A national policy research institute has suggested that the government should lower the barriers to receiving subsidies for strategic industries such as semiconductors and electric vehicles. This means easing the eligibility requirements and expanding the scope of support.
Subsidies have a significant impact in attracting investments from multinational corporations, and the reason is that South Korea is less generous with subsidies compared to major countries. A countermeasure was also suggested to retrieve a portion of subsidies from corporations that earn profits above a certain level due to fiscal burdens.
The Korea Institute for International Economic Policy (KIEP) released a report on the 9th detailing the impact of 'strategic subsidies for investments' on multinational corporations' investments and supply chains. Strategic subsidies refer to the funds provided by national governments for strategic industries.
Eui-joon Yeo, a researcher at KIEP, noted, 'Subsidy policies should be determined by comprehensively considering the average productivity and entry probability of the entering corporations.' This is because there are initial expenses when a corporation builds a factory in a specific country, but there are also ongoing maintenance expenses.
For example, if the government only subsidizes fixed costs to attract multinational corporations, companies with low productivity may come in. Conversely, if support is only provided for initial costs, there is a high likelihood of low-quality corporations entering. Researcher Yeo said, 'If policies that increase fixed costs (subsidies) are implemented, it can encourage the entry of high-productivity corporations.'
Currently, many countries are implementing strategic subsidy policies. Since 2019, China, the United States, Germany, and Canada have actively expanded their subsidy policies. In fact, China provides support for projects that overcome market-relevant constraints related to integrated circuit equipment through independent research and development, with subsidies of 100 million yuan (approximately 20 billion won) or 30% of qualified investment expenses. The United States also announced it would provide $2 billion (approximately 3 trillion won) in subsidies to promote electric vehicle production.
South Korea has also increased strategic subsidies to keep up with this trend, but it is comparatively weak compared to major countries. Support to induce facility investment is also passive. Researcher Yeo explained, 'Unlike the overall (global) trend, our country's subsidy policy is concentrated on financial support and trade financing for domestic corporations to enter overseas markets and secure them.' He further added, 'The effect of expanding facility investment domestically is inevitably limited.'
Researcher Yeo also depreciated the government support method of providing tax deductions. This is because corporations that incur losses after investments cannot benefit from tax deductions. He suggested, 'To secure global competitiveness for strategic industries, the eligibility requirements for subsidies should be expanded,' adding that regarding the financial burden from expanding subsidy support, 'It is necessary to consider a method that expands eligibility and retrieves a portion of the paid subsidies when excessive profits are generated.'
Researcher Yeo emphasized that when designing subsidy policies, support should differ by strategic industry. He stated, 'A screening mechanism capable of attracting high-quality investment should be differentiated by industry,' and urged the use of public-private partnership channels at the policy design stage.
In relation to the trade war that arose after the second Trump administration's launch, Researcher Yeo remarked, 'We must ensure that the risks for corporations investing in our country do not increase.' This means actively exploring measures to mitigate the damage from U.S. trade pressure by increasing subsidies for domestic investment corporations. He suggested, 'The uncertainty of subsidy policies makes attracting new investments difficult due to the deterioration in investment revenue,' emphasizing the need to consider the investment attraction effects of subsidy policies.