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


  • Kyung-Mook Lim

    (Department of Macroeconomic and Financial Policies, Korea Development Institute (KDI), P.O. Box 113, Cheongnyang, Seoul 130-012, Korea)

  • Wonhyuk Lim

    (Brookings Institution, 1775 Massachusetts Avenue, NW Washington, DC 20036 USA and Korea Development Institute)


In post-crisis Korea, facility (equipment) 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 and 2004 did lead to lower investments in automobiles, hence dragging down total investment growth in these years; (b) rejects the claim that investment 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 and 2004, whereas aggregate investment in the national account showed anemic growth); (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 bankruptcies); and (d) supports the "hollowing-out" hypothesis, which holds that outward foreign direct investment has reduced domestic 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. (c) 2007 The Earth Institute at Columbia University and the Massachusetts Institute of Technology.

Suggested Citation

  • Kyung-Mook Lim & Wonhyuk Lim, 2006. "Investment Bust in Post-Crisis Korea: Fact or Fiction?," Asian Economic Papers, MIT Press, vol. 5(3), pages 1-18, Fall.
  • Handle: RePEc:tpr:asiaec:v:5:y:2006:i:3:p:1-18

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    Cited by:

    1. International Monetary Fund, 2008. "Republic of Korea; Selected Issues," IMF Staff Country Reports 08/296, International Monetary Fund.

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