S.Korea’s reshoring firms wane due to insufficient support, incentives
TL/DR –
The number of South Korean companies reshoring, or returning to their home country from overseas, has been unimpressive due to inadequate incentives, despite a global trend amid the COVID-19 pandemic and US-China trade conflict. As per the Ministry of Trade, Industry, and Energy, only 20 Korean companies per year on average, most of which are SMEs, have returned over the last five years. Korea’s small market size and high labor costs are cited as major hurdles for return, with experts suggesting the need for a more favorable business environment in terms of employment and infrastructure.
Korea Struggles to Attract Reshoring Companies Amid Global Trend
Reshoring, the transition of companies back to their home countries from overseas, has become the global trend post COVID-19. Governments worldwide have extended attractive incentives and tax breaks, leading to job creation back home. Despite this trend, Korea’s reshoring efforts remain unimpressive due to insufficient incentives.
Data from the Ministry of Trade, Industry, and Energy indicates that on average, only 20 Korean companies have returned annually over the past five years, with the majority being small- and medium-sized enterprises (SMEs).
In 2019, only 14 companies reshored to Korea from overseas. This number rose to 25 in 2021 due to the pandemic, but then decreased to 22 in 2023. The Korean government has since introduced the \”Reshoring Support Strategy 2.0\”, providing up to 40 billion won ($30 million) per company in support. However, if this trend continues, industry officials predict the annual number of reshoring companies could fall below 20.
Contrasting Trends in Japan, US, and Europe
In contrast to Korea’s reshoring struggle, neighboring Japan is witnessing an increasing number of major companies returning annually. Big players such as Toyota Motor, Honda, Yaskawa Electric, Subaru, and Canon have reshored in recent years. In fact, approximately 600 to 700 Japanese companies return annually, surpassing the total of 151 Korean companies to have reshored over the past decade.
The US has also seen a remarkable increase in manufacturers returning since the launch of the \”Remaking America\” reshoring initiative in 2010. Between 2011 and 2019, a total of 3,327 companies returned to the US. Additionally, the US is attracting global manufacturing plants through laws such as the Inflation Reduction Act and the CHIPS and Science Act. Similarly, the European Union offers substantial subsidies to reshoring companies.
Creating a More Favorable Business Environment
Industry officials assert that despite the Korean government’s expanded support, the number of reshoring companies remains lower than expected. Experts attribute this to Korea’s relatively small market size and high labor costs, urging the government to create a more business-friendly environment in terms of employment and infrastructure.
The Korean government has been providing incentives and tax benefits under the Reshoring Act since 2014. Reshored companies are completely exempt from corporate taxes for seven years and receive a 50% tax cut in the following three years. However, reshored companies have only received a total of 2 billion won in tax benefits over the past five years.
Among the large companies that have reshored, Hyundai Mobis Co. and LG Chem Ltd. are well-known. Hyundai Mobis halted its Chinese auto parts plant and reshored to Korea in 2019, while LG Chem decided in 2022 to build a biodegradable bioplastic plant in Korea instead of overseas.
To further promote reshoring, experts suggest the need for regulatory reforms, such as easing restrictions on operations in the Seoul metropolitan area. According to the International Institute for Management Development’s world competitiveness ranking, Korea ranked 47th out of 67 countries in business conditions and 39th in government efficiency.
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