease in the working-age population due to low birth rates and aging, and the decline in investment efficiency, are making it difficult to innovatively change the economic structure. As a result, there has been a focus on maintaining the competitiveness of existing core industries, with relatively insufficient resource movement to new industries.
Fourth, adaptation to changes in the external trade environment and global value chains (GVCs) has been delayed. Although global trade structures and GVCs have changed significantly since the global financial crisis, Korea's export structure has not sufficiently responded to these changes. In particular, export item diversification has proceeded relatively slowly in response to global trends such as digital transformation, service trade expansion, and the rise of eco-friendly industries. Additionally, despite increased competitive pressure in existing core export items due to China's rise and reduced technology gaps, there has been a lack of new export growth engines to replace them.
As these factors have worked in combination, Korea's export structure has been maintained without major changes over the long period of 20 years. What is particularly noteworthy is that the Herfindahl-Hirschman Index (HHI), which measures export concentration, has remained at a high level compared to major advanced countries. This is a clear indicator showing that the Korean economy is overly dependent on a small number of core industries.
💡 Economic Impacts and Risks of High Export Concentration
Korea's high export concentration has various impacts on the overall economy, particularly creating a structure vulnerable to external shocks.
First, economic fluctuations in specific industries have a large impact on the entire national economy. Korea's high export concentration results in business cycle fluctuations in core industries such as semiconductors and automobiles quickly transferring to the entire national economy. In fact, the recent semiconductor business downturn has directly hit Korea's exports and economic growth rate. According to the Korea International Trade Association, when semiconductor exports decrease by 10%, the GDP growth rate falls by about 0.5 percentage points. Such high dependence on a few industries amplifies economic volatility and hinders stable economic growth.
Second, vulnerability to changes in the global trade environment increases. In the midst of rapid changes in the international trade environment such as strengthening protectionism, geopolitical conflicts, and global supply chain reorganization, an export structure concentrated in a few items can be a significant risk factor. In particular, the U.S. announcing additional tariff impositions or China's technology self-reliance policy can directly affect Korea's core export items. Additionally, shocks from industrial policy changes in major countries (e.g., semiconductor support acts, inflation reduction acts) can also quickly spread throughout the economy through a few concentrated industries.
Third, resource allocation inefficiency between industries and hindrance to new industry growth occur. In an economic structure with high export concentration, resources such as capital, personnel, and R&D tend to concentrate in existing core industries. This limits resource allocation for new industries and technology development, and can reduce the economy's dynamism and innovation capacity. Additionally, as policy support and protection for existing core industries are strengthened, the establishment of an institutional environment for fostering new industries may be relatively delayed.
Fourth, it leads to employment structure rigidity and job creation constraints. The export-led manufacturing-centered economic structure is gradually weakening in job creation capacity due to technological advancement and automation. In particular, capital-intensive industries such as semiconductors and displays have limited employment effects compared to production scale. Industrial structure diversification is essential for new growth industries and diverse job creation, but high export concentration is a factor limiting such changes.
As such, high export concentration can have negative impacts not only on short-term economic volatility but also on long-term growth potential and economic structure flexibility. What is particularly noteworthy is that Korea's export concentration as measured by the Herfindahl-Hirschman Index is considerably higher than major advanced countries. This suggests that the Korean economy may be structurally vulnerable to external shocks and emphasizes the need for risk dispersion through industrial diversification.
💡 Industrial Diversification Strategies and Policy Directions
Comprehensive strategies and policy directions are needed to lower Korea's export concentration and diversify its industrial structure.
First, intensive cultivation of future growth engine industries is necessary. A strategy is needed to select and intensively cultivate promising future industries such as biohealth, artificial intelligence, robotics, renewable energy, aerospace, and advanced materials. This requires a comprehensive policy package including expanded R&D investment, regulatory innovation, human resource development, and tax support. In particular, support for basic research and original technology development should be strengthened to pursue 'leading-type' innovation, moving away from the existing 'catch-up' strategy. This approach can have the effect of filling gaps caused by the gradual decline of existing core industries with new growth industries.
Second, an industrial innovation foundation should be created through strengthening the SME and venture business ecosystem. It's important to create an environment where innovative small and medium-sized enterprises and venture businesses can grow, moving away from a large corporation-centered industrial structure. Policies to strengthen venture capital and angel investment activation, technology startup support, and expanded regulatory sandboxes should be enhanced. In particular, it's necessary to support innovative startups that can grow into 'unicorn companies' to quickly enter the global market. Such venture ecosystem activation can be the driving force for creating new export items and industries.
Third, export strategy diversification is required in response to changes in the global trade environment. Efforts are needed to lower dependence on core export markets and items, and to discover emerging markets and new export items. In particular, it's important to capture new opportunities arising from digital transformation and green transition, and to expand immaterial trade such as service trade and the data economy. Additionally, Korean companies should be supported to secure competitiveness in core technologies and components/materials fields in the process of global value chain (GVC) reorganization.
Fourth, high value-added transformation and convergence innovation of existing core industries should be pursued. Existing core industries such as semiconductors, automobiles, and shipbuilding should be supported to create new added value by converging with 4th Industrial Revolution technologies. Examples include the transition to electric and autonomous vehicles in the automobile industry, smart ship development in the shipbuilding industry, and introduction of eco-friendly production methods in the steel industry. Such convergence innovation can be an effective strategy to maintain the competitiveness of existing industries while securing new growth engines.
Fifth, education and human resource development system innovation is the core foundation for industrial diversification. Innovation in the education system to cultivate talent needed for future industries is essential. Along with curriculum reform to strengthen creative problem-solving abilities, convergent thinking, and digital capabilities, practice-oriented education through industry-academia-research cooperation should also be expanded. Additionally, the flexible response of the labor market to industrial structure changes should be promoted through re-education and job transition support for existing industry workers.
These industrial diversification strategies can contribute to lowering Korea's Herfindahl-Hirschman Index (HHI) and strengthening resilience to external shocks. What's important is to pursue consistent policies from a long-term perspective rather than short-term results, and to create an environment that promotes private creativity and innovation. Industrial diversification is an essential task for sustainable growth of the national economy, requiring a comprehensive and systematic approach.
4️⃣ In Conclusion
The fact that 8 out of Korea's top 10 export items have remained unchanged over the past 20 years clearly shows the lack of innovation and rigidity in the industrial structure of the Korean economy. High dependence on a few items such as semiconductors, automobiles, and petrochemicals increases export concentration and causes increased vulnerability to external shocks.
Korea's export concentration as measured by the Herfindahl-Hirschman Index (HHI) is considerably higher than major advanced countries. This means that economic fluctuations in specific industries have a large impact on the entire national economy. In fact, the recent slump in the semiconductor industry has directly hit Korea's exports and economic growth rate. Additionally, changes in the trade environment, such as the U.S. announcing additional tariff impositions, can also act as greater shocks within a concentrated industrial structure.
In this situation, industrial diversification is an essential strategy to disperse risks for the Korean economy and secure new growth engines. It's necessary to intensively cultivate promising future industries such as biohealth, artificial intelligence, robotics, and renewable energy, and to create an innovation foundation by strengthening the SME and venture business ecosystem. Additionally, efforts to secure new competitiveness through high value-added transformation and convergence innovation of existing core industries should be pursued in parallel.
Effective implementation of industrial diversification requires cooperation among various actors including government, businesses, academia, and research institutions. In particular, it's important to maintain consistent policies from a long-term perspective rather than short-term results, and to improve regulations and practices that hinder innovation. Additionally, innovation in the education system to cultivate talent needed for future industries will be a core foundation for industrial diversification.
These challenges facing the Korean economy are both crises and opportunities. Lowering export concentration and diversifying the industrial structure may be difficult tasks in the short term, but in the long term, they are essential processes for sustainable growth of the Korean economy and securing global competitiveness. Particularly now, with global megatrends such as the 4th Industrial Revolution, digital transformation, and green transition creating new industries and business models, is an important time to innovatively reorganize the industrial structure.
In conclusion, the rigidity of Korea's export structure is a signal showing the limitations of the past success model, and now is the time when active efforts are needed to build a more diverse and balanced industrial ecosystem. By lowering export concentration and improving the Herfindahl-Hirschman Index, enhancing resilience to external shocks and securing new global competitiveness will be key tasks for the future of the Korean economy.