[HERALD INTERVIEW] Free economic zones to foster closer networks between foreign, local firms

When it comes to attracting foreign direct investment, people often assume that foreign-invested firms would be most interested in exclusive incentives in free economic zones for the purpose of lowering their labor and capital costs.

However, foreign firms actually would prefer to partner with Korean firms here to tap into the growth potential of the Korean market and demand of consumers here, according to the head of the planning office of the eight free economic zones.

“A variety of incentives is, of course, necessary and effective in attracting foreign investment. But, based on what we have researched, what’s more important is to help them establish close networks with important local partners to do something exciting,” Kwon Oh-jung, director general of the Planning Office of the Free Economic Zones, said in an interview with The Korea Herald on Thursday.

“So, there should be more incentives for Korean firms who are willing to do business with foreign firms within the FEZs,” he said.

Kwon Oh-jung, director general of the Planning Office of the Free Economic Zones, speaks during an interview with The Korea Herald in Sejong, Thursday. (Kim Yoon-mi/The Korea Herald)

More than 63 percent of foreign-invested companies said their investments in Korea were to make inroads into the local market, Kwon said, citing a recent survey by the Korea Trade-Investment Promotion Agency. Another 16 percent was for stake investment and 10 percent for making use of Korean technologies and infrastructure.

To help foreign companies team up with local ones, the government is seeking a law revision to allow foreign-invested companies to lease leftover office space to local partner firms within the FEZs, Kwon said.

“Many vacant offices were left unoccupied due to the strict banning of leasing by foreign firms, who have been telling us that they could work with Korean companies more efficiently if they are nearby,” he said.

Corporate tax reductions are currently allowed only for foreign firms in the FEZs. However, such incentives can be extended to their local partner companies for a certain period of time “if it doesn’t hurt the purpose of the FEZs,” Kwon said.

Foreign-invested firms doing business in the FEZs benefit from 100 percent exemption of corporate tax for five years. An additional 50 percent reduction is offered for the following two years, on the approval of the trade minister-chaired committee of the FEZs.

Korea started to designate FEZs in 2003 to attract foreign investment and promote balanced regional development.

Currently, there are eight FEZs in Korea: Incheon, Busan-Jinhae, Gwangyang Bay, Yellow Sea, Daegu-Gyeongbuk, Saemangeum-Gunsan, East Coast and Chungbuk, accommodating more than 2,100 companies and 96,000 employees, as of 2015.

According to government data, the eight FEZs received $13.2 billion of promised foreign direct investments between 2004 and August 2016, accounting for 7.3 percent of the country’s total foreign direct investments over the same period.

By sector, 34 percent of foreign companies in the FEZs were doing business in tourism, followed by 33 percent in manufacturing, 16 percent in construction and 3 percent in logistics.

Kwon admitted that some of the FEZs such as the East Coast have seen delays in the development of projects.

Since being designated as a FEZ in 2013, East Coast FEZ has had difficulty in finding a foreign investor for projects in the Okgye District for three years. With a Chinese company recently vowing to invest in the district, the expiration date for East Coast’s Okgye development has been extended to December 2018 from February 2017.

“The government is witnessing the need to restructure development projects in the FEZs. If a project is being delayed for too long, it should be scrapped,” Kwon said.

Although there were “some demands” from Incheon for the expansion of the FEZ, it is not the time to discuss such expansion when the government is pushing restructuring in the FEZs, he said.

By Kim Yoon-mi (yoonmi@heraldcorp.com)

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