Foundations for Growth and Competitiveness 2026

Korea

Korea’s GDP per capita has converged toward the OECD average over the past decades, and the gap with the most advanced OECD economies has continued to narrow until recently. Growth has mainly been driven by capital accumulation, heavy investments in education and increasing labour supply. However, due to low birth rates and population ageing, the labour force is shrinking. The low participation rate, compared to the top performing OECD economies, also points to untapped potential.

To enhance Korea’s growth potential, it is essential to promote competition and technological innovation while at the same time reducing carbon emissions. Continued efforts to reduce barriers to foreign direct investment can increase the inflow of know-how, capital and technology. Improving the education system would more efficiently provide skilled workers that meet businesses’ needs.

Economic performance

Gaps to the average of the upper half of the OECD countries

Source: Panel A: OECD, Economic Outlook database; Panel B: OECD, Labour Force Statistics database; Panel C: OECD, Economic Outlook and Productivity databases; Panel D: OECD, Economic Outlook and Annual National accounts, GFCF by assets databases.

Selected policy gaps

Source: OECD calculations based on the Foundations for Growth and Competitiveness database.

Openness: Create a more foreign investment-friendly environment

Korea has made considerable progress to reduce barriers to services trade and foreign direct investment (FDI) over the past few decades. However, barriers to FDI remain high compared to OECD peers. Restrictions on foreign ownership in key industries, such as telecommunications and broadcasting, and restrictions on market access for security reasons discourage foreign investment, leading to lower FDI inflows compared to other OECD countries.

Recommendations

✓ Re-evaluate regulations that hinder FDI, such as foreign equity limitations, in terms of their effectiveness and economic impact, with a view to easing or removing them.

✓ Streamline screening and approval procedures related to foreign investment.

✓ Streamline recognition of foreign qualifications and facilitate the exchange of professionals in service sectors such as accounting and law.

Competition: Reduce barriers to firm entry and growth

The overall stringency of product market regulations is around the OECD average, but there is ample room to reduce barriers to trade and state involvement in business operations in services and network sectors. Increased competition would promote entry and expansion both among small and medium-sized enterprises, and in markets dominated by domestic incumbents. A well-developed system of regulatory sandboxes and “regulation-free zones” allow trialling new technologies and business models.

Recommendations

✓ Shift to a comprehensive negative-list regulatory system.

✓ Generalise reforms successfully trialled in regulatory sandboxes and “regulation-free zones” in a systematic and timely manner.

✓ Limit by law the scope for broadly defined public support to companies to a list of permitted causes linked to market imperfections, regardless of company size.

Innovation: Increase the effectiveness of public R&D support

The decline in the labour force caused by low birth rates could be partly mitigated by innovative technologies boosting productivity. However, compared to the OECD average Korea has a relatively low number of innovative firms and a lower share of employees working in such firms. Support for companies is based more on characteristics such as the number of employees and revenue rather than the level of technological innovation, resulting in relatively weak incentives for innovation.

Recommendations

✓ Systematically withdraw public support for SMEs after pre-defined time limits to encourage the growth of innovative firms rather than the survival of non-viable ones, while supporting affected workers and providing training and employment services.

✓ Promote a guarantee system that enables startups and SMEs to receive business loans from financial institutions based on an evaluation of their proprietary technologies.

Education: Reform vocational education to equip workers with skills in demand

Korea's high university enrolment rate and strong investment in education have contributed to economic growth, but the proportion of students receiving vocational education at the upper secondary level remains low. In addition, participation in workplace-based vocational training is also relatively low compared to top-performing OECD countries.

Recommendations

✓ Increase the quality and availability of vocational education to reduce labour market mismatch and labour shortages in SMEs.

✓ Expand the designation of Meister high schools and the Work-Learning Dual System and revitalise school-industry links by expanding industry-contracted programmes to foster talent meeting demand from employers.

Environment: Scale up investment to boost energy efficiency and renewables

Korea’s greenhouse gas emissions per unit of GDP are higher than in OECD peers and its energy mix remains heavily reliant on imported fossil fuels. Renewables accounted for less than 3% of the total energy supply in 2023. Expansion of renewables would bolster energy security but is held back by lengthy permitting processes, delayed grid connections, limited electricity market competition and opposition from local communities.

Recommendations

✓ Streamline permit and grid-connection procedures for renewable electricity generation projects, while assigning a share of their benefits to local communities.

✓ Build on planned electricity market reforms to move towards a market-based system where the true cost of energy and emissions is fully reflected in electricity supply and use.

Recent progress on structural reforms

Korea introduced the regulatory sandbox in 2019 and has continuously expanded its scope to enable companies with innovative technologies and business models to enter the market. Vocational education is also being enhanced, with the establishment of specialised high schools for advanced technologies such as artificial intelligence and software, as well as companies setting up industry-academia collaborative programmes in universities for semiconductors, displays and automobiles.