NABO Economic Trends & Issues (No. 140)


 

Published on March 25, 2026
Published by Macro-Economic Analysis Division


 

■ Economic trends
   In recent months, the Korean economy has witnessed strong improvements in the form of a recovery in the service sector, strong exports, and increases in consumption and facility investment. Yet, uncertainties such as sluggish construction investment and a reduction in job growth persist.
    In January 2026, total industrial production decreased by 1.3% MoM, with the manufacturing sector decreasing by 2.1% MoM and the services sector remaining flat. The cyclical component of the coincident composite index increased by 0.2p MoM. Retail sales climbed by 2.3% MoM. Construction completion fell by 11.3% MoM, while facility investment grew by 6.8% MoM. On the fiscal side, in November 2025, the government's cumulative total expenditure increased by KRW 59.9 trillion YoY. In February 2026, the trade balance recorded a surplus of USD 15.51 billion, with exports surging by 29.0% YoY. In February, consumer prices increased by 2.0% YoY, stabilizing around the inflation target. The spread between the three-year treasury bond yield and the base rate reached 61 basis points. At the end of February, the KOSPI index closed at 6,244, recording significant growth from the end of January. However, throughout March, it has fluctuated widely amid the US-Iran conflict. In December 2025, household loans continued to grow, with the housing price index increasing by 0.28% MoM and transaction volume decreasing MoM in January. In December, corporate loans increased by KRW 55.1 trillion YoY, and in January 2026, the issuance of stocks and corporate bonds amounted to KRW 17.7 trillion, decreasing MoM. In February, the KRW/USD exchange rate fell MoM to KRW 1,424.5, before soaring significantly following the US-Iran conflict, while foreign reserves increased MoM to USD 427.6 billion.
 

■ Economic issue analysis: Impact of Expanding Investment in the US on Domestic Facility Investment
   Amid significant changes in the country's external environment such as the restructuring of global supply chains and the US administration's bolstering of the 'America First' industrial policy, Korean companies have rapidly expanded their outbound direct investment(ODI). More specifically, under the bilateral memorandum of understanding on strategic investment, Korea's investments in the US are expected to increase further both in terms of scope and scale. Against this backdrop, this report conducts an empirical analysis to better understand whether Korea's ODI expansion in the US is expected to 'crowd out' or 'crowd in' domestic facility investment.
   Korea's ODI has steadily expanded over the past 15 years. Until 2020, Asia was Korea‘s major ODI destination, but starting from 2021, the US surpassed Asia to secure the top position, accounting for 29% of Korea‘s ODI in 2025. Excluding the financial and insurance sector, the manufacturing sector makes up the largest share of ODI in the US (21.1%). Within manufacturing, the top three sectors - electrical equipment and batteries (37.1%), electronic parts and semiconductors (16.8%), and chemicals (13.9%) - account for 68%. Investment in these sectors increased significantly from 2020 to 2023, driven by the US administration's industrial and trade policy agenda.
   Korea's ODI in the US is characterized by its continued connections to domestic industries, that is, a significant share of intermediate materials continues to be sourced from Korea despite an increase in local production in the US. At the same time, global supply chains have expanded through the joint expansion of investors and their partner companies. For this reason, there are chances for Korean ODI in the US to crowd in domestic facility investment or crowd it out through partial relocation of production.
   Empirical analysis using a fixed-effects panel model discovers that ODI in the US crowds in domestic facility investment - a 1% year-on-year increase in ODI in the US is associated with a 0.07% growth in domestic facility investment with a 2-year time lag. Nevertheless, if the US requires associated localization and policy uncertainty increases, the crowding-in effect may weaken or a crowding-out effect may even emerge in certain industries. Based on these findings, a strategic approach needs to be taken to preserve core capabilities in R&D, materials, components, and processes within Korea and foster companies in the materials, parts, and equipment(MPE) sector to maintain linkages with Korea’s production base during overseas expansion.