Residential apartments on the top floor of the towering First World complex offer a panoramic view of the Songdo International Business District (IBD), where shimmering glass skyscrapers and the sprawling low-rise Songdo convention centre intersect with the neatly trimmed lawns of the Central Park, replete with a museum and a sea water canal catering to residents and visitors in the Incheon metropolis, South Korea’s third most populous city.

Currently home to 22,000 residents, a figure expected to rise to 27,000 people by the end of this year, it is hard to believe that just 10 years ago, Songdo IBD was underwater. Constructed on six square kilometres of reclaimed land along the Yellow Sea, Songdo IBD is part of Incheon Free Economic Zone (IFEZ), and it has been ranked by the Massachusetts Institute of Technology as the largest ever private real estate venture.

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Forming part of the government’s efforts to attract inward FDI into South Korea, the development of Songo IBD is estimated to cost $35bn upon completion. Gale International, a US-based real estate and development company, will construct four square kilometres of residential and retail complexes, and the entire project is expected to be finished by 2018.

“After the Asian financial crisis [in 1997], the government realised that the country’s economy needed to be targeted towards inward FDI,” says Scott Summers, vice-president of foreign investment at Gale International. It was already proceeding with building a new international airport by filling in two islands and it then begun creating Songdo as one of three free economic zones in Incheon. It conducted a search to find an international developer to create a new masterplan for Songdo IBD. That is how Gale International was invited to develop Songdo IBD." 

Balancing act

Songdo IBD illustrates the government’s efforts to reduce its reliance on the performance of its chaebols, which are South Korea’s principal exporters, through promoting itself as a headquarter location for foreign companies which wish to do business in north-east Asia, via its free economic zones (FEZs). In 2003 the government started designating new FEZs, and in a bid to attract new enterprises all FEZs offered investors one-stop services for their administrative needs, as well as three-year tariff exemptions and seven-year corporate tax exemptions. 

“Although we host many companies that have headquarters in Seoul, we want to develop other regions to promote a balanced development,” says Park Jaeyung, director of the policy planning office of free economic zones at the Ministry of Trade, Industry and Energy. 

“There are eight Korean FEZs in total,” says Simon Hoggett, marketing manager of Daegu-Gyeongbuk Free Economic Zone Authority (DGFEZ). “The first group of FEZs were designated in 2003, and they were all were port-based. In 2008, the government designated the Daegu, Saemageum and Yellow Sea regions as FEZs. The final two, namely East Sea and Chungbuk FEZs, were created this year. Each of these sites was designed to be close to some kind of industry cluster.”

High flying

IFEZ is the oldest and best-known FEZ in South Korea. Home to Incheon International Airport, it is also the closest of the eight FEZs to the country’s capital city, Seoul.

Designed to leverage South Korea’s global position as a trade and aviation hub, IFEZ is among a handful of economic zones globally that has developed as an ‘aerotropolis’. Incheon International Airport’s aviation capacity, which South Korea's free zone authority Korea FEZ estimates is the second largest airport in the world for cargo handling, was combined with its business, high-tech and education industries, by integrating three cities that serve selected industries.

Songdo City makes up one-third of IFEZ, and Songdo IBD is expected to be South Korea’s largest ‘smart city'. Its buildings have been designed to emit a third of the greenhouse gases typically produced in urban centres. Set to become Incheon’s business district, by 2018, Gale International estimates that Songdo IBD will accommodate 70,000 residents and 300,000 commuting workers.

Two other cities make up the other two-thirds of IFEZ. Cheongna City will serve as the zone's leisure and tourism hub, while Yeongjong Island is set to become the logistics centre by 2020. Having attracted global companies such as Germany-based BMW, and Boeing from the US, Mr Summers is confident that cities such as Songdo IBD will fare well in attracting FDI from companies seeking cheaper rents in cleaner and greener environments.

“Songdo IBD is a 20-minute drive from Incheon International airport, and its residents enjoy a greener and cleaner quality of life at a lower cost,” he says. “International organisations are looking at Songdo as the place to be, and when the Green Climate Fund chose to headquarter in Songdo IBD, it really validated our vision. It is notable that Songdo is also ranked the number one FEZ in South Korea.”

All in the logistics

Located in the south-east of South Korea, Busan-Jinhae FEZ was developed around the Port of Busan, which is the world’s fifth largest container handling port. Formed in 2003, and encompassing 21 districts, BJFEZ has evolved as a strategic outpost for international exporters in South Korea.

“Almost every business in South Korea exports out of Busan, as BJFEZ has one of the largest deep-water ports in Asia,” says Mr Hoggett. “For example, there is a company in the north of the country that transfers its goods via a three-hour trip on the highway, in order to ship their items out of Busan.”

The zone, which currently hosts industrial parks that cater to advanced research and design companies, high-tech industries, and tourism and leisure operators, is currently constructing a new port, which will have 45 berths by 2020.

Designed with a primary focus on maritime logistics, Gwangyang Bay Area FEZ (GFEZ) also caters to the manufacturing, tourism and construction industries. Situated close to the Gwangyang Port, which handles 242 million tonnes of cargo annually, and connected to the Seoul Metropolitan Area via the KTX express railway, its transportation links are its key asset.

GFEZ has experienced success in attracting companies involved in heavy industry, including South Korean firms such as Posco and Hyundai Engineering. Mr Park believes that GFEZ's coastal location will continue to make it integral to the government’s efforts in attracting inward FDI. “FDI into FEZs located on the coastline has been on the rise,” he says. “We have many global Korean firms such as Samsung and Posco that have established themselves in GFEZ. As a result, many foreign companies want to set up their factory in these FEZs, in order to directly sell components to these Korean companies.”

Brain powered

Formed in 2008, with the aim of developing South Korea’s knowledge-based, manufacturing and services industries, Daegu-Gyeongbuk Free Economic Zone Authority (DGFEZ) encompasses 10 districts that focus on a selected number of sectors. Its close proximity to 51 universities and five public research institutions has enabled DGFEZ to become South Korea’s foremost R&D centre, and Mr Hoggett says that the region’s ability to supply more than 70,000 graduates annually has led it to become well known for offering companies a ready supply of high-quality staff.

“One of our sites is a special R&D zone, and it houses public institutions, including a university that is focused on developing next-generation technology,” says Mr Hoggett. “We have the raw materials, the labour and each industry in DGFEZ has its own cluster that is connected to the next segment of the supply chain. We built R&D institutes into the value system, and one of the leading projects we are engaging in is developing facilities that cater to the intelligent transportation of vehicles. This is the only facility of its kind in the country, exclusively for intelligent and electronic-based vehicles.”

Currently home to more than 600 foreign companies, including US-based energy firm Exxon Mobil, German telecommunications firm Siemens and the Japanese advanced materials maker Toray, Mr Hoggett says that DGFEZ’s efforts in developing modern facilities have attracted $60bn in FDI to date.

Also designated in 2008 to attract FDI into the creative and knowledge-based industries, Yellow Sea FEZ's (YSFEZ's) main focus is on exporters catering to the Chinese market. The zone has worked to integrate logistics, production and R&D processes across three districts, and YSFEZ is expected to develop into an international business district for companies targeting China.

Saemangeum-Gunsan FEZ (SGFEZ), which was built on a reclaimed archipelago of more than 60 islands, was created with a heavy focus on the maritime industry. In addition to Songdo IBD, SGFEZ is the government’s other pilot programme that will develop a low-carbon city, in order to attract renewable energy companies, as well as further its goals of reducing its greenhouse gas emissions.

Pressing ahead

The government’s decision in 2013 to designate two more FEZs formed part of its resolve to develop South Korea’s smaller seaport routes and expand its light manufacturing industry. East Sea Rim FEZ (EFEZ) is expected to become a hub for companies wishing to export high-tech materials to Japan, Russia and China.

Government officials are confident that EFEZ’s tourism industry is also poised for growth. In the run up to the Pyeongchang 2018 Winter Olympics, which will be hosted in Gangwon province in EFEZ, it is hoped that international hoteliers will invest in the zone to cater to the influx of tourists for the games.

The second of 2013's new FEZs is Chungbuk FEZ (CBFEZ). CBFEZ was formed with a focus on developing South Korea's biomedicine industry, as well as its ecology and information and communications technology sectors. As the country's newest FEZ, it remains to be seen how it will fare in attracting foreign companies.

While the government’s scramble to designate a plethora of FEZs appears an apt response to the country’s slowing export performance, questions have been raised as to whether the government's plan to create inward FDI through its FEZs is flawed. Commentators suggest that the ‘one size fits all’ approach in offering similar incentives across all FEZs not only increases each zone’s already tricky task of differentiating itself, but they say that the incentives may not be customised enough to suit all company’s needs.

Michael Reed, the head of FIL Asset Management’s South Korea operations, says that having the special designation of being a FEZ can actually have the undesirable effect of making a company seem insular and separate from the wider South Korean market. In a culture where appearing integrated in the local business framework is key, and cultivating close ties with South Korean customers is valued, FEZs could actually distance companies from their customers.

“We came to Korea to be with the Koreans, and to be part of the society and the economy,” says Mr Reed. “If you place us in a FEZ, we appear foreign, and I believe we should be a part of the greater Korean society.”

Making it work

Seoul is well known as South Korea’s business hub and so an added issue that FEZs further inland face is that few international companies are aware of where they are. Therefore, increasing their brand exposure is a challenge.

“Just like when tourists think of Asia, they think of the Forbidden City in Beijing, or Tokyo – and they usually consider Seoul when they think of South Korea – the same goes for foreign companies,” says Mr Hoggett. “When they look at South Korea, they look at Seoul because they want to be close to the capital.”

He does note that these perception issues are changing though. Pointing to the upcoming global World Energy Conference that will be hosted by DGFEZ, Mr Hoggett says that more FEZs have worked to showcase their regions' strengths by hosting such international events. This is encouraging evidence that the government’s proactive attempts to promote inward FDI through these FEZs might just work. While the challenges that South Korea’s FEZs face are considerable, they could perhaps become the critical lifeline that South Korea needs to revamp its slowing FDI performance.