Gov`t to Boost Investment via Deregulation, R&D Support

The government yesterday announced measures to attract investment, including encouraging companies to invest early via deregulation and boosting growth potential by facilitating research and development investment.

To this end, tax incentives, financial support and deregulation will be pushed for. Market watchers say the measures go further than the government’s previous two campaigns to improve the business environment last year.

The move comes amid fears that the global economic crisis will further damage investor confidence, thus weakening Korea’s growth engine. The government apparently also wants to make corporate investment a new growth engine in the second half when its own fiscal resources are expected to dry up.

Strategy and Finance Minister Yoon Jeung-hyun said, “It is impossible for the government alone to tackle all problems such as the economic slowdown and job insecurity. It is now the corporate sector’s turn.”

○ Tax incentives

The critical part of the government’s business-friendly measure is tax incentives for R&D investment. Notably, the tax cut rate for companies investing in core technologies will grow four to eight times from three to six percent (25 percent for small and medium-size enterprises) to 25 percent (35 percent for smaller companies).

That means companies investing one trillion won (787.7 million U.S. dollars) will get 250 billion to 350 billion won (196.9 million to 275.7 million dollars) in tax deductions.

The tax deduction rate for 17 new growth engines like LEDs, green transportation system and renewable energy will increase to 20 percent (30 percent for smaller companies) from three to six percent. The Strategy and Finance Ministry plans to provide tax incentives by 2012 and determine whether to extend their period the same year.

Tax incentives for investment in R&D facilities, funding related to R&D activities, land for R&D centers attached to businesses, and investment in smaller companies were scheduled to end this year. The government, however, has extended its tax incentives for these programs.

It initially planned to reshuffle the incentives but finally decided to keep them for investment projects.

○ Financial support

A facility investment fund worth five trillion won (3.9 billion dollars) will be set up with Korea Development Bank, Industrial Bank of Korea and the National Pension Service. Ten trillion won (7.8 billion dollars) will be financed for facility investment, however, since the two state-run banks plan to lend an additional five trillion won (3.9 billion dollars) to companies that receiving investment from the facility investment fund.

The government will raise the fund to 20 trillion won (15.7 billion dollars) as early as next year and encourage banks to lend an additional 20 trillion won (15.7 billion dollars), for a combined amount of 40 trillion won (31.5 billion dollars).

Fiscal spending will also grow, with the government’s R&D budget to grow an average 10.5 percent per year to 18.4 trillion won (14.5 billion dollars) by 2013 from 12.3 trillion won (9.6 billion dollars) this year.

To encourage voluntary R&D investment by the private sector, the government will return R&D costs to companies that meet state-set goals from next year.

○ Deregulation

Moreover, the government will ease regulations as requested by business associations. It will simultaneously ease regulations in 10 sectors such as synthetic natural gas plants, which transform coal into gas and recycles discarded metals.

State support is also slated for Hynix Semiconductor, which will be encouraged to expand investment through the easing of environmental regulations. The government will also legalize the “poison pill” system as pledged by President Lee Myung-bak and long requested by businesses.

The system is a corporate protection measure that helps companies protect themselves from hostile takeovers by granting the right to established shareholders to buy new shares at a giveaway price.

cha@donga.com ceric@donga.com