As Korea experiences a slowdown in economic growth, the gap between regional growth rates has recently been further widening. In particular, compared to the Seoul metropolitan area (SMA) and the Chungcheong region (an annual average increase of 3.4 percent from 2011 to 2022), the Dongnam, Honam, and Daegyeong regions have shown notable sluggishness (+1.4 percent). Growth accounting analysis of growth rates, decomposed into labor, capital, and total factor productivity, revealed that more than half (51.7 percent) of the growth disparity between these regions from 2011 to 2022 can be attributed to differences in productivity.

   The higher productivity in the Seoul metropolitan area and the Chungcheong region is understood to largely derive from agglomeration economies, due to the concentration of large corporations, highly skilled labor, research and development activities, and production support infrastructure. For example, 95.5 percent of the top 30 companies (by market value) and 100 percent of the top ten universities (by number) are located in the Seoul metropolitan area, showing an exceptional level of concentration when compared to other countries including Japan. The resultant productivity gap deepens the spatial concentration of labor and capital, eventually leading to polarization between the expanded Seoul metropolitan area and other regions, with significant concerns that negative externalities such as low birth rates will increase across the country.

   To improve the situation, it is vital to concentrate investments outside of the Seoul metropolitan area in big cities where agglomeration economies can be realized. Historically, public investment has focused on developing underdeveloped areas, resulting in a tendency for big cities to be rather under-optimally invested. The investment expenditure ratio relative to GRDP for the local governments of big cities outside the Seoul metropolitan area (average 1.4 percent) is significantly lower than for medium-sized cities (3.9 percent) and small cities and counties (16.0 percent). Moreover, even though the relocation of public institutions from the Seoul metropolitan area would have resulted in higher production and employment creation in big cities due to economies of scale and human capital effects, the relocated institutions were spread across ten regions, restricting the achievement of the initiative's goals such as the formation of regional hubs. In fact, comprehensive infrastructure development was crucial during Korea's period of population growth, but given the anticipated population decline, investments will be more effective when focused on a few hub cities. Countries with GDP per capita over USD 30,000 and population density over 200 people per square kilometer (e.g., Japan, Germany, the UK, Italy) have from two to six hub cities (second-tier cities) outside the capital area per 100,000 square kilometers, fewer than the ten innovation cities in Korea.

   Results from analysis using a scenario (general equilibrium model) that considers population migration and interregional industrial and trade linkages indicate that enhancing productivity through concentrated investments in regional hub cities has a spillover effect on adjacent areas (+1.3 percent in national GDP), providing better outcomes for small to medium-sized cities and counties compared to when focusing on productivity improvements in the Seoul metropolitan area alone (+1.1 percent in national GDP). Therefore, it is crucial to make large-scale investments in infrastructure and intellectual property in regional hub cities to establish metropolitan economic regions on par with the Seoul metropolitan area. Additionally, active efforts should be made to implement legal and institutional reforms to support this initiative.