(2010) Modularization of Korea's development experience : export promotion

Abstract

Korea undertook a variety of supplementary export promotion measures to build on the successful export promotion policies of 1960s. In this regard, the Korean government established “Free Export Zones (FEZs)” in Masan and Iksan after adopting “the establishment act of Free Export Zones” in 1970 and let foreign firms enter Korea to produce export products in these zones. FEZs were established on the back of governmental-wide efforts. The Ministry of Construction was in charge of land and infrastructure, while the Ministry of Commerce and Industry was in charge of managing the FEZs. Investors in FEZs were in principle foreign firms. They benefited from tariff exemptions on imported goods to FEZs as well as from tax incentives and low cost of installation, etc. Among the two FEZs, the Masan FEZ has been regarded as having been more successful than the Iksan FEZ. The Masan FEZ not only brought about the expected outcomes such as increased exports, foreign exchange earnings, investment inflows and jobs, but also contributed to improving the industrial strength in the vicinity of the FEZ via import of advanced technology. On the other hand, the Iksan FEZ fell short of expectation due to the underdeveloped of supporting industries and inconvenient logistics nearby. Other countries have also established industrial zones similar to Korea’s FEZs. Singapore has been operating Free Trade Zones focused on logistic competitiveness. Taiwan and China have managed export processing zones similar to Korea’s FEZs, which are focused on manufacturing production of foreign investors. The United States have established Free Trade Zones targeting both logistics and production at the same time. These FEZs faced new economic challenges, including the successful Masan FEZ, in the late 1990s, as Korea’s wage advantage for export-oriented foreign firms rapidly declined at the expense of other developing countries. Therefore, the Korean government wanted to transform these FEZs into “free economic zones,” which allow for greater competitiveness in logistical and urban functions as well as manufacturing production. Based upon Korea’s experience with FEZs, we can suggest the following lessons for developing countries: firstly, locations with good infrastructure and supporting industries should be selected; secondly, adequate incentives should be provided to investors, and the legal and institutional system should be appropriately adapted based on the economic development level.