South Korea’s AI & Innovation Investment

In a new report from Citi Research, a team of economists and analysts led by Jin-Wook Kim assesses the potential implications of South Korea's AI transformation and ultra-innovation projects. AI-driven productivity gains could substantially offset a slowdown caused by population aging and declining labor supply. As part of our assessment, we raise our KOSPI target to 3,700 from 3,600.

In late August, President Lee Jae-myung’s administration unveiled an economic-growth strategy for AI and ultra-innovation projects, setting strategic technology targets and mobilizing capacities to support the development of leading-edge products.
According to Bank of Korea estimates, productivity improvements driven by AI could substantially offset a slowdown in economic growth caused by South Korea’s aging population and declining labor supply. South Korea’s gross domestic product (GDP) is projected to decline around 16.5% between 2023 and 2050, but the AI transition could moderate this decline to a range of ~5.9% to ~13.2%.

The government plan selects 30 flagship AI transformation projects across corporates, public and household sectors. In the corporate sector, seven projects look to apply AI to physical manufacturing processes to enhance industrial competitiveness. The projects are earmarked for the robot, auto, shipbuilding, household electronics, drone, factory and semiconductor industries. In the public sector, projects will look to transform welfare/employment, tax administration and new drug review. The government will also boost public data utilization and international cooperation on AI, expanding AI data centers through measures such as tax credits, relaxed regulation and power-supply support.

Meanwhile, “ultra-innovation” projects are intended to create new drivers of economic growth. One target is advanced materials and components, with silicon carbide power semiconductors, liquid natural gas cargo tanks, superconductors, graphene and special carbon steel included. Climate and energy projects include solar power, next-generation power grids, offshore wind, high-voltage direct current transmission, green hydrogen, small modular reactors, smart agriculture and fisheries, and ultra-high-resolution satellites. 

In the beauty and food industry, targets include biotechnology and pharmaceuticals, content, beauty clusters and food. 

Finance AI and innovation

The Lee administration’s 2026 budget proposal includes plans to expand research and development spending 19% year over year and expand spending for industry, small and medium enterprises (SMEs) and energy 15% year over year to support these AI and ultra-innovation initiatives. The government also proposes to exempt preliminary economic feasibility analysis to accelerate the pace of public investment in seven strategic technology projects, including AI and semiconductors.

The government plans to establish a National Growth Fund valued at KRW100 trillion ($72 billion) via private-public joint financing activities, initiated by private capital and public funding this year. We see South Korea’s National Pension Service as likely to be one of the major financial investors. The public fund is intended to absorb losses before private investment in order to encourage private investment into risky advanced industries. For startups and SMEs, the government will provide equity investment or subordinated debt; for export-oriented companies, large-scale facility investment loans will be offered at interest rates in the 2% range, with direct investment also under consideration.

Stepping back, the Lee administration recently formulated a “productive finance” policy to reallocate financial resources from less economically productive fields such as the real-estate market and the household loan sector to more productive ones such as the capital markets and the corporate loan sector. This policy is intended to reform the listed equity market, boost venture capital and ease corporate loans and investment.

On the subject of risk factors, we see the AI and ultra-innovation projects strategy as timely and well-positioned, but think more policy consistency and transparency will be needed to boost investor confidence given conflicting policy signals, including a plan to lift corporate taxes. We see recent public investment schemes as largely dependent on policy bank-led bond financing activities to avoid direct burden on the government’s issuance of Korea Treasury Bonds. It will be worth watching how the government manages financing of several public investment schemes without generating an unintended supply shock to the bond market.

We’re raising our KOSPI target

We’re raising our KOSPI target to 3,700 from 3,600, as we expect South Korea’s AI investment to strengthen national competitiveness and enhance corporate productivity. We think the strategic investment focus will boost the growth of the AI-chip supply chain, while the National Growth Fund’s efforts to foster startups will eventually create more opportunities for the semiconductor supply chain. We also see traditional industries such as manufacturing, autos, consumer goods, power and telecommunications as beneficiaries from the initiative, as they seek to leverage AI for future growth. We also project K-beauty and K-food companies as benefiting from government support, as both are part of a broader government focus to globalize Korean products.