CONTRIBUTION Cash grants should be utilized as a way to attract foreign investments

It has been one year since the U.S. government enforced the Inflation Reduction Act (IRA) in August last year to protect American companies and attract foreign investments. The general view is that the IRA has helped build the local supply chains of raw materials and create jobs, albeit falling short of its original intent of keeping inflation in check.

Through the IRA and The CHIPS and Science Act (CHIPS), the U.S. has encouraged American companies to re-shore their overseas operations and attract investment from major global companies. Multinational companies have decided to relocate or start business operations in the U.S. due to the requirements under the law, which require semiconductors, electric vehicles and batteries, etc. to be assembled in the U.S. to receive subsidies.

British daily, The Financial Times, has stated that since the IRA and the CHIPS went into effect, the combined amount of U.S. investment plans announced is at least $224 billion (300 trillion won) and the related number of jobs to be created is approximately 100,000.

The U.S. is not the only country striving to increase inflows of foreign investments.

Recently, the Chinese government announced a policy with the aim of promoting investments from foreign-invested companies in China through expanded financial and tax incentives. The Chinese government-run Xinhua says Chinese President Xi Jinping promised to proactively pursue market opening highlighting that China will reinforce the protection of foreign investors’ rights. As such, President Xi underlined that it is the top priority of the Chinese government to rehabilitate the economy.

This year China has held investment talks with a number of high-profile CEOs of companies that have made visits to China including Elon Musk, CEO of Tesla, Oliver Bloom, CEO of Volkswagen, Laxman Narashman, CEO of Starbucks, Jamie Dimon, Chairman of JPMorgan Chase, and Bernard Arnault, Chairman of Louis Vuitton Moet Hennessy (LVMH), illustrating that China has focused on exchanges with foreign companies to attract investment.

Against this backdrop of great enthusiasm for foreign investment, Korea has had to deal with its own issues. Reshoring by companies of other countries has accelerated and international competition for foreign investment has become fiercer. In this respect, now is the time for Korea to take action to attract more foreign investment.

The Korean government offers various incentives in the form of subsidies and employment and tax breaks to attract investment. Currently, the government provides tax benefits in which companies reshoring their business operations can enjoy an extended period of corporate income tax exemptions for up to 10 years. Also, it is expanding support for national strategic technologies and high-tech industries and offers incentives such as significant cash grants for foreign investments by companies engaged in the business of advanced technologies and parts, materials and equipment.

Korea Trade-Investment Promotion Agency (KOTRA) and the Ministry of Trade, Industry and Energy (MOTIE) have offered cash grant incentives to facilitate foreign direct investment (FDI) by multinational companies. The cash grant scheme provides qualifying companies with cash to fund a certain portion of their investment. In general, companies entitled to cash grants are foreign-invested companies in Korea that receive capital injections from foreign investors and the foreign-investment ratio is at least 30 percent.

If these companies operate new growth engine businesses, materials/parts/equipment businesses for advanced sectors, or businesses contributing to job creation, they can receive cash grants for a specified ratio of the invested amount. Moreover, if they clarify the necessity for foreign investment and the economic benefits of the relevant business in their investment plans, they may be eligible for a maximum cash grant and tax incentives.

This cash grant scheme benefits both the government and foreign-invested companies. The former can use the scheme to attract foreign investment to Korea, while the latter can receive significant cash grants. There is already some indication of the system being successful.

According to statistics of the MOTIE, FDIs in the first half of this year marked a 54 percent rise to $17 billion year on year (based on FDIs reported). Based on the trends of FDIs in the first half of this year as per the FDI statistics system of the MOTIE and KOTRA data, it is a record high replacing the previous high achieved in the first half of 2018.

In particular, greenfield investments, in which plants and business places are created from the ground up, rose sharply from the previous year to $12.54 billion. Investments through mergers and acquisitions also saw a 57 percent increase.

Despite the difficult global environment, I believe that the government's efforts, tax reforms and support measures to promote foreign investment are the key reasons for such achievements. Now is the time that Korea should take further steps forward. Advocating for protectionism, countries fiercely compete to attract investments and create jobs, waging "a war without shooting."

Clearly, the competition will get fiercer and looking forward, the amount of foreign investment received will determine our national competitiveness. In my experience as an advisor directly helping foreign-invested companies secure cash grants, the Korean government must increase the budget for and scope of cash grant incentives. Especially, it needs to provide sufficient support to ensure that the cash grant scheme can pave the way to facilitate foreign investment in Korea.

Businesses should also actively utilize the cash grant scheme, thereby contributing to foreign investments and job creation. If Korea achieves greater outcomes and attracts more foreign investment, it will contribute to the local economy. I encourage Korea to take a lead role on the global investment battlefield in the war without shooting.

Robert Browell is a tax partner at Samil PricewaterhouseCoopers (PwC) and Chairperson of the Taxation Forum at the European Chamber of Commerce (ECCK). Any opinions expressed in this article are those of the author and do not purport to reflect the opinions or views of Samil PricewaterhouseCoopers or the ECCK.