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Survey shows R&D spending, profitability waning
Sluggish investment and a slowdown in business expansion have eroded the future growth potential of South Korean conglomerates, a survey showed. According to a recent survey of the nation's major companies performed by the Bank of Korea, sales growth decelerated in 2005 to 5.8 percent from 24.1 percent recorded the previous year. The firms suveyed represent the top three companies in six industrial fields. This figure stands in stark contrast with an improvement in sales growth for the world's leading companies overall. For the top three companies in each industry among Fortune 500, sales grew 5.9 percent last year, up from 4.2 percent in 2005. Except in the automobile sector, where General Motors (GM) is struggling to survive, local firms are lagging behind other global counterparts in sales growth, the report showed.In terms of profitability, South Korean firms also showed a lackluster performance. In 2005, South Korean firms surveyed saw the ratio of ordinary profit against sales drop to 9.5 percent from 12.1 percent the previous year. That compares with that figure in global companies, which fell only to 7.5 percent from 8.1 percent. More worrisome is that local companies' future growth potential has also been eroded. The debt ratio for major South Korean firms in 2005 stood at 99.5 percent, far below the 182.3 percent found on average at the world's leading companies. This means that compared to the top companies in the world, South Korean firms are only investing about half as much of their income into activities that fuel growth. This particular figure shows "that [South Korean companies] remain extremely conservative in making investments," a Bank of Korea official said. Indeed, investment in research and development (R&D) accounted for only 3.2 percent of the total capital spending by South Korean firms in 2005. "At a time when sales figures [for South Korean firms] are smaller than those of the world's leading companies, a smaller R&D investment could make these companies less competitive in the global market down the road," the Bank of Korea official added.
