Not Much Tread On These Welcome Mats

So far, Korea's three new enterprise zones haven't lured a lot of foreign investment

Not so long ago, Korea seemed to spare no effort in trying to bar the door to foreign companies. Now, with its economy in the doldrums and neighboring China attracting billions of dollars in foreign investment, Korea is putting out the welcome mat. Actually, three of them, in special zones that offer three-year tax holidays and relaxed labor regulations. "China's rise poses a serious threat to Korea, and we still have difficulty closing the technology gap with Japan, so [the zones] are our survival strategy," says Cho Soung Ik, deputy minister for free economic zones at the Finance Ministry.

The hope is that foreigners will help boost the economy, not only with their investment but also their expertise. Korea wants a critical mass of competitors to develop in each zone and help kick-start new industries. The bustling port of Busan, Korea's second-largest city, is to be a regional shipping hub. The southern port of Gwangyang is being promoted as a base for steel and petrochemicals. And Incheon, home to Korea's biggest airport, 40 kilometers west of Seoul, is being pitched as a location for multinationals' regional headquarters.

Problem is, most of the contracts that 14 foreign companies have signed are to build basic infrastructure, not to start up the new industrial development Korea is seeking. Gale Co., a U.S. developer, is overseeing construction of the $25 billion New Songdo City that will eventually be home to 65,000 people at Incheon. British builder Amec PLC has agreed to build a $1 billion bridge connecting Songdo to the Incheon airport. And port operators from Dubai and Singapore have invested a total of $512 million at Busan.


By contrast, only four manufacturing companies have agreed to invest in the zones. "We are not satisfied with this level of interest," Cho says. VaxGen Inc. (VXGN ) of the U.S. has a $150 million joint venture to make pharmaceuticals in Songdo. A unit of Renault plans $600 million in new facilities near its existing plant in Busan. And carmaker GM Daewoo Auto & Technology Co. has agreed to build a $100 million test track and research facility at Incheon. Now the government is hoping that dozens of preliminary commitments will be converted into contracts. But there's no guarantee. Microsoft Corp. (MSFT ), Hewlett-Packard Co. (HPQ ), and four other companies, for instance, had tentatively agreed to invest as much as $1.2 billion in a digital marketplace for mobile games and videos in New Songdo City last year, but they pulled out of the deal because they felt it would take too long before they earned any profit.

One reason for the sparse interest may be that Korea hasn't done a very good job of articulating the benefits of the zones. "They are trying to sell the incentives before explaining the business opportunities," says Jean-Jacques Grauhar, secretary-general of the European Chamber of Commerce in Seoul. Worse, regulations on labor flexibility and business licensing have yet to be finalized, leaving question marks for potential investors worried about Korea's reputation for labor militancy.

Still, foreign companies continue to flock to Asia. And Korea is hoping they'll see its advantage -- that it is cheaper than Japan but can produce higher-quality products and services than China. With the welcome mats out, Korea now just needs to persuade foreign investors to come through the door.

By Jennifer Veale in Seoul

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