South Korea’s service industry has grown significantly in scale, but its productivity and efficiency remain at low levels, it has been revealed. In particular, even the high value-added service sector, which once grew rapidly driven by the digital transformation following the COVID-19 pandemic, has recently seen its growth slow. The Bank of Korea (BOK) has proposed that the service industry should be developed into a strategic industry, similar to manufacturing, and that related systems and policies need to be revamped.
According to an evaluation of productivity in Korea’s service industry released by the BOK on July 3, as of 2024, the private service sector accounted for 44% of the nominal gross domestic product (GDP) and 65% of all employed persons. The industrial structure is advancing, centered on high value-added services such as information and communications, finance and insurance, and professional, scientific, and technical services, as well as business-to-business (B2B) transactions.
However, the labor productivity per person in the service industry has remained at around 40% of that of the manufacturing industry for the past 20 years, with both its absolute level and rate of improvement lagging behind major countries. The high value-added service sector also saw a temporary surge in productivity in 2020-2021 due to increased demand for non-face-to-face services, but it has been declining since 2022, falling to about 10% below pre-pandemic levels. This contrasts with the United States, where the information and communications and professional services sectors have driven both employment and productivity.
The BOK analyzed that because South Korea has long perceived the service industry as having a complementary role to manufacturing, private capital investment has been limited, leading to a labor-intensive structure with high dependence on the domestic market. Consequently, productivity improvements in the service sector have been slow, and even the growth of the high value-added service sector has faltered since the pandemic.
In 2020, 32% of the service industry’s output was linked to manufacturing exports, focusing heavily on supporting the manufacturing sector, and the investment rate decreased from 26% in 2000 to 18% in 2022. The market capitalization of the service industry is about half that of the manufacturing industry. 98% of the revenue of high value-added service companies is concentrated in the domestic market, with only 2.2% of companies having expanded overseas.
The BOK stated, “The service industry, which was previously confined to a supporting role for manufacturing, has emerged as a global tradable good since the pandemic,” adding, “Especially for an export-driven country like South Korea, it is crucial to actively foster the service industry based on the strengths of its manufacturing sector.” This means a strategy is needed to create high added value by combining services with manufacturing, similar to Apple, Nvidia, and Tesla, which enjoy a lock-in effect not just from services but from their integration with manufacturing.
In this context, the BOK emphasized that a pan-governmental control tower should be established through the ‘Framework Act on Service Industry Development,’ which is currently undergoing legislation, and that this should be accompanied by foundational improvements including deregulation and the creation of digital infrastructure.
Policy directions were also presented. The vision is that the high value-added service sector should enhance its export competitiveness by transforming into an AI and data-driven industrial service sector, leveraging the strengths of the manufacturing industry.
On the other hand, for the low value-added service sector, the focus should be on inducing a transition to wage-based jobs rather than simply reducing the number of small-scale self-employed businesses, the BOK explained. This means that policy support should be provided to help subsistence-level and involuntary self-employed individuals move into regular jobs at mid-sized or larger companies by improving corporate access to capital and promoting business scaling through measures like corporatization and franchising. It added that customized financial and institutional support is also necessary to enable a healthy cycle of start-ups and closures within the industry.
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