Supply Chains: South Korea

Investment Climate

South Korea is one of the most globally integrated countries in the world with a large and sophisticated economy. Since market liberalization measures were implemented in the 1990s, foreign direct investment (FDI) has been rising steadily. South Korea currently maintains few restrictions on FDI and has a relatively open business climate. In 2021, South Korea received US$16.8 billion of inbound FDI versus US$12.1 billion five years earlier, an increase of 39 percent, and real GDP grew by 4 percent.

South Korea’s advanced economy, highly educated workforce, and strong information and communications technology (ICT) infrastructure remain highly attractive to foreign investors. That said, the country’s already mature status and large domestic firms mean its capital stock is already high, making other countries in the region potentially higher growth investment opportunities. Additionally, the expiration of tax breaks for foreign investors in 2018 and the economy’s complex regulatory framework remain barriers for further investment. South Korea sits high up in the global value chain and has prioritized making itself a leader in research and skill-intensive products. As such, the economy currently ranks 5 out of 146 in economic complexity.

To encourage greater FDI, the government has been experimenting with low regulation “sandboxes” in innovative industries and is looking to re-shore some of its overseas production through incentives. In July 2020, the Korean New Deal, was introduced under which the government will invest US$144 billion with the aim of creating 1.9 million jobs in the digital and green sectors by 2025. In recent years, South Korea’s top foreign sources of investment have been the United States, Japan, the Netherlands, and Singapore.

Key Data Points

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Recent Investment/Supply Chain Policies

National

Subnational

Economy-Wide Policies

TAX INCENTIVES

National

On July 26, 2021, the Ministry of Economy and Finance released its 2021 Tax Revision Bill. The bill outlines measures designed to incentivize investment in national strategy technologies, new growth engines, core technologies, and the intellectual property market, as well as “boost consumption and support businesses” more broadly. Under this bill, the government will expand its re-shoring tax incentives (100 percent income tax cut for five years) to cover overseas companies that return to South Korea within two years–– beyond the current one year limit.
On June 28, 2021, the Ministry of Economy and Finance released its Economic Policies, H2 2021, which outlines several policies aiming to attract foreign investment in “strategic technologies,” including semiconductors, batteries, and vaccines. For example, the government states that it will provide “tax and financial support” to companies working on strategic technologies.
On January 6, 2021, the government issued Updates to the 2020 Tax Revision, which include expanding “the job creation tax incentive to companies which failed to retain jobs in 2020" and expanding "corporate investment tax deductions to almost all businesses, except rental property businesses and clubs."
On July 22, 2020, the South Korean government released a 2020 Tax Revision Bill, which the National Assembly approved on December 2, 2020. According to a Ministry of Economy and Finance (MOEF) press release, the bill aims to support COVID-19 economic recovery efforts by providing additional tax incentives, including offering "higher tax deductions for investments in new growth engines, including those in the Korean New Deal," allowing investment tax credits and tax deductions for losses to be carried over for longer periods of time, providing tax incentives to companies either increasing workplaces or opening new ones, and more.
On June 1, 2020, the Ministry of Economy and Finance released its Economic Policies, H2 2020, which outlined several policies aiming to attract foreign investment. For example, the government states that it will "improve tax deduction for corporate investment," provide re-shoring support, and reduce income tax for foreign researchers to promote research and development (R&D), among other initiatives.

SUBSIDIES

National

On June 28, 2021, the Ministry of Economy and Finance released its Economic Policies, H2 2021, which outlines several policies aiming to attract foreign investment in “strategic technologies.” For example, the government states that it will launch a KRW2 trillion (US$1.7 billion) “support package” and “expand reshoring support” in this area.
On December 17, 2020, in its Economic Policy Direction for 2021, the Korean Ministry of Economy and Finance announced expanding subsidies and relaxed accreditation requirements for high-tech investments and two or more companies that re-shore together “outside metropolitan areas.” The ministry also noted that maximum levels of support “within the scope of current laws and regulations” would be provided to re-shoring companies considered to be of strategic importance.
On December 2, 2020, the National Assembly enacted its 2021 budget. The proposed budget allocated KRW65.9 trillion (US$57.6 billion) to promote investment, including KRW200 billion (US$175 million) to "increase incentives, expand on-site support, make joint investment in R&D centers and living accommodations to attract foreign talents, and increase support for global joint projects."
On September 1, 2020, the Korean Ministry of Economy and Finance announced additional measures in the 2021 budget for re-shoring companies amounting to KRW52.2 billion (US$45 million), a 147 percent increase from 2020. These include the expansion of investment incentives, subsidies for job creation, and the expansion of a “one-stop support desk” that provides customized support to investors.
On February 3, 2020, the Ministry of Trade, Industry and Energy announced amendments to the Foreign Investment Promotion Act, which took effect on August 5, 2020. The amendment adds 2,990 technologies across 33 sectors to the list of technologies eligible for government cash grants.

ADMINISTRATIVE BARRIERS

National

On June 28, 2021, the Ministry of Economy and Finance released its Economic Policies, H2 2021, which outlines several policies aiming to attract foreign investment in “strategic technologies.” For example, the government states that it will work on “deregulation to approve new technologies or businesses” in this area.
On July 22, 2020, the government released a 2020 Tax Revision Bill, which the National Assembly approved on December 2, 2020. The bill follows up on the government's earlier H2 2020 economic policy outline and redesigns the "nine facilities investment tax incentives into one consolidated tax incentive."
On June 1, 2020, the Ministry of Economy and Finance released its Economic Policies, H2 2020, which outlined several policies aiming to incentivize investment. For example, the government states that it will "make tax deductions for facilities investment simple and easy by integrating it with other investment tax deduction programs."
On February 3, 2020, the Ministry of Trade, Industry and Energy announced amendments to the Foreign Investment Promotion Act, which took effect on August 5, 2020. Among other actions, the amendment recognizes foreign reinvestment of earned surplus as foreign direct investment.

SPECIAL ECONOMIC ZONES

National

On November 2020, the Korean government announced the “Free Economic Zone 2.0: 2030 Vision and Strategies,” which outlines three aims: (1) expanding the direction of the FEZs away from development only and attracting foreign investment to achieve innovative growth, (2) offering incentives to high-tech and key strategic industries, and (3) implementing regulatory reforms to facilitate investment in new industries.
On June 1, 2020, the Ministry of Economy and Finance released its Economic Policies, H2 2020, which outlined several policies aiming to attract foreign investment. For example, the government states that it will "give a 30 percent rent reduction to businesses locating in free economic zones, free trade zones, and foreign investment zones."

OTHER POLICIES

National

On June 1, 2020, the Ministry of Economy and Finance released its Economic Policies, H2 2020, which outlined several policies aiming to incentivize investment. For example, the government states that it will "promote corporate investment in logistics centers and manufacturing facilities, worth 6.2 trillion won (US$5.4 billion)" and "develop 10 trillion won (US$8.7 billion) worth of public projects for private investment, including 1.5 trillion won (US$1.3 billion) wastewater treatment facilities."

Subnational

On February 7, 2022, the city of Seoul launched “Invest Seoul,” an investment promotion agency (IPA) to attract foreign investment and overseas companies. Invest Seoul focuses on four areas: (1) market research for FDI in Seoul, (2) attraction of global companies, (3) promotion of investment, and (4) setting up global companies’ Seoul offices. The agency will support companies in investment registration and aims to attract financial services companies leaving Hong Kong.
On August 26, 2020, according to Yonhap News, the city of Busan signed a memorandum of understanding (MOU) with Korea Trade-Investment Promotion Agency (KOTRA) to further promote foreign investment and business reshoring, and bring overseas production and services back to Korea. Both agreed to “work together to find global investors and venture capitalists, appoint a trade office dedicated to the partnership and run joint-corporate events and presentations overseas.” KOTRA will also help city governments set up foreign direct investment (FDI) policies and implement investment initiatives in major growth sectors.

Information and Communication Technology

TAX INCENTIVES

National

On May 13, 2021, President Moon Jae-in unveiled the government’s new K-Semiconductor Strategy. Under the strategy, the government will aim to attract more than KRW510 trillion (US$450 billion) of investments from the private chip sector through significant tax incentives and other measures. These include up to 50 percent in tax breaks for chip research and development (R&D) investments and a six-fold increase in tax breaks for investments in facilities.

On January 6, 2021, the government announced Updates to 2020 Tax Revision. Updates include adding "25 new technologies to the facilities investment tax deduction given to new technology commercialization"; offering "a separately-taxed dividend income tax of nine percent for up to 200 million won [US$175,000] of investment in New Deal infrastructure funds and a separately-taxed dividend income tax of 14 percent for up to 100 million won [US$87,000] investment in mutual funds investing in New Deal projects"; and expanding "technology R&D tax reduction to 240 technologies,” which now includes digital and green new deal technologies and bio health technologies.

SUBSIDIES

National

On August 31, 2021, the Ministry of Finance announced the allocation of subsidies in its 2022 National Budget that aims to stimulate growth in key high-technology industries, including semiconductors, biotechnology, and electric vehicles. The budget includes ₩2.8 trillion (US$2.4 billion) in subsidies for these industries, often referred to as “the Big 3.”
On May 13, 2021, President Moon Jae-in unveiled the government’s new K-Semiconductor Strategy. Under the strategy, the government will provide “all-embracing support” to semiconductor companies, by providing “low-interest loans for facility investments” to allow production capacity to be “expanded rapidly.” Facilities covered in this measure include electricity transmission lines and water/wastewater recycling.
On November 10, 2020, the Korean Ministry of Trade, Industry and Energy announced amendments to the Act on Support for Overseas Companies to Return to Korea (U-turn Act) aimed at strengthening support for high-tech industries and R&D centers returning to Korea. The amendment widens the scope of companies eligible for U-turn subsidies and support – relaxing business site requirements, employment thresholds, and domestic-overseas product uniformity standards. The amendment also makes it possible for research facilities, R&D centers, and hi-tech industries to receive U-turn subsidies.
On July 9, 2020, the Korean Ministry of Trade, Industry and Energy issued its Materials, Parts, Equipment 2.0 Strategy in response to Japan’s export regulations in mid-2019 and as a “preemptive response to global supply chain reorganization.” Under the strategy, the Korean government will allocate KRW1.5 trillion (US$1.3 billion) over five years to develop new technologies in the materials, parts and equipment sectors and to attract high-tech industries from abroad, including through U-turn (re-shoring) subsidies, infrastructure investments, and high-tech investment tax deductions.

ADMINISTRATIVE BARRIERS

National

On May 13, 2021, President Moon Jae-in unveiled the government’s new K-Semiconductor Strategy. Under this measure, the government will provide “all-embracing support” to semiconductor companies through “regulatory reform,” to allow for corporate investments to be “made in a timely manner.” For example, licensing approval procedures will be “shortened as much as possible.”
On June 1, 2020, the Ministry of Economy and Finance released its Economic Policies, H2 2020, which outlined several policies aiming to incentivize investment. For example, the government states that it will revise regulations to promote “smart working and doing business remotely”; work to deregulate additional key industries including data and artificial intelligence, autonomous vehicles, medical technologies, Fintech, tech startups, and e-commerce; and promote “regulatory sandboxes” as well as “regulation-free zones.”

SPECIAL ECONOMIC ZONES

National

On July 6, 2021, the Ministry of Trade, Industry and Energy (MOTIE) announced amendments to the Enforcement Decree of the Designation and Management of Free Trade Zones Act, which took effect on July 13, 2021. According to a MOTIE press release, high-tech and re-shoring/U-turn companies are now eligible to enter free trade zones if they have an export ratio exceeding 30 percent –– significantly lower than the 50 percent required of other large businesses.

On May 13, 2021, President Moon Jae-in unveiled the government’s new K-Semiconductor Strategy. Under the strategy, the government will “establish a close-knit supply network for materials, parts and equipment,” including complexes in Pangyo, Cheongju, Yongin, Hwaseong and Cheonan.

Financial Services

SUBSIDIES

Subnational

[Possible New Policy/Program] On November 11, 2021, according to the Korea Herald, the Korean government will invest 241.8 billion won (US$204 million) over a five-year period to transform Seoul into a global financial hub. As part of this initiative, a new agency will be created in 2024 to oversee foreign investment in Seoul with the aim of “attracting more than 250 foreign financial firms and attaining foreign direct investment of $30 billion by 2030.” Additionally, an international finance office will be opened in Yeouido (western Seoul) that will support foreign firms opening offices in western Seoul by offering legal and financial services, as well as the subsidization of monthly rent in Yeouido of up to 70 percent for five years.

Energy

TAX INCENTIVES

National

On July 8, 2021, President Moon Jae-in unveiled the government’s new K-Battery Development Strategy. Under the strategy, the government will attract more than KRW40 trillion (US$35 billion) from the private battery sector through massive tax incentives and other measures. Tax incentives include up to 50 percent in tax breaks for battery research and development (R&D) investments and up to 20 percent for facility investments.

SPECIAL ECONOMIC ZONES

National

On July 8, 2021, President Moon Jae-in unveiled the government’s new K-Battery Development Strategy. Under the strategy, the government will establish a “next-generation battery park … to provide comprehensive support for research, empirical assessment and the nurturing of professionals.”