By Lee Hyo-sik The nation's three free economic zones (FEZs) have been playing a key role in attracting foreign direct investment (FDI), spearheading South Korea's endeavor to transform itself into a financial, logistics and business hub for Northeast Asia. The Korean government has designated three FEZs in Incheon (Inchon), Busan-Jinhae (Pusan-Chinhae), and Gwangyang (Kwangyang) over the past two years, to be equipped with business-friendly environments, advanced financial institutions, attractive tourist destinations, and state of the art logistical and industrial facilities, to more effectively lure overseas investments. The FEZs are special areas where, compared to the rest of Korea, foreign companies and their workers will be able to benefit from certain measures for incentives such as tax breaks, foreign language services, labor flexibility, relaxation of greater-Seoul restraints, and the establishment of foreign education and medical institutions. The Incheon FEZ envisions to serve as a logistical center for international business, finance and tourism, while the Busan-Jinhae FEZ (BJFEZ) aims to become a center for telecommunications and high technology industries, and maritime logistics. The Gwangyang FEZ is expected to emerge as an international maritime logistics center and an industrial cluster for petrochemicals and steel. The FEZ planning office at the Ministry of Finance and Economy (MOFE), and three FEZ authorities have been making every effort, including holding a series of overseas investor relation (IR) sessions, to secure more foreign investments. They just participated in the 16th World Real Estate Fair in France early this month and set up an information booth to attract potential investors by explaining the merits of investing in the three FEZs. The planning office said that it plans to attract about $5 billion in foreign capital this year to finance the construction of international business complexes, leisure towns and theme parks, and other special areas in which businesses can enjoy various benefits. Over the past few years, the FEZ authorities have also been able to attract a large amount of FDI by promoting the nation's state-of-the-art information technology (IT) and communications infrastructure, a highly educated workforce and sophisticated manufacturing technology. The U.S-based Gale Company, a developer and marketing agent, reached an agreement for a real estate joint venture with POSCO Engineering & Construction early last year to develop the Songdo Intelligent City by 2020 inside the Incheon FEZ. Renault Samsung Motors last November unveiled a plan to invest $500 million over the next three years to set up an engine plant inside the BJFEZ, while Snowbox, a leading British leisure facility developer, also announced a plan last December to invest $200 million in constructing a comprehensive winter leisure town in the zone. The companies, including the Hong Kong conglomerate Hutchison Whampoa, signed a memorandum of understanding (MOU) early last year with the Gwanyang FEZ authority to participate in port operations through a $100 million investment scheme. Benefits and incentives The National Assembly passed a bill in December 2002 that enabled the government to create free economic zones across the nation to attract foreign companies and investors to establish their operations here, with a wide range of benefits and incentives. "Unlike the city-states of Hong Kong and Singapore, Korea is a country with a large territory and an economy in which nationwide reform is not always easy. Thus, the FEZs are Korea's answer to piecemeal reform of the whole country _ first with a foothold in the FEZs, and then to the rest of the country," Cho Soung-ik, Deputy Minister for the FEZ planning office at the MOFE, said. Income and corporate tax incentives along with reduced land costs will be provided to foreign companies that invest in the any of three FEZs in order to lessen corporate financial burdens. Foreign investors who invest $10 million or set up manufacturing operations in the zones will be exempted from corporate or income taxes for the first three years and enjoy a 50 percent reduction in these taxes for the following two years. Those who invest more than $50 million will pay no taxes for the first seven years and receive a 50 percent reduction for the following three years, while foreign corporate executives will be required to pay only a flat rate of 17 percent in income taxes. International companies that plan to set up business operations in the FEZs are exempted from acquisition, registration, property, and aggregate land taxes for the first three years, with a 50 percent reduction for the following two years. Financial assistance is also available for the construction of facilities such as hospitals and schools to make life more convenient for foreigners. In addition, the Korean government will set up foreign investment ombudsman's office in each economic zone to assist foreign companies and their employees, and public documents will be published in English. "The Korean government will actively support the construction of FEZ infrastructure and will host the regional headquarters of the world's top 500 corporations. Five years from now, when the FEZs get into shape, they will have become the world's premier cosmopolitan cities where everyone from all over the world would want to live," Cho said. Moreover, the Assembly last December passed the revised bill on the FEZs, designed to create more business-friendly and attractive environment for foreign investors. In an effort to encourage foreign investors and companies to construct and operate a wide range of facilities, the government will allow Korean nationals to attend foreign schools and receive medical services at foreign-run hospitals inside the zones from May. "Medical services for Koreans are available alongside prominent foreign hospitals, which are a key factor for the successful establishment of the economic zones and the government's goal to make the nation a business hub for Northeast Asia," Cho added. The planning office has been negotiating with the medical schools of four U.S. universities, including Harvard, to build one or two hospitals in the Incheon FEZ in 2008 and many more in all three FEZs by 2020. Foreign investors will also be able to construct leisure and sports complexes and high-rise buildings inside the FEZs in a bid to create a better investment and living environment, compared to rivaling countries such as Hong Kong and Singapore. Investment promotion activities As Korea is located between China and Japan with easy access to the rich natural resources of the Russian Far East, multinational corporations have given high marks to the strategic importance of Korea as production platform for serving East Asian markets. Many foreign investors are also attracted to Korea's advanced IT and telecommunication infrastructure and highly educated and skilled workforce. A number of foreign companies have already expressed keen interest in investing in Korea's FEZs with various incentives and benefits, such as tax breaks, and many more are expected to jump on the bandwagon. The U.S-based Gale Company has been undertaking a project to build Songdo city, Korea's first international city, inside the Incheon FEZ by 2020 in cooperation with a local construction firm. "Songdo is aimed at becoming a corporate hub in Northeast Asia, a bilingual English-Korean city in which international schools and hospitals for foreigners are located and international companies can obtain relief from the local taxes and bureaucracy," Lee Hwan-Kyun, commissioner of the Incheon FEZ Authority, said. Lee added that it is also important to eliminate negative factors that are deeply rooted in Korea, including excessive regulations, soaring labor costs, labor strikes, political instability, expensive land prices, higher tax rates and anti-business sentiment. As the first concrete step toward creating a global city, Gale International Korea, a 70-30 joint venture between Gale Company and POSCO E&C, broke the ground last November for constructing the Songdo International Convention Center on 326,585 square meters of land in the planned New Songdo City. The company will be in charge of constructing the center at a cost of $125 million. I will also participate in building the international business district of new city on land of some 5.51 million square meters. The envisioned convention center will be completed by December 2007. New Songdo City will boast an up-to-date IT infrastructure providing an advanced business environment and international hospitals and schools will also be located within the city. In addition, the Incheon FEZ Authority last October signed a MOU with a consortium of six global and local IT giants, including Microsoft, Hewlett-Packard, Sun Microsystems, and KT, to initiate a detailed feasibility study for the development of the digital entertainment cluster in the city of Songdo. Meanwhile, two other FEZs in Busan-Jinhae and Gwangyang have also attracted a large amount of FDI over the past year. The BZFEZ Authority celebrated its first anniversary on March 11, having attracted about $700 million in foreign investments so far. Renault Samsung Motors plans to invest $500 million over the next three years in setting up an engine plant inside the zone The automaker also said it will increase investment to build a global manufacturing base within the zone not only for domestic sales, but also for exports to the European market and other parts of the world. The British leisure facility developer Snowbox announced a plan to spend $200 million to build a comprehensive winter leisure town last December. During President Roh Moo-hyun's state visit to the United Kingdom last year, the commissioner signed a MOU with the British company for the leisure town investment project, which is to be completed by 2007. The U.S-based port operator CSXWT also signed a MOU with the BJFEZ in late 2002 to make an investment of $46 million in developing a new seaport in Pusan (Busan). The Gwangyang FEZ Authority has attracted many international companies to develop the zone as a logistics and industrial hub for Northeast Asia. The companies include the Hong Kong conglomerate Hutchison Whampoa, which signed a MOU with the Gwanyang authority early last year to participate in port operations through a $100 million investment scheme. With a $200 million investment plan, the Dutch logistics firm Steinweg is also expected to set up cargo terminals to handle international containers heading to China and Japan from Europe. The U.S-based construction firm HRH signed a MOU last September with the state-run Korea Land Corp. to invest $3 billion in constructing leisure and commercial facilities, such as hotels, resorts, golf courses and convention halls, in all three FEZs.