Can Korea attract companies fleeing Hong Kong?

Economy

Published: 24 Jul. 2020, 18:26

Can Korea attract companies fleeing Hong Kong?

General Motors' new modular platform and battery system, Ultium. The automobile manufacturer has been increasing research and development in electric vehicles. [GENERAL MOTORS]

International companies may be looking for a way out of Hong Kong after Beijing passed a new law that could restrict freedoms there and threaten the rule of law. While some countries are focusing on attracting companies that leave Hong Kong, Korea is struggling to keep the foreign companies that already have invested here.

General Motor’s Technical Center in Korea (GMTCK) is the only research and development center in Asia for the American automobile giant. It might give some clues as to how Korea can turn into a global hub like Hong Kong and attract other multinationals.

When the JoongAng Ilbo visited the center recently, 3,400 workers of varying nationalities were working diligently in the center, which is located in Bupyeong, Incheon.

“This is the only Research & Development Center for General Motors (GM) in Asia,” explained an official from GM. "This place was opened directly by GM headquarters in the United States and is the only regional R&D center that has expanded into a global one."

The center not only oversees models like Chevrolet manufactured in Korea but also other models of GM produced overseas like Buick and Cadillac.

From this year, the GMTCK will take part in research and development of electric vehicles, an important business for GM's future. The company announced early this year that 25 percent of the researchers at the center would be involved in the development of electric vehicles.

“Korea is a crucial location for the company in developing electric vehicles (EV) as it has an advanced IT infrastructure, high level of technological advancement and a large number of customers who are knowledgeable about the technology behind EV cars,” said Jesse Ortega, architectural chief engineer at GM Autonomous and Electric Vehicle Programs.

The GMTCK lab could set a good example for other Korean companies to follow, in an era when some companies may move their Asia headquarters from Hong Kong.

Hong Kong has been an R&D hub for biopharmaceuticals and nano-technology industries because companies can tap into a highly educated labor force from Hong Kong University and the Hong Kong University of Science and Technology.

While Korea may be behind other countries like Singapore in terms of finance, it could attract research centers.

“Korea is advanced in information and technology and has a high education level,” said Cheong In-kyo, professor of international trade at Inha University. "We have all the conditions that should be appealing to international companies for global research and development centers."

Last November, the world’s largest plane manufacturer, Boeing, opened the Boeing Korea Engineering & Technology Center (BKETC) near Coex in Gangnam District, southern Seoul.

This is the 12th international research center for the U.S. aviation company. The Korean center focuses on autonomous flight technology and artificial intelligence (AI). Boeing Korea said that the company was drawn here by the “massive pool of human resources.”

Umicore, a global materials technology and recycling group based in Belgium, inked a memorandum of understanding on June 20 with the south Chungcheong government to open a research center dedicated to developing battery anodes, a core part of electronic batteries for electric cars. The company plans to invest around $30 million in the construction of a 19,000 square meter research center in Cheonan by 2025.

The reason that global companies are paying attention to Korea is because of its advanced hardware technology in promising industries such as semiconductors and electric batteries. Korea also has a good IT infrastructure needed for AI research.

“Korea excels compared to other countries in both the software and hardware of the so-called fourth industrial revolution technologies,” said Chung Tae-kyoung a business professor at CHA University.

“Even compared to other competitors in North Asia, like China and Japan, Korea has a competitive advantage in terms of those technologies.”

However, analysts say that rigid regulations could be Korea’s Achilles heel in terms of attracting foreign companies. Business groups have called on the government to ease the 52-hour workweek and introduce flexible working hours for research work.

“The government needs to resolve issues regarding working hours to increase its competitiveness and bring in more global research centers,” advised Sohn Kyung-shik, chairman of the Korea Enterprises Federation.

Additionally, analysts advise the government to increase tax benefits for research by companies. In fact, Korea has reduced tax benefits four times since 2013 for research budgets. Currently, the government gives less than two percent in tax deductions for research expenses, according to the Federation of Korean Industries. Compare that with Japan, which increased tax benefits to range between 6 to 14 percent during the same period.

Other international companies with regional offices in Korea say that government regulations are the biggest hurdle to overcome while continuing business here.

The European Chamber of Commerce in Korea (ECCK) suggested in a publication last year the easing of more than 180 regulations across 20 industries. Some of them prevent international companies from doing research in Korea. The number of regulations pinpointed by the European business group was only 123 two years ago.

“A good example is the Enforcement Decree of the Act on Registration, Evaluation, etc. of Chemicals, which is slowing down the development process by complicating the registration process of new chemical substances,” said the ECCK.

Despite suggestions from business groups, companies say that the list of regulations is getting longer every year.

The Regulatory Reform Committee of the Korea Federation of Industries (KFI) found more than 3,000 regulations have been either newly created or strengthened by the government from 2017 through 2019. Among them, 96.5 percent have been fast-tracked and were able to avoid the Regulatory Reform Committee’s evaluation, says Yoo Jeong-joo, an official from KFI.

“If the government continues to come up with new regulation without looking into them closely, who would want to invest in Korea?” Yoo pointed out.

Other foreign companies that have regional offices in Korea say cultural barriers and political risks are other issues for potential investors.

“Korean people have a negative perception of companies that make profit on Korean soil with foreign capital, and that sentiment is often reflected in government policies. This is why it’s difficult for global headquarters to increase investments in Korea,” said an employee of an international home appliances company who wished to remain anonymous.

“Labor regulations exist in every country around the globe, so they alone should not be an issue. But we are confused since each administration [in Korea] is inconsistent in its interpretations of them,” said a source at a global IT firm who asked to remain anonymous.

“Sometimes we think the Fair Trade Commission is also influenced by public sentiment,” he added.

BY KANG KI-HEON, CHOI SUN-WOOK [kang.jaeeun@joongang.co.kr]