Specialization key to revitalizing FEZs

Each of Korea`s six free economic zones should focus on its own specialized industry, if they were to attract foreign investment, an expert said yesterday.

"While the Incheon FEZ should pursue its original goal of strengthening the local service industry, the other five FEZs should clarify on which area they want to focus," Jeong Hyung-gon, a research fellow at the Korea Institute for International Economic Policy, told The Korea Herald.

"The Korean FEZs have too many overlapping priority industries, such as autos, electronics and bio-technology," he said.

Korea has designated six free economic zones since 2003, but critics say that they have largely failed to achieve the goal of promoting foreign investment.

The Roh Moo-hyun administration opened the first FEZs in Incheon, Busan-Jinhae and Gwangyang in July, 2003.

The current Lee Myung-bak administration added three more - in the West Sea, Saemangeum-Gunsan and Daegu-Gyeongbuk areas - in 2008.

However, the FEZs in Incheon, Busan-Jinhae and Gwangyang have attracted only 83.2 trillion won ($71.1 billion) of investment over the past six years, compared with the original target of 367.9 trillion won, according to a report by Konkuk University for the Ministry of Knowledge Economy.



The report also showed that foreign capital accounted for only 13.5 percent, or 11.2 trillion won, out of the 83.2 trillion won investment.

Jeong argued that the government should give tax incentives not only to foreign companies in the FEZs but also to large-sized local companies in order to attract more foreign capital.

"There will be foreign companies wanting to invest in Korea if conglomerates like Samsung enter FEZs," Jeong said.

A government official, who did not want to be named, said providing tax incentives to local companies would run counter to the original purpose of the FEZ establishment, which is to benefit foreign investors.

Experts attributed the sluggish foreign investment to the fact that the Korean FEZs are offering less attractive incentives than those in other countries like the United Arab Emirates.

While Korea exempts corporate tax for foreign investors in FEZs for three years and gives a 50 percent cut from the 27 percent corporate tax rate for another two years, UAE exempts corporate tax for 50 years for foreign investors in the Dubai FEZ.

"We know that the level of incentives is much lower than what other free economic zones around the world such as Dubai offer foreign companies. We are discussing the issue of offering more incentives with related ministries such as the Finance Ministry and the Land Ministry," Shin Ki-taek, a director at the planning office of Free Economic Zones, said.

However, a Finance Ministry official said the government was not considering any measure related to expanding tax incentives for companies in FEZs or giving the same tax incentives to local companies.

"We have not received any request from the Ministry of Knowledge Economy to review any measure related to giving local firms tax incentives in FEZs," said Hwang Jeong-hoon, director of tax relief division at the Finance Ministry.

Another problem pointed by critics is the investment imbalance among the three FEZs. Out of the 83.2 trillion won investment, 70 trillion won all went into the Incheon FEZ, and the rest into the two other FEZs established in 2003, the report showed.

There is not much the government can do to balance the speed of development of the three economic zones, Shin of the Knowledge Economy Ministry said.

"Incheon FEZ has lured more investment due to its geographical proximity to the Seoul metropolitan area and the country`s No. 1 trade partner China. Incheon surely has more advantages other than two other regions. But the level of incentives has to be the same," he said.

A Busan-Jinhae FEZ spokesperson stressed the need for more attention to FEZs.

"The government needs to place the promotional committee of FEZs under the President`s office so that a wide range of issues involving the FEZs can be discussed more efficiently," Woo Wang-suk, public relation director of Busan-Jinhae FEZ said.

KIEP`s Jeong also noted that the government should scrap regulations in FEZs so that foreign companies can easily make investment decisions.

According to government data, it takes about 9 months for a project to be approved by FEZ authorities.

Shin said that the government has been making efforts to eliminate administrative hurdles for foreign companies.

"The government cannot dramatically cut off all the measures because it needs to study the feasibility of every project to be undertaken in the FEZs," he said.

(yoonmi@heraldm.com)

(christory@heraldm.com)





By Kim Yoon-mi and Cho Chung-un