Lesson from Korean FEZ Policy

Prof. Sung-Hoon Lim

Konkuk UNIV.
 Contents

 About FEZs in Korea

 Asian Business Hub and Strategic Targeting

 FEZs and Strategic FDI Policy

 Discussion & Concluding Remarks

Prof. S-H Lim 2

 About FEZs in Korea
 Launch a Northeast Asian Economic Hub Vision

In 2002, the Korean govn’t identify new engines of growth

for the 21st century by devising a plan for becoming an
economic hub in NE Asia

“The rapidly changing environment that followed the end of

Cold War, collapse of communism in Eastern Europe, and
the emergence of China”

“After the end of the 1990s, Korean manufacturing industry

faced increased competition from China in terms of cheap
labor and from Japan in high-tech fields (i.e., nut-cracker)”

Prof. S-H Lim 4

 Overview of Economic Hub of Northeast Asian

Balanced Development
Knowledge-Based
Strategic FDI Government Reform
Growth Drivers
Non-discrimination

Cluster-Based Economic Development

Logistics R&D Financial

Hub Hub Hub

Advanced Logistics National Innovation Advanced Financial

System System System

Prof. S-H Lim 5

 FEZs for Northeast Asian Economic Hub Vision

Korean govn’t selected the FEZ system as a key policy

measure to achieve the new vision

“Korea aims to become a regional hub for logistics,

multinational companies, and, finance in Northeast Asia”

“In developing county, FEZs are recognized as an efficiency

way to construct an advanced infra-system in a specific area
within a short period of time”

Prof. S-H Lim 6

 Nine FEZs since 2003

“Korea has designated three

FEZs in 2003: Incheon,
Busan/Jinhae, and
Gwangyang”

“Four more FEZs are added:

the Yellow Sea, Daegu-
Gyeongbuk, and
Saemangeum/Gunsan in 2008;
East Cost and Chungbuk in
2013; Ulsan FEZ followed in
2020”

Prof. S-H Lim 7

 South Korean FEZs, North Korean (Original) SEZs

Gangeung

· Feb. 14. 2013 Chungbuk FEZ

· 4.96㎢
· Eco-Friendly IT-BT Convergence Industry Hub
12
Chungju

13 · June. 3. 2020
Usan FEZ · 4.75㎢
Ulsan · Northeast Energy Hub

Prof. S-H Lim 8

 Governance for FEZs

Prof. S-H Lim 9

 NE Asian Business Hub and
Strategic Targeting
 MNC Activities: Motives for FDI

Market-seeking
(market size & per capita income, market growth, etc. )

Efficiency-seeking
(cost of resources, labor cost, communication cost, etc.)

Resource/asset-seeking
(raw materials, technology, labor, physical infrastructure, etc. )

Prof. S-H Lim 11

 Host Country Determinants of FDI
Economic, political and social stability
Rules regarding entry and operations (incl. Labor
Policy framework flexibility)
Policies on functioning and structure of markets
(especially competition and M&A policies)
International agreements on FDI
Economic determinants
•Market-seeking
•Efficiency-seeking Investment incentives
•Resource/Asset-seeking Investment promotion (including image building
and investment-generating activities and
investment-facilitation services)
Hassle costs (related to corruption, administrative
Business facilitation efficiency, etc.)
Social amenities (bilingual schools, quality of life,
etc.)
After-investment services

Prof. S-H Lim 12

 Definition of Regional Headquarter (RHQ)

Prof. S-H Lim 13

 Determinants of RHQ Investment

Prof. S-H Lim 14

 Economic Policy and FDI Policy

Unemployment
Economic Problems Lack of Foreign Exchange
Unbalanced Regional Development

Underdeveloped Industrial Sector/

Low Exporting Competitiveness Int’l Monetary Policy

Employment Policy
Economic Policies

Regional Development Policy

FDI Policy
Industrial Policy/ Sub-Economic
Export Promotion Policy Policies

Prof. S-H Lim 15

 Korean FDI Policy by Stages

Stage I Stage II Stage III Stage IV

Foreign exchange NE Asian business

crisis hub needs
Investment Policy Macro economic
Stage stability Strategic FDI Scheme
Mixed Economic
Lack of Policy Period
foreign capital
reserve Primitive Industrial
Foreign Capital Policy Period
Introduction
Policy Period
Long FIPA Nov. 1998
FCIPA Jan. 1960 3rd FCIA Jul. 1984
Incentive Period
4rd FCIA Mar. 1991 Cabinet meeting Agenda
(Tax Exemption/ 2003. 2. Sept.
Reduction Years)
Short AFIFCI Apr. 1997
Many
Number of Objects
to Incentive
Few FCIAEO Jan. 1990

Time

Prof. S-H Lim 16

 Examples of FDI policy change

Ireland
- Irish FDI attraction policy was initially geared to that high levels of
unemployment that plagued its economy, was radically modified
after 1999 when full employment was reached.
- Policy shifted focus to boosting underdeveloped regions in the
west of Ireland and fostering cutting-edge industries.

Thailand
- Thailand has also recently revised its FDI attraction policy.
- While it was previously designed to channel investment toward
the outskirts of Bangkok, it is now geared to supporting
investment across the territory with the goal of boosting industries
such as agriculture, fashion, automobiles, IT, logistics and design.

Prof. S-H Lim 17

 FEZs and Strategic FDI Policy
 Industrial Strategies & Strategy for FDI Attraction

Basic direction for industrial strategies Strategic attraction of Creation of innovative

foreign Investment clusters
Development of new industries
with growth potential
Further advancement of Attraction of
existing industries world-class
into high-tech industries research National Innovation System
institutes

Gateway into the Northeast Asian market

Attraction of
MNCs with Regional Innovation System
Test-Bed strategy innovative
(Export of intermediate goods) technologies

Nurturing and exporting of

core components/materials
industry

Training of specialized manpower/

technological innovation

Prof. S-H Lim 19

 Strategies for Attracting FDI by Industry
Value added LCD(TFT)
(Industry Communications
attractiveness) Medicine equipments (terminals)
Precision machines Digital electronics
Auto parts (electric) Semiconductors
Communications
III
-devices Industries for enhancing
Fostering of competitiveness
new high-tech industries

Conveyance
II -machines
Fine chemistry
Clothes Parts/materials Further development of
existing industries
Textiles Auto parts (general) into high-tech ones
Food & Beverages
General machines
Daily necessities
Mature industries
I

Prof. S-H Lim 20

 Building of NE Asian Business Hub
through Attracting FDI

Business Environment
· Improve the labor market
· Labor market which is not flexible
· Complexity of regulations environment
Competitive To be
disadvantages · Reform complex regulations
improved High-tech centered
· Improve foreigners’ living
Living Environment for Ex-Pats
conditions R&D centered
· Insufficient number of foreign schools
· Difficulty in communicating · Utilize free economic zones Logistics centered
in English
· Lack of cultural and tourism opportunities Financially centered

· Excellent aviation/harbor/
Knowledge-based
services centered
communication infrastructures · Improve the industrial
Competitive · Huge market nearby with a To be innovation system
advantages utilized
population of 2 billion · Build industrial clusters
· World-class competitiveness specialized by region
in core industries like
semiconductors, electronics, and steel

Prof. S-H Lim 21

 Phases of Strategic FDI Retention

Identify Identify Improve FDI Implement Monitor

investment priority retention FDI retention Investment
goal target system activities results

• Deregulation • Concentrate on • Quantity

• Secure stable • Absence of a
investment type one-sided indicator (basis
foreign capital targeting
Before and industries, the publicity events of reports)
• Downsizing of • Marketing the limitation of
Strategic companies country as a • Inadequacies
properties, etc
due to general
FDI • Improve whole • Establish
international IR
domestic investment
improvement organizations
• Handle difficulties
by synthesizing
and categorizing
problems

• Realize Korea • Cultivate modern • Improve • Establish target • Improve quality

environment to
as the business industries strengthen strategies indicator
After hub of NE Asia • Target business investment appeal • Execute & • Develop multiple
Strategic • Cultivate center, logistics • Demand-side develop indicators of
FDI strategic hub & NE Asian oriented incentives
• Strengthen profession IR linkages among
industries cooperation investment material per domestic
• Realize • Targeting on the organization industry industries
economic ripple basis of the capabilities &
systematic
effects competitiveness of improvement
regional industry • Handle difficulties
through
problem resolution
Prof. S-H Lim 22
 The Future of Strategic FDI Targeting

Value chain Inbound Outbound

R&D Operation Service
Industry logistics logistics Marketing
Conveyance
Machine
Precision
Machine

Fine
Chemistry
Bio / Medicine

Semi-
Conductor
Communication
Equipment
Distribution/
Logistics

Prof. S-H Lim 23

 FDI Targeting Model

Possibility of attracting FDI

Low High

Low
X

Priority of
FDI policy Y Y
goals

Z Y Y
High

Prof. S-H Lim 24

 Incentive Policy for FDI

Korean government gives Foreign investors various benefits

including tax exemption, financial support and location incentives

• National tax, local tax

Tax and custom duty
Incentives exemption for
greenfield FDI

• Sales or lease of state-

Administration Foreign Location owned land at the very
Support Incentives low price
Investor

• Cash grant
Financial • Hiring and training cost
Incentives support

Prof. S-H Lim 25

 FDI Policy Objectives and Instruments
Objectives of FDI policy FDI policy instruments: Incentives

FDI = Foreign Direct Investment Fiscal incentives

“MNC” + “Investment” (Tax reduction/exemption,
accelerated depreciation, etc)

Advancing industrial structure Financial incentives

Enhancing export (Grants, Subsidized credits, etc)
Creating employment
Regional expansion
Market preferences
(Monopoly rights, supply
guarantees, etc)
Increasing foreign exchange reserves

Prof. S-H Lim 26

Prof. S-H Lim 27
 Tax Incentives – High-tech and FIZ
Description Business Minimum FDI size Tax Exemption

KRW 50 mn
High-tech Business & Industry Support Service
(around US$ 44k)  National taxes (corporation tax, income
tax, dividend tax): 100% exempt for the
 Manufacturing business US$ 30 mn first 7(5) years and 50% for the next
3(2) years
 Tourist hotel business *( ) Applied from 2005
 Comprehensive leisure
business and comprehensive  Local taxes (acquisition tax, registration
US$ 20 mn
amusement park business tax, property tax, aggregate land tax):
 International conference 100% exemption for 5 years, 50% for
Foreign the following 3(2) years. The exemption
facilities business
Investment period can be prolonged up to 15 years
Zone *( ) Applied from 2005
 Distribution & logistics business
US$ 10 mn
 Infrastructure facilities
 Customs duty, special excise tax, and
VAT: 100% exempt on imports of
US$ 5 mn capital goods for a 3-year period dated
Hiring more than 10 from the initial report of the intended
 R&D center
master’s degree FDI
employees

Prof. S-H Lim 28

 Tax Incentives – FTZ, CFZ, FEZ & Jeju
Description Business Minimum FDI size Tax Exemption
 Manufacturing business US$ 10 mn
Free Trade Zone  National taxes
 Logistics business US$ 5 mn (corporation tax,
income tax, dividend
 Manufacturing business US$ 10 mn tax): 100% exempt
Free Economic for the first 3 years
 Tourism business US$ 10 mn
Zone and 50% for the
 Logistics business US$ 5 mn next 2 years
US$ 30 mn
 Local taxes
Free Economic Zone developer Participate in a over (acquisition tax,
US$ 500 mn & 50%- registration tax,
FDI project property tax,
Jeju High-tech KRW 50 mn aggregate land tax):
 High-tech, BT, IT, & culture businesses similar to above
Complex (around US$ 44k)
national taxes. The
 Tourism, culture, silver, youth training facilities, and exemption period
Jeju Investment substitute energy businesses can be prolonged up
US$ 10 mn
Promotion Zone  Traditional hotel, recreation, excursion ship, event hall, to 15 years
etc.
Jeju Free Trade  Manufacturing business with over 100 employees US$ 10 mn  Customs duty:
Area 100% exempt on
 Logistics US$ 10 mn imports of capital
US$ 10 mn goods for a 3-year
period dated from
Jeju Investment Promotion Zone developer Project: over the initial report of
US$ 100 mn & 50% the intended fDI
ratio of FDI

Prof. S-H Lim 29

 Bibliography
 References (S-H Lim’s int’l publication on FEZ, FDI policy)
Articles
• “Determinants of the Performance of Investment Agency: Evidence from a Mix of Emerging
Economies,” Emerging Markets Finance and Trade, 2018
• “The Nature of Compromising Foreign Investment Motives and Incentive: The Case of
Korean Firms through Multidimensional Scaling Analysis,” Journal of Korea Trade, 2015
• “How Beneficial Would the Construction of a Rason-Hunchun Sub-Regional Economic
Cooperation Zone in the Northeast Asian Borderlands Be?,” North Korean Review, 2015
• “Regional Headquarters Inducement Strategy of Korea's FEZs: The Pursuit of a Premier
Business Hub in Northeast Asia,” Issues & Studies, 2012
• “Risks in the North Korean SEZ: Context, Identification, and Assessment,” Emerging
Markets Finance and Trade, 2011
• “Seven Business Models for North Korea's SEZs,” North Korean Review, 2010
• “How Chinese Foreign Direct Investment Can Achieve Success in Korea: M&A Deals in the
Automotive and Semiconductor Industries,” Issues & Studies,”, 2008
• “How Investment Promotion Affects the Attraction of FDI: Analytical Arguments and Empirical
Analyses,” International Business Review, 2008
• “SEZs as Survival Strategy of North Korea,” North Korean Review, 2006
• “Foreign Investment Impact and Incentive: A Strategic Approach to the Relationship between
the Objectives of FDI Policy and Their Promotion,” International Business Review, 2005
• “Effects of Outward FDI on Home Country Exports: The Case of Korean Firms,”
Multinational Business Review, 2001
 References (S-H Lim’s int’l publication on FEZ, FDI policy)
Articles
• “Determinants of the Performance of Investment Agency: Evidence from a Mix of Emerging
Economies,” Emerging Markets Finance and Trade, 2018
• “The Nature of Compromising Foreign Investment Motives and Incentive: The Case of
Korean Firms through Multidimensional Scaling Analysis,” Journal of Korea Trade, 2015
• “How Beneficial Would the Construction of a Rason-Hunchun Sub-Regional Economic
Cooperation Zone in the Northeast Asian Borderlands Be?,” North Korean Review, 2015
• “Regional Headquarters Inducement Strategy of Korea's FEZs: The Pursuit of a Premier
Business Hub in Northeast Asia,” Issues & Studies, 2012
• “Risks in the North Korean SEZ: Context, Identification, and Assessment,” Emerging
Markets Finance and Trade, 2011
• “Seven Business Models for North Korea's SEZs,” North Korean Review, 2010
• “How Chinese Foreign Direct Investment Can Achieve Success in Korea: M&A Deals in the
Automotive and Semiconductor Industries,” Issues & Studies,”, 2008
• “How Investment Promotion Affects the Attraction of FDI: Analytical Arguments and Empirical
Analyses,” International Business Review, 2008
• “SEZs as Survival Strategy of North Korea,” North Korean Review, 2006
• “Foreign Investment Impact and Incentive: A Strategic Approach to the Relationship between
the Objectives of FDI Policy and Their Promotion,” International Business Review, 2005
• “Effects of Outward FDI on Home Country Exports: The Case of Korean Firms,”
Multinational Business Review, 2001
 References (S-H Lim’s int’l publication on FEZ, FDI policy)
Books
• “Rethinking Special Economic Zones as a Survival Strategy for North Korea,” In Suk Hi Kim,
Terence Roehrig and Bernard Seliger (Ed.), The Survival Strategy of North Korea: Essays
on Strategy, Economics and International Relations, Jefferson, NC: FcFarland & Company,
Inc., Publishers, May 2011

• АДААДЫН ХθРθНГθ ОРУУЛАЛТЫГ ДЭМЖИХ YЙЛ АЖИЛЛАГААНЫ БОДЛОГЫГ

ТОДОРХОЙЛОХ, УЛААНБААТАР: АДМОН ХЭВЛЭЛИЙН ГАЗАР, 2008.
Articles on
SEZ, FEZ (Incheon FEZ), NE Biz Hub, SEZ, FDI Policy
Books on
SEZ (North Korean SEZ), Strategic FDI Marketing
Economic/Social Vision & Policy of Korea
Northeast Asia Business Hub Strategy, Strategic FDI Policy
Text Books
Int’l Marketing, Int’l Trade, , Int’l Management
 S-H Lim’s Curriculum Vitae (in the filed of FEZ policy)
 건국대학교 사회과학대학 국제무역학과 교수 (Konkuk University, Professor)
 경제자유구역위원회 위원 (FEZ Authority, Commissioner)
 행정중심복합도시건설추진위원회 위원
(Korea's new future The Administrative City of Sejong, Commissioner)

 대통령직속 국민경제자문회의 수석전문위원

(National Economic Advisory Council, Senior Advisor)

 대통령직속 동북아시대위원회 수석전문위원

(Presidential Committee on Northeast Asian Cooperation Initiative, Senior Advisor)

 대통령직속 동북아경제중심추진원회 수석전문위원

(Presidential Committee on Northeast Asia Business Hub, Senior Advisor)

 월드뱅크(the Word Bank Group, MIGA: Washington DC) 초청컨설턴트

(Multilateral Investment Guarantee Agency, Visiting Consultant)

 감사원 초청감사관 (The Board of Audit and Inspection, Visiting Consultant)

 KOTRA 통상직, 책임연구원 (KOTRA, Manger, Invest Korea, Senior Researcher)

 S-H Lim’s Curriculum Vitae (in the filed of FEZ policy)
 건국대학교 사회과학대학 국제무역학과 교수 (Konkuk University, Professor)
 경제자유구역위원회 위원 (FEZ Authority, Commissioner)
 행정중심복합도시건설추진위원회 위원
(Korea's new future The Administrative City of Sejong, Commissioner)

 대통령직속 국민경제자문회의 수석전문위원

(National Economic Advisory Council, Senior Advisor)

 대통령직속 동북아시대위원회 수석전문위원

(Presidential Committee on Northeast Asian Cooperation Initiative, Senior Advisor)

 대통령직속 동북아경제중심추진원회 수석전문위원

(Presidential Committee on Northeast Asia Business Hub, Senior Advisor)

 월드뱅크(the Word Bank Group, MIGA: Washington DC) 초청컨설턴트

(Multilateral Investment Guarantee Agency, Visiting Consultant)

 감사원 초청감사관 (The Board of Audit and Inspection, Visiting Consultant)

 KOTRA 통상직, 책임연구원 (KOTRA, Manger, Invest Korea, Senior Researcher)

 Discussion & Concluding Remarks
 Why FEZ? Among special zones

“Free Trade Zone (Korea…), Foreign Trade Zone (USA…),

Industrial Free Zone (Liberia…), Free Zone (UAE…), Export
Free Zone (Ireland…), Free Economic Zone (Korea), Export
Processing Zone (Philippine…), Special Economic Zone
(China…), Investment Promotion Zone (Sri Lanka…)…”

Prof. S-H Lim 41

 Why FEZ? Among special zones

“Free Trade Zone (Korea…), Foreign Trade Zone (USA…),

Industrial Free Zone (Liberia…), Free Zone (UAE…), Export
Free Zone (Ireland…), Free Economic Zone (Korea), Export
Processing Zone (Philippine…), Special Economic Zone
(China…), Investment Promotion Zone (Sri Lanka…)…”

Prof. S-H Lim 42

 Reverse Discriminantion?

“The reverse discrimination between foreign-owned and local

companies”

“Reasons for granting incentives in scholarly literature”

“CASE: Samsung Electronics Company, Reshoring company…”

Prof. S-H Lim 43

 Efficiency/Effectiveness or NOT?

“Efficiency of organizational governance”

“Strategic effectiveness of attracting FDI performance”

“Strategic effectiveness of developing FEZ infrastructure”

Prof. S-H Lim 44

 Thank you very much.

Prof. S-H Lim 45