Gov't reshoring initiative draws little enthusiasm

The Korea Times

The Korea Times

Finance

Sat, September 23, 2023 | 13:51

Policies

Gov't reshoring initiative draws little enthusiasm

Posted : 2020-05-19 17:02

Updated : 2020-05-20 10:49

President Moon Jae-in delivers a speech during the third-year anniversary of his inauguration at Cheong Wa Dae, May 10. Moon said the government will bolster the reshoring of Korean firms overseas. / Korea Times file

'Risk diversification' plan needed to reduce value chain disruption

By Lee Kyung-min

The government's initiative to bring the country's manufacturing back home, known as its "reshoring initiative," has gained a lukewarm response from local businesses which claim that there is no reason to return home unless the government overhauls "outdated and growth-stunting" regulations.

The Moon Jae-in administration's move to speed up reshoring came amid elevated concerns of global value chain disruption brought on by the COVID-19 pandemic.

An official from the Federation of Korean Industries said businesses will have no reason to return without a measure to reduce labor costs.

"Many firms have come under increasing pressure over the past few years due to a rapid hike of minimum wage. Without assurances involving substantial reduction in the fixed labor cost, they will not return," said an official who refused to be named said.

Unless the government makes drastic changes to lift "unreasonable" restrictions, companies will not come back to a country long bogged down by militant labor unions that continue to thrive on complicated, complex and inconsistent labor policies, the experts said.

Some say government policy should focus on how best to diversify risk, instead of obsessing over the number of firms fully reshored ― a rather meaningless and futile attempt lacking corporate profit concerns.

"The situation for Korean firms is completely different from U.S. or Chinese firms," Korea Institute for Industrial Economics & Trade senior research fellow Cho Chul said.

He said the number of U.S. firms that returned as part of a reshoring initiatives averaged 480 per year between 2010 and 2018, some 791 from China and 108 from Mexico.

The firms in turn created 757,000 new manufacturing jobs in America, boosting domestic consumption and added-value creation for other industries, thereby strengthening the economy.

In a dramatic contrast, the number of Korean firms returned between 2014 and September 2019 stood at only 65, an inevitable result given costly regulations ― notably rules restricting manufacturing capacity expansion in Seoul, Incheon and the surrounding Gyeonggi Province.

The highly developed areas are favored by businesses for their easy access to a highly skilled workforce and operational efficiency due to the close proximity of related industries' factories and research bodies.

Yet firms are not allowed to build or expand manufacturing facilities that take up more than 500 square meters there, forcing businesses needing storage or larger manufacturing facilities to seek out much more costly alternatives in remote regions.

The Ministry of Economy and Finance said Sunday that it has no immediate plans to ease the restrictions.

"The rules explain precisely why firms will not come back," Korea Economic Research Institute (KERI) economic policy team head Hong Sung-il said.

Unnecessary costs incurred meant reduced spending in research and development (R&D) and other areas of investment needed for long-term corporate growth. Yet the current business environment shows no sign of improvement in the near term, keeping them away.

"Policy makers should stop trying to force firms to come back and start asking why they will not come. With no material changes in heavy corporate tax and labor market rigidity, coming back will be last option for businesses," he added.

Korea Development Institute (KDI) research fellow Chung Sung-hoon said the government should identify ways to diversify risks to reduce global value chain disruption, a key focus neglected in the current reshoring discussion.

"Firms left because the benefits of doing that outweighs staying here. The government should focus on formulating policies to help firms hedge risks brought on by unforeseen factors that could disrupt highly specialized manufacturing activities concentrated in only a few areas around the world."

Reshoring may not be the only answer, if factoring in the quality of jobs created by firms returned.

"Bringing back firms is only as good as the quality of jobs they create here and their corporate sustainability. If companies struggling overseas with little growth prospect come back only because of short-term policy incentives, they will only end up wasting taxpayers' money," he added.

lkm@koreatimes.co.kr