Entering the Era of 1% Potential Growth and 17% Zombie Firms — The Grammar of Survival Has Shifted from 'Expansion' to 'Selection'
Diagnoses that the South Korean economy has entered a structural low-growth phase are gradually solidifying. In its economic outlook report released in November 2025, the Bank of Korea estimated the nation's potential growth rate at around 1.8%, while the Korea Development Institute (KDI) similarly projected the current year's potential growth rate in the upper 1% range in its outlook for the first half of 2025. According to the baseline scenario, influenced by demographic shifts, the potential growth rate is expected to continue its downward trend in the future, dropping to around 0% by the 2040s. This means that the potential growth rate, which stood at around 5% in the early 2000s, has slipped into the 1% range within a single generation.
Low growth is not merely a phenomenon of declining growth figures. It is an environmental shift that collapses the very growth premises upon which companies have relied. In a period when the market expanded every year, top-line expansion was synonymous with survival; however, in a phase where the market stagnates or contracts, the question of 'What should we cut and what should we keep?' takes center stage in management, rather than 'What should we add?' This paper examines the structure of choices confronting companies in the low-growth era and explores decision-making criteria for distinguishing between what must be reduced and what must be protected.
The Polarization of Corporate Resilience Revealed by Low Growth
The low-growth environment brings to the surface the disparities in corporate resilience that were previously obscured in the shadow of growth. According to the '2004 Annual Corporate Management Analysis Results' released by the Bank of Korea in October 2025 (note: cited as reported), among approximately 960,000 domestic non-financial for-profit corporations, the proportion of companies whose operating profits failed to cover even their interest expenses—meaning their interest coverage ratio was below 100%—reached 42.8%. This is the highest figure since related statistics began being compiled in 2009. The same report confirmed that while the proportion of sound companies with an interest coverage ratio of 500% or higher declined compared to the previous year, the proportion in the lower brackets increased, deepening the polarization among enterprises.
The cumulative scale of so-called zombie firms—companies unable to pay interest with operating profits for three consecutive years—is also at an all-time high. Based on the Bank of Korea's Financial Stability Report, the proportion of zombie firms among companies subject to external audit stood at 17.1% at the end of 2025, the highest since statistics began in 2010. By industry, the proportion of zombie firms was notably high in real estate and accommodation & food services. An analysis by the Federation of Korean Industries (FKI) also showed that the proportion of zombie firms among listed companies rose rapidly from about 7% in 2016 to around 20% by the third quarter of 2024, recording the largest increase among major economies second only to the United States.
What deserves attention is that this accumulation of distress does not end as a problem for the affected companies alone. According to research by the Bank of Korea, a 10-percentage-point increase in the proportion of zombie firms within an industry was analyzed to drive simultaneous declines in the sales growth rate and profitability indicators of healthy companies in the same sector. This indicates a so-called congestion effect, whereby if distressed companies linger while occupying resources in the market, sound enterprises find it difficult to secure investment capital and human resources. In a low-growth phase, the longer restructuring is delayed, the more that cost is passed on to the entire industry.
What to Cut — Criteria for Selection
The foremost challenge companies face in the low-growth era is the restructuring of costs and businesses. However, indiscriminate reduction carries the risk of defending short-term profits while simultaneously shaving away growth engines for the recovery period. Therefore, 'the act of cutting' must not be a uniform reduction, but a selection based on priorities.
First is the cleanup of business portfolios that are not directly connected to core competitiveness. In a period of expanding markets, diversification into adjacent areas served as a risk-diversification tool, but in a low-growth era, dispersed resources can instead become a burden that diminishes concentration on the core business. The cases of Japanese companies shedding non-core businesses and refocusing resources on main-line competitiveness after enduring long-term low growth since the 1990s serve as a reference for South Korean firms. However, judgments on what is core and what is non-core must be made prudently, taking into account not only short-term profitability but also long-term market position and technological assets.
Second is the reassessment of fixed cost structures. Fixed costs accumulated by relying on market growth rapidly erode profitability the moment sales stagnate. However, it is necessary to note that if fixed cost reduction is simplified into workforce downsizing, it can lead to the loss of capabilities necessary during a recovery period. Reorganizing the cost structure is closer to the task of distinguishing which costs are investments creating future value and which originate from the inertia of past growth.
Third is the liquidation of top-line scale without profitability. The practice of making sales volume itself a target comes under review in a low-growth era. Businesses with large top-line figures but thin margins or heavy working capital burdens become factors that pressure cash flow when the market stagnates. This is why a shift in perspective—evaluating businesses centering on cash flow and capital efficiency rather than sheer scale—is required.
What to Keep — Assets That Must Be Protected
Just as important as cutting is the judgment of what must be protected to the end. If restructuring in the low-growth era flows in a direction that exhausts even future capabilities, companies will lose the foundation to rebound when the market recovers.
First are core talent and organizational capabilities. The greater the cost pressure, the more the workforce becomes the easiest target for reduction; yet specialized capabilities and core talent that take a long time to accumulate are difficult to recover once leaked. Especially in a low-growth era, the choice to preferentially allocate limited resources to retaining core talent dictates long-term competitiveness.
Second are selective investments in future growth engines. Rather than uniformly cutting all investments, resources must be concentrated on areas targeting the recovery period and the next growth cycle. Digital transformation and AI-driven operational efficiency are cited as areas where investment priority actually rises during low-growth periods, as they can serve as means to reduce costs while simultaneously boosting productivity. The fact that the management consulting market also projects digital transformation as the fastest-growing sector going forward suggests that companies are focusing on efficiency through technology investments.
Third are financial soundness and cash reserves. In a low-growth era, the buffering capacity against external shocks is precisely survival capability. Growth models dependent on debt quickly become vulnerable when the interest rate environment changes. The current situation, where over 40% of companies have an interest coverage ratio below 100%, can be read as a warning showing how dangerous top-line expansion leaning on borrowings is. Companies that stably secure cash flow and maintain financial leeway are highly likely to weather the low-growth phase and preempt opportunities during the recovery period.
The Era of Selection, Management's Questions Change
Low growth is simultaneously a crisis and a turning point that reorganizes disparities among companies. In an era when the market grew together, even average companies could ride the tide of growth, but in a stagnated market phase, the quality of selective judgment decides a company's fate. Current indicators—where the proportion of zombie firms hits historic highs and corporate polarization deepens—demonstrate the reality that under the exact same environment, some companies collapse while others expand their market share.
The questions required of executives have also changed. The center of gravity has shifted from 'How can we grow faster?' to 'What should we cut and what should we keep to build the resilience to endure the next cycle?' Cutting must not be a retreat that chips away at the future, but a choice to concentrate resources on the core. Keeping must not be an obsession with inertia, but an intentional investment for the recovery period. Ultimately, management strategy in the low-growth era begins with knowing what one can afford to give up.