When Manufacturing Cools, the Economy Loses Warmth: Urgent Need for a Better Environment for Business Growth

A survey has found that the performance of South Korea’s manufacturing sector has become even worse than during the COVID period. According to a survey by the Korea Chamber of Commerce and Industry (KCCI), 75% of 2,275 manufacturing firms nationwide expected this year’s operating profit to fall short of their targets set at the beginning of the year. This is higher than the figure recorded in 2020, the early stage of the pandemic. Domestic demand remains weak as consumer spending recovery is delayed, while exports—apart from semiconductors—continue to decline, draining vitality from the industrial sector as a whole.

Manufacturing remains the central pillar of the Korean economy. It accounts for about 27% of gross domestic product (GDP) and has long driven exports, employment, and technological innovation. But the recent difficulties are not merely a temporary economic slowdown; they are closer to a structural problem. Small and medium-sized manufacturers in particular are facing worsening financial conditions and difficulties securing skilled workers. On top of this, the technological gap with China is narrowing rapidly. Whereas South Korea once held an overwhelming lead 15 years ago, more than half now assess Korea and China as being “similar” in technological competitiveness, and some analyses suggest that China has already moved ahead in production efficiency.

The problem is that the institutional environment is not supporting firms’ resilience. Forty-four percent of responding companies said the burden from laws and regulations had actually increased this year. Discussions over shorter working hours and the possibility of a corporate tax increase are adding to uncertainty in business management. If such institutional measures are not aligned with conditions on the ground, they can undermine incentives for production and investment.

The core of industrial competitiveness lies in whether firms can operate in a predictable environment. As uncertainty grows, companies choose cost-cutting and risk avoidance over investment. When domestic industry becomes rigid, production bases move overseas and jobs decline. This is not simply a problem for individual firms; it leads to a weakening of the industrial sector’s overall foundations. What is needed now is not to accelerate policy for its own sake, but to align the direction of institutions and regulations with reality.

Countries around the world are pursuing structural reforms to protect the foundations of manufacturing. The United States is promoting the return of key industries to its own soil, while Japan and Europe are fostering advanced technology industries and strengthening competitiveness. South Korea, too, urgently needs institutional reform to shore up the foundations of manufacturing. Rather than uniform regulation, a flexible approach that takes into account the characteristics and scale of different industries is needed. Complex procedures should be simplified, and conditions should be created in which firms can innovate on their own.

What is needed now is not short-term stimulus, but the restoration of the industrial ecosystem. Even new industries such as AI and digital technologies can produce sustainable results only when combined with manufacturing. For new industries to grow, the foundations of existing industries must be solid. Institutional predictability must be enhanced so that firms do not hesitate to invest, and regulations that hinder efficiency in the field must be reformed.

When manufacturing cools, the warmth of the economy cools with it. National competitiveness comes out of the factory. Industrial vitality is not merely a matter of economic indicators; it is the foundation that supports people’s jobs and quality of life. What the government must do is not replace the market, but improve the environment so that firms can grow on their own. The recovery of manufacturing is the recovery of the Korean economy, and it will be the starting point of growth that people can truly feel.

Ho-gyeong Lee, Researcher, Center for Free Enterprise (CFE)

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Original title: 제조업 식으면 경제 온기 사라져, 기업 성장 환경 마련 시급

Author: Ho-gyeong Lee

Date: 2025-10-28

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=28236