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Industry Trends

2018.05.30
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[Services] Current Status and Outlook of the Korean Services Industry

Korea's economy experienced rapid growth riding on the back of a competitive manufacturing industry, but in the recent years marked with the global economic crisis and the weakening comparative advantage of the Korean manufacturing industry, the country's economic growth rate has dipped to a mere 2-3%. In striving for economic recovery and a solution to unemployment, strengthening the competitiveness of the services industry has become a key topic of economic policy. This study seeks to analyze Korea's services industry in light of the country's distinct market features, trade status and regulatory environment to draw some implications for strengthening the competitiveness of the services industry.


Current Status and Features of the Korean Services Market


Although the services industry played a small part in Korea's economic growth to date, its role is growing steadily. In terms of total GDP and employment, the services industry made up 48% and 37%, respectively, in 1980. In 2017, the numbers stood at 58% and 70%. However, while the services industry accounts for 70% of total employment, it makes up less than 60% of GDP, which is considerably lower than the OECD average of 74.2%. Moreover, after the services industry's share of GDP reached its peak at 60% in the mid 2000s, growth stagnated and the industry' share of GDP stabilized at 58% - 59%.


Korean Services Industry Share of GDP and Employment

Korean Services Industry Share of GDP and Employment
Category 1980 1990 2000 2010 2017
Share of GDP 48.7% 51.9% 57.5% 59.3% 58.3%
Share of Employment 37.0% 46.7% 61.1% 68.4% 70.1%

Source: Bank of Korea Economic Statistics System; Statistics Korea KOSIS National Statistics Portal DB


Taking a closer look at the industry by sector, distribution service sectors with low productivity, such as wholesale, retail and transportation, made up the greatest share of added value and employment. On the other hand, sectors with relatively higher productivity (specialized scientific and technical services, business support services) only made up 7.4% of the national economy. Compared to the UK (13.9%), France (12.9%), the U.S. (12.1%) and Germany (10.6%), the share of high-productivity sectors in the natinal economy remains relatively low in Korea. However, over the last decade, growth trends in distribution and consumer services have slowed, while the share of business services in the overall economy has increased.


Korean Services Industry Share of Added Value and Employment by Sector

Korean Services Industry Share of Added Value and Employment by Sector
Category Share of Total Added Value Share of Employment
2007 2017 2007 2017
Services Industry 60.3% 58.3% 66.9% 70.1%
Wholesale and Retail 8.4% 8.1% 15.7% 14.2%
Transportation 4.3% 3.6% 5.3% 5.3%
Accomodation and Food 2.7% 2.6% 8.7% 8.6%
Publication, Video, Broadcasting and Information services 4.5% 3.7% 2.7% 2.9%
Finance and Insurance 6.6% 5.5% 3.5% 3.0%
Realestate and Leasing 8.5% 7.8% 2.1% 2.3%
Specialized Science and Technology Services 4.4% 5.2% 3.0% 4.1%
Business facility maintenance and Business support services 2.0% 2.2% 4.0% 4.8%
Public administration, National defence and Social welfare administration 6.9% 7.3% 3.4% 4.0%
Educational services 5.8% 5.1% 7.4% 7.1%
Medical and Social welfare services 3.5% 4.7% 3.2% 7.2%
Cultural and other services 2.7% 2.5% 7.8% 6.7%

Source: Bank of Korea Economic Statistics System; Statistics Korea KOSIS National Statistics Portal DB


Current Status of Trade in the Korean Services Industry


In recent years, service exports have continued to grow globally, and since 2010, service exports have contributed to total exports at significant and increasing rates. On the contrary, the contribution of the services industry to exports is lower than that of imports in Korea. Compared to the OECD average of 26.8%, Korea's services industry accounts for a remarkably low 15.3% of total exports.


Korean Services Industry Share in Key Economic Indicators by Country

Korean Services Industry Share in Key Economic Indicators by Country
Category Korea U.S. Japan Germany UK OECD
Total Exports 15.3% 34.1% 21.5% 21.6% 35.9% 26.8%
Total imports 22.0% 18.6% 24.0% 18.7% 33.6% 23.7%
GDP 59.2% 78.9% 70.0% 68.9% 79.2% 74.2%

Footnote: 1) Total exports, total revenue as of 2016, using BOP BPM6.
2) GDP is based on services, etc., and value added. Korea, Germany, and the UK figures are based on 2016 findings, and Japan, the US and OECD figures are based on 2015 findings.
Source: OECD Statistics; The World Bank Data


The growth of trade in Korea's services industry is relatively slow, and continues to be in deficit. Looking at the 2017 trade structure in the services industry by sector, transportation, travel and construction have a high share in total exports and imports are concentrated in two sectors: transportation and travel. With the exception of construction, most sectors are in deficit, with about 50% of the overall trade deficit coming from the travel sector.


Current Status of Korea's Trade by Service Sector (as of 2017)

Current Status of Korea's Trade by Service Sector (as of 2017)
Category Exports Imports Balance
(USD 1 million)
Total
(USD 1 million)
Share Total
(USD 1 million)
Share
All Services 87,497 121,969 - 34,472
Manufacturing 2,193 2.5% 8,951 7.3% - 6,758
Maintenance 372 0.4% 450 0.4% - 78
Transportation 24,607 28.1% 29,902 24.5% - 5,295
Travel 13,427 15.3% 30,600 25.1% - 17,173
Construction 9,399 10.7% 1,690 1.4% 7,709
Insurance and Pension 946 1.1% 731 0.6% 215
Finances 2,218 2.5% 1,806 1.5% 412
Intellectual property 7,138 8.2% 9,254 7.6% - 2,116
Communication/Computer/Information services 4,301 4.9% 3,194 2.6% 1,106
Business Other 20,952 23.9% 33,020 27.1% - 12,068
Game/Culture/Entertainment 916 1.0% 718 0.6% 198
Government services 1,028 1.2% 1,652 1.4% - 624

Source: Bank of Korea Economic Statistics System


Regulatory Environment of Korea's Services Industry


In recent years, opening up the services industry has emerged as a key issue in various bilateral and multilateral trade agreements with growing trade and investment in the global economy. As such, this section will provide an assessment of the regulatory environment and openness of Korea's services industry based on the OECD's Services Trade Restrictiveness Index (STRI). Although the STRI does not reflect preferential trade agreements such as free trade agreements, it does provide a relatively detailed evaluation of Korea's regulations and restrictions by service sector, and thus can serve as a key indicator for assessing Korea's regulatory environment.
Compared to the average of the 44 countries evaluated in the STRI in 2017, the overall services industry in Korea is relatively and highly open. The railway transportation and accounting service sectors were the only exceptions with high entry restrictions.


Korea's OECD STRI Index by Service Sector (as of 2017)

In addition, changes the STRI from 2014 to 2017 show that most of the index values have declined, signalling a gradual improvement in Korea's openness index. When compared to Japan, the U.S. and China, Korea's market entry regulations appear to be improving extensively.



Changes in the OECD STRI as a Result of Policy Changes (2017 compared to 2014)

Changes in the OECD STRI as a Result of Policy Changes (2017 compared to 2014)
Countries Increase No Change Decrease
Korea 0 3 19
Japan 3 12 7
Germany 0 2 20
U.S. 1 19 2
China 1 11 10

Footnote: A decline in the STRI value signifies more openness, an increase implies less openness and no change in the value means no change in the openness index.
Source: OECD Services Trade Restrictiveness Index


Outlook and Implications


As seen above, the services industry in Korea is not yet on par with major competing nations in terms of its share in the national economy and role in stimulating trade. Of course, there is great interest and effort on the national level to foster the services industry, and subsequent policies are underway. In fact, some structural changes are already taking place in Korea's services industry, including the growing proportion of the business service sector.
In order to continue on this upward trend and enhance the competitiveness of the services industry, the government must implement appropriate policies along with foreign investment promotion and utilization efforts. Intangible assets such as industry know-how are crucial for the services industry, thus the entry of foreign companies and capital will play a central role in enhancing the competitiveness of the industry and activating the market.
However, Korea already has highly-open markets in the services industry with the exception of a few sectors such as accounting and rail transportation. Therefore, improving the competitiveness of the industry will require more than opening up markets; policymakers have to focus on the efficient operation of Korea's foreign investment system. In other words, Korea must undertake selective foreign investment promotion programs and implement an efficient management and supervision system for foreign capital.


By Seung Kwon Na
Senior Researcher
Korea Institute for International Economic Policy
skna@kiep.go.kr



The opinions expressed in this article are the author’s own and do not reflect the views of KOTRA
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