South Korea’s New External Economic Development Strategy

Executive Summary 

The global trade environment is undergoing a fundamental transformation, characterized by the weakening of the multilateral free trade system and the rise of security‑ and resilience‑oriented industrial policies. The United States, once the principal architect and supporter of free trade, has increasingly emphasized domestic production and inward investment through discretionary tariffs and industrial policy instruments. Similar policy shifts are spreading across other major economies, while international trade rules remain fragmented and the effectiveness of the World Trade Organization (WTO) continues to decline. 

These developments pose significant challenges to South Korea’s long‑standing, export‑led growth model. Rising tariff uncertainty, growing pressure for local production in overseas markets, and the expansion of outward investment by South Korean firms have heightened concerns regarding export performance, domestic employment, and industrial hollowing‑out. Given South Korea’s relatively small domestic market, however, sustained economic growth inevitably requires continued reliance on both exports and outward foreign direct investment (FDI). 

This paper argues that exports and outward FDI are not substitutes but are largely complementary. South Korea’s export structure has already shifted toward intermediate goods, which now account for more than 70 percent of total exports. Empirical evidence indicates a strong positive relationship between South Korean firms’ overseas investment and exports of high value‑added intermediate goods supplied to overseas affiliates. 

Accordingly, South Korea requires a new external economic development strategy that integrates outward investment with export expansion. Such a strategy should strengthen South Korea’s role as a global hub for advanced intermediate goods, position South Korea as a core region for future‑oriented research and development (R&D), and enhance the global competitiveness of small and medium‑sized enterprises (SMEs). With appropriate policy support, outward investment can reinforce domestic industrial upgrading, expand exports, and create high‑quality employment. 

Background 

Since the 1960s, South Korea has achieved rapid economic growth through export‑led industrialization, initially centered on labor‑intensive products and later on heavy and chemical industries. By the mid‑1980s, heavy and chemical industries had become major export drivers, enabling South Korea to emerge as a leading global trading nation. By 2024, South Korea ranked among the world’s top economies in terms of GDP, trade volume, and exports, supported by an extensive network of high‑standard free trade agreements. 

Over time, South Korea’s export structure evolved from final consumer goods toward intermediate goods, as rising domestic wages reduced the competitiveness of final goods production. South Korean firms increasingly specialized in productivity‑enhancing materials, components, and equipment while expanding overseas manufacturing. This transition was reinforced by outward FDI, particularly in China following diplomatic normalization in 1992, where South Korean subsidiaries in China imported intermediate inputs from South Korea and produced finished products exported from China to global markets. 

From the 2010s onward, rising production costs and geopolitical tensions prompted South Korean firms to redirect investment toward ASEAN economies and, more recently, toward advanced economies such as the United States and Europe. By 2024, the United States had become South Korea’s largest destination for outward FDI, reflecting an emphasis on local market access, host‑country industrial incentives, and investment‑related policy pressures.

Recommendations for Strategy Implementation  

First, South Korea’s new external economic development strategy should prioritize exports linked to overseas investment by South Korean firms. South Korea should transition from an emphasis on final goods toward becoming a global hub for high value‑added materials, components, and equipment used in advanced manufacturing industries. Clear government commitment and consistent policy support are essential, particularly in strategic sectors such as semiconductors, batteries, automobiles, artificial intelligence, robotics, biotechnology, shipbuilding, defense, and power systems. 

Within frameworks such as the recently reached U.S.–South Korea investment agreement, the government should ensure favorable tariff treatment for intermediate goods supplied from South Korea to U.S.-based investment projects and request the provision of appropriate visas that allow skilled South Korean professionals to work in the United States for a reasonable duration. 

To mitigate geopolitical supply chain risks, South Korea should diversify sources of critical minerals and strengthen partnerships with resource‑rich countries such as the United States, Canada, and Australia through investment and supply chain agreements. Domestic efforts to secure critical materials, including recycling and recovery, should also be expanded. Early accession to the Comprehensive and Progressive Agreement for Trans‑Pacific Partnership (CPTPP) would further stabilize supply chains, expand export markets, and enhance South Korea’s strategic position with limited additional adjustment costs. 

Second, South Korea should position itself as a global core region for advanced technology R&D that integrates research, pilot production, and commercialization. This requires a shift of South Korean R&D policies from quantity‑based evaluation toward a focus on industrial competitiveness. South Korea should develop integrated R&D-manufacturing clusters in future industries and attract leading foreign firms and researchers by offering competitive research autonomy, compensation, long‑term visas, and favorable living conditions. 

Third, South Korea must enhance the global competitiveness of SMEs. Government policy should reduce the risks and costs of overseas expansion, encourage joint ventures with large South Korean firms, and promote technological upgrading beyond simple subcontracting. Improved access to overseas market information, networking platforms, and structured training programs is essential to strengthening SMEs’ global managerial and organizational capabilities. 

Conclusion 

The global shift toward protectionism, industrial policy, and geopolitical fragmentation requires South Korea to fundamentally rethink its external economic development strategy. Export expansion alone is no longer sufficient, yet outward investment—when properly leveraged—can strengthen domestic growth rather than undermine it. By linking outward FDI with export growth, positioning South Korea as a hub for advanced manufacturing and R&D, and empowering SMEs to compete globally, South Korea can transform external challenges into strategic opportunities. A coordinated and forward‑looking approach will be essential to sustaining long‑term growth, resilience, and global competitiveness in an increasingly uncertain world. 

Dr. Taeho Bark is President of the Seoul Forum for International Affairs (SFIA) and Professor Emeritus at the Graduate School of International Studies (GSIS) of Seoul National University. He served as the Minister for Trade of the Republic of Korea from 2011-2013. Dr. Dongchul Kwak is Associate Professor at the School of Economics and Trade and Head of the Research Center for Digital Economy and Trade of Kyungpook National University, Daegu, South Korea. All views are the authors’ alone.

This material is distributed by KEI on behalf of the Korea Institute for International Economic Policy. Additional information is available at the Department of Justice, Washington, DC.