The Government of the Republic of Korea has been active in efforts to attract Foreign Direct Investment (FDI) through improvement of its regulatory framework. Korea’s Foreign Investment Promotion Act (FIPA) – passed in 1998 – has been instrumental in attracting FDI into Korea.
As a historical background, during the late 1980s, foreign exchange reserves soared in Korea due to its strong export based economy and the country did not need to provide many investment incentives to attract inward FDI. In the 1990s, Korea faced economic slowdown and applied for emergency loans from the International Monetary Fund in 1997 and due to a sudden withdrawal of foreign portfolio investors, Korea experienced a sudden shortage of foreign exchange reserves. Realizing the importance of FDI, the Government passed FIPA.
There are two main points to FIPA: 1) foreign investors have access to invest in virtually all types of business in Korea; and 2) potential foreign investors only have to “notify” the relevant government authorities rather than to “seek” consent.
FIPA provides incentives to foreign investors by way of tax relief, cash grants, supply of industrial sites and financial supports.
Foreign investors engaged in high technology sectors receive varying reduction on corporate, income and local taxes. The foreign investor must make a request for tax relief to the Ministry of Finance and Economy (MFE). MFE notifies foreign investors of its financial decision within 20 days from the date of the request. Custom duty reduction or exemption is also available on capital goods imported as long as their intended use is directly related to the foreign investor’s principal business.
Eligible foreign investors may receive a grant corresponding to five per cent or more of their total investment in Korea. To be eligible for cash grants, a foreign investor must invest US$10 million or more in eligible industry support service or high-tech businesses.
Supply of Industrial Sites
The Government makes available industrial sites within specially-designated zones to all foreign-invested firms meeting a certain minimum set of requirements. Land within these zones is provided either free of charge or at low cost through a long-term lease.
Financial support toward the cost of staff education and training, the cost of hiring, and project infrastructure development (within designated investment zones) is available to companies in which the foreign investor has 30 per cent or more equity stake. In addition, the Government also provides financial support toward recruitment of research and development staff employed by eligible companies.
According to Korea’s Ministry of Knowledge Economy, FDI pledges have hit their highest level in nine years, totalling US$6.78 billion for the first seven months of 2009. The surge in FDI in Korea is especially noteworthy because the global economic recession has depressed FDI in most advanced countries and some emerging markets. Recently, Korea has been receiving positive attention from international agencies with regard to its future economic growth prospects. The Organization of Economic Cooperation and Development (OECD) predicted that of all 29 OECD member countries, Korea's economy would rebound at the quickest pace.
For Canadian firms looking to invest in Korea and take advantage of Korea’s highly educated and skilled labour market, research and development capabilities and central geography in the Far East should carefully consider options available under Korea’s Foreign Investment Promotion Act.