Security concerns now drive nearly half of South Korea's semiconductor investment decisions

South Korea's investment decisions in key industries, particularly semiconductors, are increasingly driven by security and global factors, a significant shift from previous market-driven considerations. A recent Bank of Korea report indicates that security and global elements now constitute 48.7% of semiconductor investment decisions, a sharp rise from the 33.1% average between 2016 and 2019.

This trend underscores the complex entanglement of the Korean economy within the intensifying US-China technological competition and the ongoing global industrial realignment. The report highlights that "geopolitical risk" within the security and global factors category has seen the most dramatic increase, rising from 4.8% to 15.8%. Conversely, market and economic factors' contribution has decreased from 66.9% to 51.3% during the same period.

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The decision-making structure for semiconductor facility investment has expanded to a multi-layered structure that includes security and global factors since 2019, as US-China technology competition intensified and major countries' industries were reorganized.

The analysis, utilizing a vector autoregression model, reveals a similar pattern in the automotive manufacturing sector, where security and global factors' influence grew from 25.9% to 50.9% between 2015-2019 and 2020-2024. Across South Korea's manufacturing sector as a whole, these factors' share in investment decisions rose from 29.6% to 43.9% from 2001-2019 to 2020-early 2026.

The Bank of Korea suggests that this "rise of the economic security paradigm" presents both a crisis and an opportunity for the Korean economy. It recommends strategically leveraging South Korea's position in upper-tier global value chains, particularly in semiconductors, batteries, and materials, to actively respond to supply chain realignments. This includes pursuing strategic diplomacy that links corporate investment and trade negotiations with major countries' industrial policy designs.

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The rise of the economic security paradigm is both a crisis and an opportunity for the Korean economy. We propose actively responding to supply chain reorganization by utilizing the negotiation power of industries in the upper echelons of the global value chain.