SPECIAL ECONOMIC ZONES AND KOREA S EXPERIENCE. Prof. Sherzod Shadikhodjaev (PhD) KDI School of Public Policy and Management

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1 SPECIAL ECONOMIC ZONES AND KOREA S EXPERIENCE Prof. Sherzod Shadikhodjaev (PhD) KDI School of Public Policy and Management

2 Prof. Sherzod Shadikhodjaev (KDI School) 2 Overview of Special Economic Zones (SEZs) Modern SEZs have existed since late-1950s only, with Ireland s Shannon Free Zone set up in 1959 being widely recognized as the first model modern SEZ. Before the 1970s, most zones were clustered mainly in Western Europe, but in the 1980s the zone development trend expanded to new regions, including South Asia, South America and sub-saharan Africa, and subsequently to Eastern and Central Europe, the CIS, Middle East and North Africa.

3 Prof. Sherzod Shadikhodjaev (KDI School) 3 Overview of Special Economic Zones (SEZs) Common features of SEZs (1) geographically delimited (usually fenced-in) area (2) single management (3) fiscal and other incentives for zone-located companies, and (4) streamlined administrative procedures Common Incentives Enhanced physical infrastructure Streamlined administrative services Fiscal incentives Relaxed legal and regulatory requirements Export promotion services

4 Overview of Special Economic Zones (SEZs) Type of Zone Free Trade Zone (Commercial Free Zone) Developm ent Objective Support trade Physical Configuration Typical Location Size < 50 hectares Prof. Sherzod Shadikhodjaev (KDI School) 4 Ports of entry Eligible Activities Entrepôt and trade-related activities Markets Domestic, re-export Examples Colon Free Zone, Panama Traditional EPZ Hybrid EPZ Freeport Export manufactur ing Export manufactur ing Integrated developme nt Size < 100 hectares; total area designated as an EPZ Size < 100 hectares; only part of the area designated as an EPZ None None Manufacturing, other processing Manufacturing, other processing Mostly export Export and domestic Size > 100 km 2 None Multi-use Domestic, internal and export Karachi EPZ, Pakistan Lat Krabang Industrial Estate, Thailand Aqaba SEZ, Jordan Enterprise Zone, Empowerment, Urban Free Zones Urban revitalizatio n Size < 50 hectares Distressed urban or rural areas Multi-use Domestic Empowerment Zone, Chicago Single Factory EPZ Export manufactur ing Designation for individual enterprises Countrywid e Manufacturing, other processing Export Mauritius, Mexico, Madagascar Source: FIAS (2008)

5 Prof. Sherzod Shadikhodjaev (KDI School) 5 Background Shift from import-substitution to export-oriented policy in the 1960s Federation of Korean Industries visit to the Kaoshiung export processing zone in Taiwan in the late 1960s Free Export Zone Establishment Act in 1970 Free export zone - an area with the characteristics of a bonded area where the application of pertinent laws and regulations would be waived or relaxed in whole or in part. Opening of two special zones in the early 1970s: in Masan (the south-eastern coast) and Iri (the mid-western coast). Masan zone s success Oh (1993): capital inflows into this zone increased from $1.2 million in 1970 to $88.9 million in 1975; the average investment per enterprise rose from $238,700 in 1971 to $1,871,100 in In , exports from the Masan zone accounted for 2-4% of total national exports, with electronics and electrical goods being major exports going basically to Japan, United States and Western Europe. Success factors: convenient location near the seaport; skilled labor force from adjacent industrial complexes; well-developed infrastructure; the existence in the zone of foreign multinationals such as Sony and Sanyo (Japan) and Nokia (Finland); backward linkages with local industries and subcontractors; in-zone improvement of technological capabilities of workers and their circulation into out-of-zone local firms etc. In the early 2000s, free export zones renamed to free trade zones ; free economic zones introduced

6 Prof. Sherzod Shadikhodjaev (KDI School) 6 Regulatory Framework Foreign Investment Promotion Act (1998) & Enforcement Decree (1998) Act on Designation and Management of Free Trade Zones (2000) & Enforcement Decree (2000) Act on Designation and Management of Free Economic Zones (2002) and Enforcement Decree (2003) Types of free zones Foreign investment zones Free trade zones Free economic zones

7 Prof. Sherzod Shadikhodjaev (KDI School) 7 Source: KICOX et al (2010)

8 Prof. Sherzod Shadikhodjaev (KDI School) 8 Foreign Investment Zone (FIZ) a zone for leasing or transferring lands to foreign-invested companies from existing national industrial complexes a zone in which a foreign investor intends to invest a zone for leasing or transferring lands to foreign-invested companies conducting research and development (R&D) from among zones designated by a presidential decree a zone for leasing or transferring lands to foreign-invested companies engaged in any service industry that has a high valueadded, such as finance and is designated by a presidential decree More than 70 FIZs

9 Prof. Sherzod Shadikhodjaev (KDI School) 9 Foreign Investment Zone (FIZ) Category Complex Type Individual Type Overview Areas are designated in advance to attract small- Areas are designated upon the request of foreign and investors who would make large-scale investments medium-sized foreign-invested companies (1994~) (1997~) Location Industrial complex No limitations (areas that foreign investors prefer) Requirement for designation (or occupancy) Foreign investment ratio shall be 30% or more The investment amount shall be more than the required minimum amount by business sector (US$ 30 mil. for manufacturing, US$ 20 mil. for tourism, US$ 10 mil. for logistics, etc.) Site support Land is purchased before it is leased to companies Subsidies for purchase cost - Seoul metropolitan area: 40%, other areas: 75% Land purchase cost is subsidized (if requested) Share of the subsidy: - Seoul metropolitan area: 40%, other areas: 75% Tax reduction or exemption (Corporate Tax, customs duties, acquisition tax, etc.) Reduction or exemption of rent * Qualifications - Manufacturing: US$ 10 million or more - Logistics: US$ 5 million or more * Reduction or exemption period - National tax (5 years) is exempted 100% for 3 years, and reduced 50% for the following 2 years - Local tax is reduced or exempted for the duration of up to 15 years Rent is reduced or exempted by 75~100% (when necessary, the central or local governments purchase and lease land.) Source: KOTRA (2013) * Qualifications - The same as requirement for designation * Reduction or exemption period - National tax (7 years) is exempted 100% for 5 years, and reduced 50% for the following 2 years - Local tax is reduced or exempted for the duration of up to 15 years Rent is exempted 100% (when necessary, the central or local governments purchase and lease land.)

10 Prof. Sherzod Shadikhodjaev (KDI School) 10 Free Trade Zone (FTZ) An area which guarantees unrestricted production, logistics and distribution by offering a wide range of support such as exemption from tariffs and tax breaks, thereby providing an optimal investment environment to foreign invested companies and export companies. Industrial complexes, airports, seaports, distribution complexes, freight terminals and others where free activities of manufacture, logistics, distribution and trade are guaranteed pursuant to relevant laws. To generate synergy effects through clustering enterprises in manufacturing and logistics sectors. State of Play 8 industrial complex-type FTZs in Masan, Gunsan, Daebul, Iksan, Donghae, Yulchon, Ulsan, and Gimje 1 airport-type FTZ in the Incheon International Airport 5 seaport-type FTZs in Incheon, Busan, Gwangyang, Pohang, and Dangjin

11 Prof. Sherzod Shadikhodjaev (KDI School) 11 Free Trade Zone (FTZ) Category Tax reduction or exemption Qualifications Business accompanying high technology & industry-supporting service business Manufacturing: US$ 10 million or more Logistics: US$ 5 million or more Details National tax (corporation tax, income tax): for five years (100% for 3 years, 50% for the following 2 years) Acquisition, registration, and aggregate income tax: 100% exemption for 15 years Special cases on customs duties Exemption of value-added tax Customs duties are exempted on foreign goods, since the Customs Act is not applied in free trade zones. Customs duties are exempted or refunded for domestic goods whose import declaration is made in free trade zones. Domestic goods whose import declaration is made in free trade zones Foreign goods and services supplied or provided among companies in free trade zones Rent reduction or exemption 100% exemption from rent: - Foreign-invested companies with a new foreign investment amount of US$ 10 million or more - Foreign-invested companies with a foreign investment ratio of over 30%, and a new foreign investment - amount of US$ 1 million or more - New foreign investment of US$ 500,000 or more in high technology business, businesses accompanying high technology & industry-supporting service businesses Source: KOTRA (2013)

12 Prof. Sherzod Shadikhodjaev (KDI School) 12 Masan FTZ Source: MOTIE Synergies with nearby industrial complexes (Changwon Industrial Complex: automobiles, mahinery and robots) close to Sacheon, Geoje and Ulsan: steel, ships and aerospace products Key industries: cell phones, semiconductors, audio equipment, IT products, nuclear power generation equipment, automotive parts, etc. Tenants: 100 companies incl. Nokia TMC (Finland), Sony Electronics of Korea (Netherlands), TAIYO YUDEN (Japan) and Korea Hosiden (Japan)

13 Prof. Sherzod Shadikhodjaev (KDI School) 13 Free Economic Zone (FEZ) To improve the business environment for foreign-invested enterprises and living conditions for foreigners. With the launch of FEZs, Korea intends to become a hub of networking and logistics in Northeast Asia and the center of high value-added and high-tech industries. Pursues a complex development of industry, business (commerce), logistics and housing Qualifications for occupancy Foreign-invested companies Manufacturing industry, logistics industry, medical institutions, education institutions, foreign broadcasting stations, financial institutions, etc. State of play 3 initially designated FEZs: Incheon, Busan (Jinhae), Gwangyang 3 newly designated FEZs: Jeonbuk (Saemangeum- Gunsan), Daegu- Gyeongbuk (Gumi, Gyeongsan, Yeongcheon), Yellow Sea (Pyeongtaek, Dangjin) 2 new FEZ designated in 2013: ChungBuk, East coast Incheon FEZ targets international business and logistics, as well as high-tech industry such as information technology, tourism and leisure. Busan/Jinhae FEZ focuses on international logistics, R&D and tourism Jeonbuk FEZ specializes in manufacturing in the automotive sector, aviation and shipbuilding, green industry and tourism targeting China.

14 Prof. Sherzod Shadikhodjaev (KDI School) 14 Status of Free Economic Zones (as of September 2013) Name Incheon Busan-Jinhae Gwangyang b ay area Yellow Sea Name Daegu-Gyeo ngbuk Saemangeun -Gunsan East Coast ChungBuk Area km km km2 16 km2 Launch Date (Designation Date: Y/M/D) ( ) Airport/Port Developmen t Period Year Completion Process ( ) ( ) ( ) Incheon Inter lgimhae Airport Gwangyang PPyeongtaek P Airport New Busan Po ort ort Incheon Port rt Yeosu Airport Dangjin Port of I I I I II II II II III III III Business/ - Logistics - Auto parts Finance - Logistics - High-tech - Semiconduct - Logistics - Manufacturin - New city or/ Major Industries - High-tech g - Tourism/ LCD under the Basic Plan - Medical/ BT - Offshore Leisure - Steel/ - Education - Tourism/ - Education/ Petrochemistr - Culture/ Leisure Medical y Tourism Area km km km km2 Launch Date (Designation Date: Y/M/D ( ) ) Airport/Port Developme nt Period Daegu Airport ( ) ( ) ( ) Gunsan Port YangYang Inte Inter l Cheongju Inte Saemangeum r'l Airport Don r'l Airport Port ghae Port Year of Completion Process I I I I II U-IT - High-tech - Automobile/ - High-tech C- BIO - Airline/ Shipbuilding omponents & Air Machine Transport Pa - Machinery/ P Materials - Tourism/ Leis rt arts - Logistics ure - Green energ - Renewable - R&D - Auto Parts Major Industriesy Energy - Tourism/ Leis under the Basic Plan - Knowledge Service - Tourism/ Lei ure sure Source: Korea s Free Economic Zone Planning Office

15 Source: KOTRA (2013) Prof. Sherzod Shadikhodjaev (KDI School) 15 Free Economic Zone (FEZ) Fiscal and non-fiscal incentives Non-fiscal incentives Financial support Improvement of business environment for foreign-invested companies Reduction or exemption of charges including farmland preparation charge on development project operators Provision of government funds for basic facilities Reduction or exemption of rent for foreign-invested companies (up to 100%) Regulations on the Seoul metropolitan area such as factory location limits are not applied in free economic zones. Obligation to hire people of distinguished service to the state is exempted. Unpaid holidays for employees in foreign-invested companies are increased, and the period of employee dispatch and business sectors subject to dispatch are expanded. Improvement of living conditions for foreign nationals Establishment of foreign educational institutions (primary, middle, high school, and university) is allowed. Establishment of foreign hospitals (which also treat Korean nationals) is allowed. Foreign language services are provided at government and public offices and foreign broadcasting programs are retransmitted. Streamlined administrative procedures Authorization and permission under 36 Acts are provided at once by approving execution plans. The Free Economic Zone Authority is established as a one-stop service provider.

16 Free Economic Zone (FEZ) Incheon FEZ estimated population of 512,000 people the total area of three times the size of Manhattan Prof. Sherzod Shadikhodjaev (KDI School) 16 consists of three parts: (1) Songdo (international business, IT, BT, R&D projects, and foreign schools or hospitals), (2) Yeongjong (industrial parks, a customs free zone, tourism/leisure) and (3) Cheongna (theme parks, a cutting-edge industry district, leisure and sport facilities and foreign elementary and secondary schools) Major industries: business/finance, logistics, high-tech, medical/bt, education, culture/tourism