[1] To What Extent Has Korea’s Service Industry Achieved Quantitative and Qualitative Growth? 

 Korea’s service industry has undergone substantial quantitative expansion, but gains in productivity and efficiency have not kept pace. Since 1970, the private service sector has grown at average annual rates of 7% in output and 3% in employment. As of 2024, it accounts for 44% of nominal GDP and 65% of total employment. Nevertheless, labor productivity  in the private service sector has stagnated at merely 40% of that in manufacturing over the past two decades, lagging behind major economies and showing only modest improvement. 

 In particular, service-sector productivity in the post-pandemic period has fallen well below its pre-pandemic trajectory. Productivity in high value-added service industries briefly surged on the back of rising demand for less-contact-intensive services and digital transformation, but has been on a downward path since 2022 and now stands about 10% below its long-term pre-pandemic trend. This contrasts sharply with the United States, where high-tech service sectors have played a leading role in the post-pandemic recovery, both in terms of employment and productivity.

 Productivity in low value-added service sectors also fell sharply in the immediate aftermath of the pandemic shock. Although it has been gradually recovering, it still stands about 7% below its pre-pandemic trend. In particular, productivity in labor-intensive industries—such as accommodation and food services, business support services, and health and social work—plunged in 2020 and has since remained stagnant at levels lower than before the pandemic.

[2] What Are the Structural Factors Limiting Productivity in the Service Industry? 

 ❶ [Perception as a Supporting Sector for Manufacturing, a Regulated Industry, and a Provider of Public Goods] The Korean service sector, with approximately 32% of its total output directly or indirectly linked to goods exports as of 2020, has long primarily focused on playing a supporting role for production and export activities in the manufacturing sector, mainly in areas such as logistics, transportation, and finance. As a result, its independent demand base remains fragile. Furthermore, in the general social perception, the service sector has often been regarded not as an “industry” that generates value added in itself, but rather as a provider of public goods or activities offered free of charge. This perception has, to some extent, influenced industrial policies to approach the service sector mainly from the perspective of regulation and public interest. This has served as a factor that restricted private capital investment from entering the service sector, allowing its labor-intensive structure to persist. Meanwhile, the investment rate in the private service sector dropped from 26% in 2000 to 18% in 2022, and its market capitalization in the stock market also remains at half that of manufacturing, entrenching the weakness of its foundation for autonomous growth.

❷ [High Value-Added Service Sectors: Excessive Dependence on Domestic Demand and the Public Sector, and Weak Innovation] Excessive reliance on domestic demand and the public sector is considered a structural factor that dampens the incentive for companies to boost profits through entry into foreign markets or innovation. In the case of knowledge-intensive services, which are generally regarded as high value-added, nearly 98% of total corporate sales as of 2021 are concentrated in domestic demand, including transactions with the government, public institutions, domestic companies, and consumers. Whereas major countries’ high value-added service firms are rapidly expanding their global footprint, only 2.2% of Korean knowledge-intensive service firms have any experience in entering overseas markets as of 2021. Recently, as the growth momentum in domestic demand has weakened due to Korea’s demographic contraction, coupled with the accelerated entry of global Big Tech companies into the Korean market, domestic companies are facing dual pressures: a shrinking domestic demand base and intensifying competition. 

 ❸ [Low Value-Added Service Sectors: The So-Called “Revolving Door Competition” among Livelihood-Oriented Self-Employed Individuals] In low value-added service sectors, the weak foundation for quality jobs has led to a rise in livelihood-oriented self-employment with 60% of the self-employed in 2024 engaged in these sectors, resulting in the entrenchment of small-scale businesses with 73% of them being single-person businesses. The concentration of single-person or family-run businesses in certain sectors with low barriers to entry and minimal initial capital requirements is making it difficult to achieve economies of scale. This has resulted in distorted firm dynamics, characterized by repeated entry and exit among small-scale self-employed businesses, thereby constraining the foundations for corporate growth, resource reallocation, and job creation.

[3] What Policy Direction Should Korea Pursue for Its Service Industry? 

 [The First Step Toward Strategic Industrialization: Legal and Institutional Reform] It is necessary to establish a higher-level legal framework for industrial policy that encompasses all relevant sectors by reflecting the trend of manufacturing-service convergence. In particular, this effort should be underpinned by bold deregulation to ensure the flexible accommodation of emerging industries and convergent services that are not adequately covered by existing regulatory systems. To this end, an inclusive policy platform should be designed through the establishment of a pan-governmental control tower, the preparation of common foundations such as digital infrastructure, standardization, and data linkage, and the systematic reform of regulations that hinder convergence—all of which should be substantially incorporated into forthcoming legislation. The Framework Act on the Development of the Service Industry, currently under deliberation in the National Assembly, is expected to serve as the legal framework to take on this role.

 [High Value-Added Service Sectors: Export Strategies Leveraging Manufacturing Strengths] Since both manufacturing and service sectors face limitations in enhancing export competitiveness independently, they should strategically broaden their export reach by maximizing synergy through cross-industry convergence. Korea possesses intellectual assets and outstanding operational capabilities accumulated through manufacturing, generating strong potential to convert manufacturing know-how into AI- and data-driven industrial services. In addition, sectors with high global demand, such as content and digital healthcare, can complement digital-based services by combining with manufacturing technologies, thereby overcoming their limitations and enhancing value, while also expanding opportunities for new market creation.

 [Low Value-Added Service Sectors: Livelihood-Oriented Self-Employed Individuals’ Transition to Wage and Salary Employment and Achieving Economies of Scale] To address the structural constraints of low value-added service sectors, rather than directly reducing the number of small-scale self-employed businesses, it is necessary to foster a business environment that can create more quality jobs, in an effort to encourage livelihood-oriented and involuntarily self-employed individuals to transition to employment within mid- to large-sized enterprises. To this end, it is critical to enhance access to capital by companies to enable capital accumulation and business scaling. This should also be accompanied by measures to facilitate enterprise formalization and corporatization, such as incorporation and raising the share of directly operated outlets within franchise systems. Moreover, institutional support and customized financing should also be strengthened to support the business lifecycle from entry to exit (including startups and closures), thereby restoring the overall dynamism of the industry.