Global industry reform begins

The South Korean government is known to have been discussing various ways to support domestic businesses operating overseas by easing regulations on factory sites in the Seoul metropolitan area so that they would return to Korea. It is because the government realized that they would not bring their businesses back to Korea without excellent incentives as countries around the world have started to competitively encourage reshoring to prepare for the post-corona era. It plans to announce the economic policies for the second half of the year, which will include more details about the support early next month.

Businesses have built multi-national supply chains in which they build core software in advanced countries, procure parts from semi-developed countries and bring the assembly to developing countries to reduce cost and enhance productivity. But globalization has unveiled its problem when the COVID-19 pandemic cut the supply and the trade disputes between the U.S. and China. Businesses are planning to move their production bases to their home country or other major markets due to the greater sociopolitical risks.

Governments of advanced countries such as the U.S., Europe’s countries and Japan are strengthening reshoring policies to keep pace with changing environments. The Japanese cabinet recently announced that it would provide two-thirds of the moving cost for businesses returning to Japan. Germany also decided to provide subsidies for smart factories and research and development and reduce corporate income tax rate for returning businesses. The U.S. is reviewing a measure to further reduce corporate income tax rate from the current 21 percent and bear 100 percent of moving expenses for manufacturing businesses returning from China.

Korea also has been encouraging domestic businesses operating overseas to return to the nation after legislating the “Act on Assistance to Korean Off-shore Enterprises in Repatriation” in 2013. But only some 40 businesses have returned to the country. Hyundai Mobis is building a factory to produce electronic vehicle parts in Ulsan, which is the first that made a U-turn since the legislation. The scale is rather minor compared to Apple which created more than 20 thousand jobs in the U.S. and three automotive companies in Japan moved the factory from China to Japan.

The government should make a comprehensive analysis of the national benefits in a situation where the global supply chain reform begins, and countries compete to attract businesses. Bringing domestic businesses back to Korea is not an easy job. Conglomerates that focus on exports do not have many incentives to make a U-turn as the domestic market is not as big as the U.S. and China. The nation’s labor market is not as competitive as Southeast Asian countries with lower labor cost. All government ministries and agencies should devote their energy and provide customized services to each business.