South Korea is the world’s 12th largest economy and the third-largest in Asia. Its manufacturing-driven economic growth, however, has encountered limits with neighbouring China now growing as a manufacturing hub.

Part of the solution has been the establishment of a trio of free economic zones (FEZs) in Incheon, Busan-Jinhae and Gwangyang.

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Complete with ports, industrial towns, tourist attractions and financial institutions, the Ministry of Finance and Economy has pledged to attract billions of dollars of investment for these zones. With the FEZs acting as the driving force, South Korea wants to reinvent itself as the economic nerve centre of north-east Asia.

“FEZs were launched as part of Korea’s survival strategy to cope with rising competition with other countries in the global economy,” says Lee Hwan-Kyun, CEO of the Incheon Free Economic Zone Authority (IFEZA).

Growth factors

“FEZs have the task of developing the nation’s knowledge-based new growth engines, replacing manufacturing businesses, mainly by attracting foreign direct investment,” adds Mr Lee.

The zones are centred around Incheon international airport and Busan and Gwangyang ports. These are world-class logistics and business hubs which capitalise on the nation’s geographical advantage and industrial infrastructure.

Enticed by tax breaks and other incentives, a growing number of well-known multinationals have begun investing in the zones. While most competing free trade zones offer similar duty incentives, South Korea stands apart by paying greater attention to providing competitive living conditions and an efficient business environment.

Financial assistance is available for the construction of facilities such as hospitals and schools. Companies will also be able to design and create leisure and sports complexes and high-rise buildings inside the zones.

Building up

As FEZ construction takes shape, more foreign firms are showing an interest with over $20bn in investment memoranda for understanding having been signed so far. Gale, a US-based real estate investment firm, will mobilise $12.7bn of investment by 2014 with some 60 office buildings, residential and commercial facilities, a convention centre, foreign schools and an international hospital about to be built in Incheon’s Songdo City.

Songdo City is set to become a corporate hub in the Incheon zone, a bilingual English-Korean city where there will be international schools and hospitals for foreigners. The UK’s AMEC, an international project management and services company, has led the construction of the Incheon Bridge which is the first ever joint foreign-domestic private capital infrastructure construction project.

AMEC also plans to invest $2bn into the construction of a 1062-acre international business district to the north-west of Incheon international airport. Biotech firm Celltrion has already started producing the latest rheumatism treatment medication there, creating a biotech cluster in Songdo city.

At the same time, Renault-Samsung Motors, in the Busan/Jinhae FEZ, has announced a $600m construction plan for a new engine production plant.

The success of the FEZs greatly depends on whether South Korea can improve and supplement existing laws and regulations. To ensure this success, the government is working to remove any possible deterrents to foreign investment such as excessive red tape, labour costs, land prices and tax rates.

Recent legal revisions guarantee more independence and autonomy for economic zone authorities, while the government will set up foreign investment ombudsman’s offices in each economic zone to assist foreign companies and their employees.

As a result, commissioners of zone authorities will be guaranteed more autonomy over personnel appointment and office operations, while authorities will not be subject to standard qualifications when hiring public officials. The revision also includes the easing of building regulations to allow the construction of taller buildings and golf courses within the zones.