Steps to Perk Up FEZs on the Horizon

Government strives to pick up speed in luring FDIs

Seven years have passed since the free economic zones (FEZs) made their debut in Korea in 2003. The government is now ramping up the institutional foundation to reignite the momentum in attracting foreign direct investments (FDIs) into the FEZs.
The development of FEZs has been focused on the construction of sites and infrastructure, and the tendency for attracting FDIs is that when such infrastructure as roads are built up and such living structures as schools, hospitals and housing are in place, foreign companies and research institutes make decisions to invest here. Given the process for attracting FDIs, FEZs are expected to pick up momentum in luring foreign companies and see a surge in a flow of FDI amounts, said Kwon Pyung-oh, director general of the Planning Office of the Free Economic Zones.
“The government is making flat-out efforts to create the optimum living conditions as part of its efforts to facilitate foreign investments in the FEZs,” Kwon said. An international school was opened in Daegu in August and in Songdo International City in September, and the attraction of prestigious foreign universities is under way, said the director general, adding that a law governing the process of establishing foreign hospitals is pending in the National Assembly, and the supply of housing for foreigners will be overhauled.
The government has come up with a package of strategies designed to invigorate the development of FEZs, citing sluggishness in attracting FDIs despite continuous institutional reform. They were announced following a crisis management meeting, presided over by Minister of Strategy and Finance Yoon Jeung-hyun on Sept. 1.
The government plans to reserve more than 10 percent of industrial sites within the FEZs for sale or lease to foreigners and put engineering and other business services on the list of tax benefits. It is seeking to do away with such restrictions as banning remittances that have been seen as stumbling blocks in attracting foreign educational and medical institutions.
In a bid to advance the development of FEZs with an approach toward choice and concentration, the government plans to set guidelines for the more stringent designation of FEZs and their development in which areas that remain undeveloped for a long time or are considered unsuitable for development would be removed from the FEZs and the supply of industrial sites for exclusive use for foreign investors and the scope of tax benefits would be expanded as part of efforts to improve incentives.
Regarding the direction of developing the zones, Kwon said, “The process of developing FEZs so far may be in its embryonic stage, but from now on, there will be significant watersheds when determining whether FEZs can be put on the right track. In particular, on the basis of mid- and long-term visions and development strategies, FEZs should establish themselves as Korean-type models rich with Korea’s strong points and characteristics rather than duplicating special economic zones in advanced countries.
“The government is devoting itself toward providing support and assistance so that FEZs can play leading roles in developing the nation as a business hub of Northeast Asia,” Kwon continued.

BACKGROUND OF FEZs
FEZs are special economic zones that facilitate international business through deregulation, diverse incentives including generous tax benefits, and a world-class living environment. They have been established with three main purposes, reflecting the government’s commitment to the growth of the national economy by making Korea the primary business destination in the Northeast Asian region.
First, they will transform the surrounding communities into international business strongholds equipped with top-notch facilities including state-of-the-art office buildings and convention centers.
Second, FEZs will utilize the nation’s world-class international logistics infrastructure and its proximity to China to form the foremost logistics base in Northeast Asia. Finally, the establishment of liquid crystal display, semiconductor, mobile communications and IT clusters ― with the support of the government as part of its efforts to promote low-carbon, green growth ― will pave the way for an advanced industrial network that leads the international market.
To achieve its goals, the government has designated six FEZs. The three original FEZs in Incheon, Busan/Jinhae and Gwangyang, designated in 2003, are slated for completion by 2020, with current development one-third of the way there. Development of the other three, slated for completion between 2020 and 2030 in the Yellow Sea, Saemangeum/Gunsan and Daegu/Gyeongbuk sites, are still in the initial stages.

GEOGRAPHICAL VANTAGE POINT
Korea is located at a strategic point along the Pacific Rim, an economic bloc that accounts for 57 percent of the world’s GDP. On either side are the giants of Japan and China. Sixty-one cities with populations of 1 million or more are located within three hours of Seoul. This area, which covers all of Korea and Japan as well as part of China, accounts for one-quarter of the world’s population, one-third of the world’s cargo traffic and one-fifth of the world’s GDP.
Korea stands out for its advanced integrated logistics system. Incheon International Airport boats the world’s No. 2 aviation logistics volume, while Busan Port holds the No. 5 sport for marine logistics volume. Express railways serve virtually the entire country. Furthermore, Koreas prides itself on the world’s best information technology skills and global innovative spirit.
Korea is a world leader in shipbuilding, mobile communications, LCDs, semiconductors and information technology. The country is now opening up its markets through free trade agreements with the United States, the European Union, Japan, China, India, the Middle East and the Association of Southeast Asian Nations (ASEAN).

INCENTIVES
Various incentives are available to foreign-invested businesses in the FEZs. Companies that invest $10 million in manufacturing or tourism, $5 million in logistics or healthcare, or $1 million in R&D qualify for a five-year “tax holiday.” If they invest $30 million in manufacturing, $20 million in tourism or $2 million in R&D, the tax holiday period is seven years.
Foreign-invested companies in the FEZs are allowed to purchase land at special low rates. Alternatively, they may choose to lease their premises at a generous discount ― in some cases, land is free under special long-term leases available only to foreign-invested businesses. Companies engaged in high-tech businesses, parts and materials production or R&D can recover up to 5 percent of their investments in the form of cash grants. Moreover, foreign-invested businesses enjoy relaxed regulations in the areas of investment procedures and labor. Their employees benefit from lower income taxes, housing specially set aside for them (either for purchase or rental), and free foreign currency transactions of up to $10,000.
Project managers now offer one-stop administrative support and issue official documents in a number of foreign languages.nw