Free economic zone
Bold steps needed for attracting FDI
Seven years after their inception, Korea's free economic zones (FEZs) are in disarray. The government formed a task force to promote foreign investment in the zones. Korea ranks low in the OECD for attracting foreign direct investment (FDI).
The government will seek a revision of the laws to stimulate business inside FEZs. It will also strengthen a system to evaluate the performance of each of the six FEZs and link budget to performance. Incheon, Busan-Jinhae, and Gwangyang will actively campaign for attracting foreign investment. Each FEZ faces continuation or shutdown in five years.
FEZs will see more eased regulations, incentives and autonomy in personnel and budget management. Supervision will also be strengthened. FEZ CEOs are struggling with ministers, governors and mayors.
At the initial stage of inception, skepticism prevailed over the success of the FEZs. Initial objectives were to attract inbound investment. The country has seen a surge in investors of stocks and bonds while inbound investment has been stagnant.
Why has foreign direct investment been sluggish? Foreigners are unsure of earning profits in FEZs and Korea. Many Asian countries, including China and Vietnam, offer more attractive incentives than Korea. The bureaucratic struggle is serious. The central and local governments are at odds over giving preference to FEZs. For example, foreign schools have difficulty in attracting students as there are too many regulations. The same is true of hospitals.
In competition with FEZs, there are industrial complexes, `corporate city' and `innovation city' projects. Farmers also want the same preferential treatment as the FEZs in running their complexes. Inside the country, there are so many zones competing for preferential treatment. Outside these zones, criticism mounts over giving preference only to these special areas and complexes.
The most promising FEZ is IFEZ near Incheon International Airport. Thanks to its geographical advantage, it has been ahead of the other pack. But it is struggling. IFEZ built apartments for local residents, with few foreigners ready to buy the accommodation exclusively built for non-Koreans.
An international school in the IFEZ is to open after years of delay and a revision of the rules. So many memoranda of understanding (MOUs) have been signed. There are few real investments. The situation is dismal for the rest of the FEZs. Initially, three were created in 2003. The number has doubled to six. The increase is mostly the byproduct of political consideration.
The country should rethink the FEZ concept from scratch. The bottom line is to design them in such a way as to make them profitable to foreigners. The FEZs should be more competitive than the zones in nearby Asian countries.
Local FEZs are not competing with local industrial complexes and other state-designated projects. When there is a lack of interest from foreigners, the FEZs should be open to local companies. One proposal is to scrap the FEZ project and implement a system to make the whole country a free economic zone.