Recent Trend of Foreign Direct Investment


ΆΓ  Financial incentives to stimulate FDI at local gov't level

Korea Herald 2000.12.20

With greater emphasis being placed on foreign direct investment, foreign investors stand to benefit from the financial incentives being offered by the Korean government. Ever since the financial crisis of 1997, the Korean government adopted bold measures to actively promote foreign direct investment, such as the Foreign Investment Promotion Act of 1998. To achieve this, the Korean government has extended a variety of tax and financial benefits in conjunction with providing complete administrative support for the establishment of foreign-invested companies. However, many foreign-invested companies fail to take advantage of these benefits simply because they are unaware of their existence. Thus, the purpose of this article is to inform all foreign-invested companies of the wide-range of financial benefits made available to them by the Korean government, whose funds are distributed at the discretion of the local governments.

Criteria for Financial Assistance

Foreign-invested companies eligible for financial support from the national government will be companies having either a foreign investment ratio over one-third (foreign investment ratio = foreign investment amount divided by total capital amount) or a foreigner as the largest shareholder of a company.

The Government

Local governments are empowered to distribute financial aid to foreign-invested companies based on several factors, such as the financial performance of the company and the economic value of the company to the city. The national government provides 40 percent of total financial assistance in the Seoul Metropolitan Area and 50 percent of financial assistance in the other regions, with the balance carried by local governments. The following are the various types of financial incentives offered by the national government to lure further FDI:

First, under the Foreign Investment Promotion Act of 1998, land purchased by local governments and leased to foreign-invested companies located in foreign investment zones or national/regional industrial complexes, are eligible to receive financial aid from the national government. Also, under this Act, the rental period of central and local government properties has been extended from 20 to 50 years. Specific foreign-invested companies in the high-tech and manufacturing sectors are generally eligible to receive rental fee exemption and reduction incentives up to 75 percent, for national and local government properties. To clarify, if the acquisition cost of the land for the foreign investor is partially subsidized by the national government, the discounted rent amount will not be eligible for further financial aid from the national government.

Second, land leased by the local government and then leased to foreign-invested companies will be subject to rent reduction or a discount valued between the normal sale price and actual sale price contracted with foreign-invested companies.

Finally, construction and development costs incurred in the foreign investment zone are eligible for financial assistance from the national government. For example, Foreign Investment Zones with 330,000 square meters or less shall be financially assisted with long-term low interest rate loans at 5 percent per year, with a 5 year grace period, and 10 year installment payment period thereafter. This assistance is to be applied towards construction and development costs as well as land acquisition cost. Foreign Investment Zones with over 330,000 square meters shall be financially assisted in the following areas:

(1)100 percent of road, communication, and harbor facility construction costs to be borne by the national government pursuant to the conditions set forth for the Foreign Investment Zone;

(2) 50 percent of construction cost for waste water treatment facilities; and

(3) 100 percent of the installation cost for electricity facilities.

Furthermore, within the Foreign Investment Zone, the medical, educational, and residential facilities shall be assisted in accordance with the decisions made by the Foreign Investment Committee. Also, the construction and development costs, including that of infrastructure costs for tourism, can only be financially assisted in accordance with the decisions of the Foreign Investment Committee.

Finally, education and training costs are eligible to be covered by the local and national government in the case where 50 or more workers are to be hired. The local government will determine the amount of financial aid to be extended per worker for education and training related-activities not exceeding 6 months in duration. Financial support will fall anywhere between 100,000 to 500,000 Korean won. Education and training related-costs will be evenly divided between the local and the national government.

In its efforts to attract FDI and make Korea a friendlier place to invest, the government has implemented a number of measures, in the form of financial incentives, to assist foreign-invested companies in doing business in Korea. The incentives mentioned are only a portion of the major FDI initiatives available to foreign investors. Currently, amendments to once restrictive FDI regulations are being made, in recognition of its importance to the health and competitiveness of the Korean economy. Thus, it is essential for foreign-invested companies to be aware of and familiar with relevant financial incentives offered by the Korean government, that will make their experience in Korea a more profitable and pleasant one.

The writer is a home doctor at the Office of the Investment Ombudsman. He can be contacted on (02) 3460-7656 or dho2000@hotmail.com. - Ed.