Home > Business > Economy

Nonviable companies slow Korea's growth by 0.5 percent of GDP

Published: 12 Nov. 2025, 19:36

Apartments are seen from Mount Namsan in central Seoul on Oct. 28. [YONHAP]

The failure to eliminate unprofitable, debt-laden companies held back Korea's economic growth by up to 0.5 percent of GDP, the country's central Bank said in a report on Wednesday.

The Bank of Korea (BOK) presented the findings in a report released on Wednesday titled, "Why Has Korea’s Growth Become Structurally Low Since the Economic Crisis?" (translated), with the study analyzing panel data on more than 120,000 audited and unaudited firms, using metrics such as financial performance and exit status.

The researchers classified firms as high-risk for exit if their one-year default probability exceeded 5 percent, the threshold for speculative-grade corporate bonds.

Between 2014 and 2019 — a period when the economy was expected to recover from the global financial crisis — 4 percent of firms fell into the high-risk category, but only 2 percent actually exited the market. From 2022 to 2024, after the peak of the Covid-19 pandemic, the share of high-risk firms remained similar at 3.8 percent, yet the actual exit rate fell further to just 0.4 percent.

The BOK estimated that if more productive firms had replaced distressed ones, domestic investment would have increased by 3.3 percent between 2014 and 2019 and by 2.8 percent between 2022 and 2024. That additional investment could have lifted GDP by 0.5 percent in the earlier period and 0.4 percent in the latter — equivalent to roughly 10 trillion won ($6.8 billion) in missed growth based on Korea’s 2024 nominal GDP.

Further analysis of around 2,200 externally audited companies supported the conclusion. While the top 0.1 percent of firms — about 23 major corporations — maintained investment levels after the financial crisis, most others cut back or stagnated. The BOK concluded that declining profitability, rather than limited access to credit, was the main reason for weaker investment.

Containers and cars are stacked at Pyeongtaek Port in Pyeongtaek, Gyeonggi, on Nov. 6. [NEWS1]

The BOK said repeated government financial support and policy funding during crises delayed the restructuring of struggling companies. While major economies like the United States saw higher business closure rates and faster turnover of low-productivity firms during crises, Korea experienced slower or even declining exit rates.

“When weak firms stay in the market longer during crises, the economy suffers from a hysteresis effect, where corporate dynamism fails to recover over time,” the BOK said.

The analysis echoes the “creative destruction” theory advanced by this year’s Nobel Prize-winning economists Philippe Aghion and Peter Howitt, who argue that sustainable growth requires the replacement of old firms by newer, more innovative ones. Without that “destruction,” the BOK warned, the economy falls into deeper structural stagnation.

“Growth happens when firms with new technologies replace existing ones, and older firms try to catch up by innovating,” said Boo Yu-shin, head of the BOK’s research team and co-author of the report. “We need to focus on protecting the overall industrial ecosystem, not on propping up individual firms."

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.
BY PARK YU-MI [[email protected]]