Without innovation, the economy is doomed

The government must create an environment where existing companies and promising entrepreneurs can enter the race with no fear of failures.

The market cap of Nvidia, the behemoth in AI chips, has topped $3 trillion. The achievement is the first of its kind for semiconductor producers. The amount is 1.5 times larger than the market cap of Korea’s all listed companies and nine times bigger than Samsung Electronics’. The era has arrived when the huge wave of the new industrial revolution led by artificial intelligence can shake the foundation of the economy, industry and even the future of a country. If companies or countries dilly-dally on riding the gargantuan tide, they are doomed to perish amid the ever-fiercer competitions.

The Korean economy faces an unprecedented crisis after its workforce sharply declines from the country’s pitifully low birth rates and fast aging population. The past increase in capital inputs, the driving force behind Korea’s economic growth, has also slowed down. Despite the need to find a new growth engine through technological advances, innovations to survive are dwindling. A recent report by the Bank of Korea shows a deepening sense of crisis. If the economy cannot find a breakthrough to recover its growth potential, its growth will certainly decline in the 2040s.

The biggest problem is the plunging productivity in the corporate sector. According to the central bank, R&D investments by companies — 4.1 percent of the GDP as of 2022 — were ranked 2nd in the world. Their applications for U.S. patents ranked 4th around the globe. Nevertheless, the average annual growth rate of corporate productivity plunged to 0.5 percent between 2011 and 2020 from 6.1 percent in the previous decade. Even the annualized productivity growth rate of “innovative companies” that applied for U.S. patents also dropped to 1.3 percent from 8.2 percent during the same period.

Such an alarming productivity decline stems from the structural problems of the Korean economy and society. It is an inevitable offshoot given the economy’s focus on quantitative, rather than qualitative, growth for short-term profits and a critical lack of efforts to boost innovation capability. The birth of start-ups who lead “creative destruction” is not easy due to a dearth of funds to back their ventures and the responsibility they must bear when their business failed.

To avoid such a crisis, companies must widen the technology gap with their competitors, shift to higher-value fields and lift their productivity through aggressive innovations. The quality of labor and capital also must be heightened. The government must create an environment where existing companies and promising entrepreneurs can enter the race with no fear of failures. Without drastic change, the economy will most likely head to doom. The clock is ticking.