KISDI Identifies AI-Driven Productivity Innovation as a Key Strategy for Overcoming Korea's Structural Low Growth (detail)

※ URL(Korean): https://www.kisdi.re.kr/bbs/view.do?bbsSn=115003&key=m2101113055776&pageIndex=1&sc=&sw=

KISDI Policy Report (25-10)
National Growth Strategy in Response to Structural Economic Changes in the Digital Era (II)

KISDI Identifies AI-Driven Productivity Innovation as a Key Strategy for Overcoming Korea's Structural Low Growth
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▲ Korea's structural economic slowdown is intensifying, with negative growth projected in the 2040s
▲ Improving total factor productivity (TFP) through AI and digital technologies is essential for sustainable growth
▲ Greater investment in intangible assets and higher domestic value creation within global value chains (GVCs) are needed
▲ The report presents a national growth strategy based on an integrated analysis of productivity, intangible assets, and GVCs across industries

The Korea Information Society Development Institute (KISDI, President Sangkyu Rhee) recently published its Policy Report (25-10), *National Growth Strategy in Response to Structural Economic Changes in the Digital Era (II)*.

Since the global financial crisis, Korea has experienced a persistent decline in its potential growth rate. Domestically, the economy faces structural challenges including demographic change, shorter average working hours, and weakening domestic demand and fiscal capacity resulting from rising household and government debt. Externally, intensifying U.S.-China technological competition, the spread of protectionist policies, and growing geopolitical risks have further reshaped the global economic environment.

The report argues that, as quantitative expansion of labor and capital becomes increasingly constrained, improving total factor productivity (TFP) through more efficient resource allocation and technological progress is the most fundamental path to sustainable economic growth. In this context, AI and digital technologies are identified as key drivers of future productivity gains.

To assess these trends, the study constructed industry-level productivity accounts covering the period from 1981 to 2024 and conducted growth accounting analyses incorporating a broad range of knowledge-based intangible assets. The analysis identified several major characteristics of Korea's productivity and growth performance.

First, overall industrial growth has slowed steadily since the 2000s. In the 2000s, slower capital investment was the primary factor behind the decline. During the 2010s, weakening productivity became the dominant constraint, while in the 2020s the recovery from the COVID-19 pandemic has been accompanied by simultaneous declines in investment, labor input, and productivity. More recently, however, TFP growth has begun to recover, suggesting that the economy is gradually returning to a healthier growth trajectory.

Second, the composition of capital investment has shifted in a positive direction since 2020. Investment in intangible assets—including research and development (R&D) and software—has made an increasingly larger contribution to growth, indicating a gradual transition toward an intangible asset-based investment structure. At the same time, the report notes that the strategic importance of physical investment should not be overlooked, as major economies continue to expand domestic production capacity amid the ongoing restructuring of global value chains.

Third, the ICT sector continues to outperform non-ICT industries in both economic growth and TFP growth. Industries with higher levels of digital intensity also recorded stronger productivity improvements and faster growth, underscoring the importance of digital transformation as a foundation for industrial competitiveness.

Despite these positive developments, the report identifies structural weaknesses in Korea's investment patterns. Although Korea ranks among the G7 economies in terms of total investment relative to gross value added, investment remains heavily concentrated in tangible assets. By contrast, investment in organizational capital and other forms of economic competence that complement AI and digital technologies ranks near the bottom among comparable countries. The report therefore argues that investment should extend beyond R&D to include organizational innovation and improvements in workplace practices.

The report also analyzes the global linkages and value creation structure of Korea's ICT industry within global value chains (GVCs). As GVCs evolve from efficiency-driven to security- and resilience-oriented structures, the report emphasizes that increasing the domestic value added generated within global production networks is becoming more important than simply expanding export volumes.

Drawing on discussions from the **Digital Economy and Innovation Growth Forum**, composed of experts from academia, industry, and research institutes, together with a Delphi survey, the report identifies two overarching national growth strategy priorities for the AI and digital era. The first is to promote AI and digital technologies while developing long-term investment strategies that enhance productivity and sustainable growth. The second is to strengthen Korea's economic structure so that a larger share of value added generated through global value chains accrues domestically.

To support these objectives, the report proposes four key policy directions:

* Strategic government support for AI, digital technologies, and other future growth engines
* Advancement of the economic structure through expanded investment in knowledge-based intangible assets, including organizational capital
* Development of AI- and digital-ready human capital
* Strengthening the domestic creation and retention of value added throughout global value chains

The Delphi survey further suggests broadening government support beyond R&D to encompass a wider range of knowledge-based intangible assets, including organizational capital and workforce training, in order to maximize AI's productivity-enhancing potential as a general-purpose technology. The report also argues that, as GVCs increasingly prioritize security and strategic technologies over cost efficiency, supply chain policies should shift toward strategic approaches such as reshoring, friend-shoring, and onshoring. In addition, it recommends expanding direct government support—including financial assistance and tax incentives—for strategic technologies and employment alongside existing support for R&D and human resource development.

Hyunjun Jeong, Research Fellow at KISDI, noted that AI and digital transformation provide a critical foundation for productivity innovation in an economy where further quantitative expansion of labor and capital is increasingly constrained. He emphasized that Korea should strengthen investment in knowledge-based intangible assets while building an economic structure capable of generating stable domestic value added amid intensifying geopolitical competition and the ongoing restructuring of global value chains.

The report is available for download from the KISDI website ([www.kisdi.re.kr](http://www.kisdi.re.kr)).

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KISDI Identifies AI-Driven Productivity Innovation as a Key Strategy for Overcoming Korea's Structural Low Growth