Experts call for changes to rigid labor regulations

South Korea could face an accelerated deindustrialization of its manufacturing sector as the country’s small and large companies are turning their backs on the country due to its rigid labor regulations.

A report by the Organization for Economic Cooperation and Development (OECD) on Wednesday highlighted that foreign direct investment (FDI) outflows from Korea, which sharply decreased in 2023, increased again in the first half of 2024.

FDI outflows grew from $18.8 billion in the first half of 2019 to $40.9 billion in the first half of 2022, largely influenced by U.S. subsidy policies for advanced industries such as semiconductors and batteries under the Biden administration.

Although they dipped to $13.6 billion in 2023, they rebounded to $23.4 billion in the first half of 2024, up $10 billion year-on-year. FDI inflows in Korea, on the other hand, fell to $3.9 billion in the first half of 2024 from $6.9 billion a year ago.

All this means Korean companies are increasingly going abroad, while foreign companies are not coming to Korea. The primary reason lies in labor regulations, particularly the sharp increases in the minimum wage and the 52-hour workweek limit, according to experts.

“Korea’s minimum wage is exceptionally high compared to median incomes among OECD countries,” an official from an economic organization said. “Even if businesses want to employ foreign workers for vacant manufacturing jobs, current laws prohibit applying different minimum wages for foreigners.”

There is also an urgent need to improve the 52-hour workweek system. Advanced industries require extensive research and development (R&D), but the workweek limit acts as a barrier, as foreign investors, as well as domestic companies reportedly find the country’s work-hour restrictions overly burdensome.

Experts also note that even if the central government relaxes various regulations, there are often bottlenecks at the local level where domestic and foreign companies invest. They are calling for the central and local governments to consolidate their investment incentives by into larger, more impactful packages.

Many suggest direct cash subsidies as a more effective incentive, rather than tax credits that only apply when profits are generated, they also note that support for domestic investment should not differentiate between small and large companies.

Th tax law amendment in 2024 removed the cap on business inheritance deductions for small and medium-sized businesses relocating to regional “Opportunity Development Zones,” but many suggest this should be extended to large corporations as well.