South Korea is restructuring its free economic zones (FEZs) through deregulation and reform, and is poised to surpass Hong Kong and Singapore in terms of FDI attraction, said government officials.
The FEZs are expected to be test beds for the nation's deregulation, where foreign investors can enjoy free rent, tax deduction and tariff exemption, and will operate under a negative list, said Lim Kiseong, director for the Ministry of Trade, Industry and Energy on Thursday.
Named according to their geographical locations, the eight South Korean Free Economic Zones include Incheon, Busan-Jinhae, Gwangyang Bay, Yellow Sea, East coast, Saemangeum, Daegu-Gyeongbuk and Chungbuk. This year marked the 11th anniversary of the first FEZ.
"The Foreign direct investment to South Korea used to be mainly from the US and EU, but now we can see more investments from our largest trading partner," said Park Soon-kee, director general of the FEZ planning office.
He added that the government is preparing to lure more investment from China as the two countries sign the Free Trade Agreement next year.
Click on thumbnail to view. Story continues after photos. Various sources
"Our target is to go beyond Hong Kong and Singapore and be among world's top three free economic zones by 2020," said William Lee, director of tourism investment for the Incheon Free Economic Zone, to chinadaily.com.cn.
Pros and cons
South Korea has gone a long way to embrace foreign investment, despite complaints from domestic companies of "unfair treatment", according to government officials.
Within the area, foreign investors are eligible for 100 per cent exemption in national and local tax, and 100 per cent tariff exemption on imported capital goods for five years, said the homepage of the KFEZ.
Foreign companies with more than $1 million investment in advanced technology or hiring more than 300 employees in the region can have 100 per cent deduction in rent.
"The tax reduction and benefits are currently only for foreign investors. Domestic companies are still negotiating with the government," said Lim, adding that the government also needs to help level the playfield for Korean companies.
He said more incentives for foreign investments are on the way including the introduction of a negative list and deregulation in areas such as recreation, education and labour market.
"There are two keywords for the FEZs, selecting and concentrating," said Lim, explaining that the eight FEZs will have to complement and compete against each other.
Park, facing pressure from local governments, cautioned that the development is "not too fast but too much", adding that there will be a slowdown in the establishment of new free economic zones.
Inflow of 20 million Chinese tourists by 2020 Having been working with tourism industry for more than a decade, William Lee projects the inflow of Chinese tourists to reach 20 million by 2020, compared with 1.88 million in 2010, 4.6 million last year and 6 million this year.
He revealed that the government has approved the resort project led by Caesar's Entertainment Corporation of Las Vegas and Lippo Group, which has drawn much attention as the first foreigner-only casino resort in Incheon.
According to the Korean Herald, it is widely seen as a maiden move by South Korea to join the red-hot race with Macau, Singapore, Malaysia, Japan and other Asian destinations to attract international gamblers.
"It will be an integrated resort for culture and tourism," said Lee, adding that the construction will start in June.
Competitiveness within Asia "The central government will spare no effort in attracting investment," said Park at the KFEZ promotion event on Thursday.
South Korea, located between China and Japan, has signed 46 FTA with countries and regions and was ranked first in Bloomberg's 2014 Global Innovation Index.
However, the country saw a 10.7 per cent plunge in its FDI last year to US$14.55 billion (S$19.2 billion), with Japanese investment down 40.8 per cent, said Yonhap News.
Lee Kyung-geun, tax partner with Seoul-based Yulchon law firm, cautioned on Thursday that the high regulation is the main reason behind the lower-than-expected FDI volume.
"We still need dramatic regulation reform in many areas," he added. "Singapore has very low tax rate for foreign companies and it's easier to win permanent residency," said Lee.
David Carbon, chief economist and managing director of economic and currency research for DBS Bank, said bolder deregulation measures have been taken under President Park's three-year economic innovation plan, such as in for-profit hospitals, joint venture schools and foreign-owned casinos.
"But Korea is not alone and there's a lot of competition," he said. "The only way to keep the economic growth from slowing down is to keep reinventing, constant restructuring and moving up to higher value."
"I hope the investment barriers will be continuously lowered," said Lee Kyung-geun.