Large businesses prosper, new and smaller ones falter as Korea's corporate recovery splits in two

Korea’s semiconductor boom has fueled an apparent recovery in corporate profitability, but the gains conceal an increasingly fragile business landscape in which smaller firms face a steep climb toward growth.

A record 42.9 percent of Korean companies failed to generate enough operating earnings to cover their interest payments last year, up from 42.8 percent in 2024, according to a report from the Bank of Korea (BOK), released on Wednesday. This marked the highest figure since the central bank began compiling relevant data in 2009 and means that roughly 205,000 of the 477,810 nonfinancial, for-profit companies that incurred interest expenses lacked sufficient operating earnings to cover those costs.

The interest coverage ratio measures a company’s ability to cover its interest expenses with earnings from its operations.

At the same time, Korea recorded just 908,000 new businesses last year, down 1.5 percent from 2024 and the lowest since 2016, according to preliminary figures released by the Ministry of Data and Statistics on Thursday. The business formation rate has now declined for five straight years, a sign of the increasingly steep barriers that aspiring entrepreneurs face.

The strong grow stronger, but the weak struggle

Under the “K-shaped” recovery, companies have displayed polarized financial performances. Corporate winners have gained on stronger profits and healthier finances, while the losers have faced an increasingly difficult road to growth.

Across 982,767 nonfinancial, for-profit companies, the average operating profit margin climbed to 5.2 percent last year from 4.6 percent a year earlier. The share of companies with interest coverage ratios of 500 percent or higher also edged up to 29.5 percent from 29.4 percent a year earlier.

Manufacturers posted some of the strongest gains, with average operating profit margins jumping to 6.3 percent from 5.1 percent a year earlier. The electronics, video and communications equipment sector led the improvement — driven by higher semiconductor prices and stronger sales — as margins rose to 14 percent from 8.3 percent, and that of shipbuilding and other transport equipment surged to 11.6 percent from 6.4 percent.

But these gains were far from evenly shared between large corporations and smaller businesses.

The former saw their average operating profit margins climb from 5.6 percent in 2024 to 6.7 percent last year; the latter moved in the opposite direction, with margins falling from 3 percent to 2.8 percent.

“Big companies have benefited more because they make up a large share of the semiconductor and shipbuilding sectors, where profits have improved,” Kim Dan-bi, a manager of the corporate statistics team under the BOK Economic Statistics Department, said.

Profit gains belie a sales slowdown

Korea’s overall corporate growth slowed, despite an apparent improvement in profitability.

The average revenue growth stood at 2.4 percent last year, down from 3.7 percent in 2024.

Manufacturing took a sharper hit, with growth slowing to 2.4 percent from 4.6 percent as falling global oil prices drove down prices for petroleum coke and refined petroleum products. Nonmanufacturing growth also slipped to 2.3 percent from 2.9 percent, as construction revenue contracted more sharply and lower maritime shipping rates curbed revenue gains in transportation and storage. 

The BOK expects semiconductor-driven growth to spread to other sectors this year.

“Corporate financial data for small- and medium-sized enterprises [SME] subject to external audits suggest that their profitability is improving alongside that of large corporations,” said Lee Mi-joo, the head of the central bank’s corporate statistics team. “The trend of a growing number of companies unable to cover their interest expenses with operating profits may not continue.”

SMEs must undergo external audits if they meet certain criteria, such as holding at least 12 billion won ($9.1 million) in assets at the end of the previous year; having both assets and liabilities of at least 7 billion won; or employing at least 300 people.

But a new cycle of interest rate hikes could put even greater pressure on marginal firms, which have, on average, failed to generate enough operating profit to cover their interest expenses for at least three straight years.

“The fundamental problem cannot be resolved without identifying which companies remain viable,” said Yang Jun-sok, an economics professor at the Catholic University of Korea. “For years, the priority has been to rescue companies that consistently failed to generate profits, but further delays [in distinguishing those that can survive and those that should close] are becoming increasingly difficult to justify.”

A tougher climb for new entrants

The climate for starting a business in Korea has also grown tougher. The country recorded 908,000 new companies last year, down 1.5 percent from 2024, according to preliminary figures released by the Data Ministry.

It was the weakest year for new business formation since 2016, when 884,344 companies were established. The latest figure also extended a five-year losing streak.

“The surge in delivery and parcel businesses during the pandemic may have inflated the number of new firms at the time, as even tiny operations were included in the statistics,” said a ministry official.

New businesses accounted for just 11.7 percent of all active companies last year, down 0.3 percentage points from 2024 and the lowest share since such data collection began in 2011.

The shrinking presence of new entrants has fueled concerns that reduced competition with established firms could dampen innovation and job growth.

By industry, the number of new businesses in accommodation and food services fell 11 percent to 128,000 last year compared to a year earlier, and real estate saw an 8.6 percent decline. Weak domestic demand and a broader slowdown in property transactions appear to have weighed on both sectors.

New businesses established by people aged under 30 fell 7.2 percent in 2025 from the previous year, the steepest decline of any age group. Business formation also fell among people in their 30s, 40s and 50s by 1.2 percent, 3.5 percent and 2.9 percent, respectively.

By contrast, new businesses rose 1 percent among those in their 60s and 13.8 percent among those 70 and older, a trend likely tied to an aging population and more people remaining economically active after retirement.

Too costly to close, too weak to grow

Korea is also producing fewer fast-growing companies. The number of high-growth firms plunged 15.9 percent to 4,534 last year, a loss of 855 companies and the sharpest annual percentage decline since records began in 2011. It was the second straight year of contraction. High-growth firms are those whose revenue and regular employment each increased by at least 20 percent annually on average over the preceding three years.

So-called gazelle companies, or high-growth firms four to five years into operation, fell 15.4 percent, a sign that Korea’s corporate growth pipeline is weakening. Persistently high interest rates and sluggish domestic demand have sharply eroded businesses’ capacity to expand.

The total number of active businesses rose 1.4 percent to 7.75 million last year. But one-person businesses accounted for much of that growth, up 1.9 percent to 6.22 million, or 80.2 percent of all active firms. The business sector expanded in numbers, but the dominance of firms without additional employees pointed to weak job creation.

At the same time, weak business growth and hiring did not translate into more closures. Business closures declined 2.7 percent to 769,000 in 2024 compared to a year earlier, while the closure rate reached an all-time low of 10.1 percent.

“High interest rates and other pressures drove business closures to a record high in 2023, but the numbers have since fallen,” said an official from the Data Ministry. “But that may not be a sign of recovery. Businesses could be struggling to hang on rather than closing their doors, deterred by shutdown costs and hopeful that the economy will rebound.”

BY OH HYO-JEONG, NAM SOO-HYOUN, LEE SOO-JUNG [[email protected]]