Support for Development of the -Trincomalee Economic Corridor in 2016/17 KSP-ADB Joint Consulting Project : 2016/17 KSP-ADB Joint Consulting Project : Support for Development of the Colombo-Trincomalee Economic Corridor in Sri Lanka

Ministry of Strategy and Finance, Republic of KoreaⅠGovernment Complex, Sejong, 30109, Republic of Korea www.mosf.go.kr The Export-Import Bank of KoreaⅠ38 Eunhaeng-ro, Yeongdeungpo-gu, Seoul, 07242, Republic of Korea www.koreaexim.go.kr

2016/17 KSP-ADB Joint Consulting Project

Project Title Support for Development of the Colombo-Trincomalee Economic Corridor in Sri Lanka

Prepared by Korea University, Ajou University, Dongguk University

Financed by Ministry of Strategy and Finance, Republic of Korea

Supported by The Export-Import Bank of Korea (Korea Eximbank) - Seung Ho Sohn, Director General - Jae Jeong Moon, Director of KSP Team - Yu Shin Kim, Senior KSP Specialist of KSP Team - Sun Young Lim, Researcher of KSP Team

Asian Development Bank (ADB)

Prepared for Ministry of Land, Sri Lanka State Ministry of Industry & Western Development, Sri Lanka Ministry of Development Strategies and International Trade, Sri Lanka

Project Manager Hong Shik Lee, Korea University

Researchers Moon Sung Kang, Korea University Sei yong Kim, Korea University Han Sung Kim, Ajou University Back Hoon Song, Dongguk University Jong Wha Lee, Korea University Keun Hee Park, Korea University Jun Yun Kim, Korea University Kyeong Eun Lim, Korea University

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Summary

Ⅰ. Project Overview ·········································································································· 1 1 . P r o j e c t B a c k g r o u n d a n d O b j e c t i v e ······························································································ 1 2 . P r o j e c t A c t i v i t i e s a n d E x p e c t e d R e s u l t s ·····················································································2 3 . P r o j e c t I m p l e m e n t a t i o n P l a n ·········································································································· 3

Ⅱ. Urbanization Strategy ································································································· 5 1. Current Status and the Future of the Urbanization of Sri Lank a ···································· 5 2 . T h e D e v e l o p m e n t o f K o r e a ' s N a t i o n a l R e g i o n a l P l a n ························································· 1 0 3. Emergence and Growth of Industries and Industrial Comples ········································ 2 1 4. Policies for Industrial Complex Planning System ·································································· 4 0 5 . F r a m e w o r k s f o r U r b a n i z a t i o n a n d R e g i o n a l P l a n n i n g ························································· 5 7 6. Future Policy Recommendation for Enhancing Sri Lanka Urbaniza t i o n ························ 6 1

Ⅲ. Improving Trade Facilitation: Implementation of Single Window System: ··· 72 1 . C u s t o m s P r o c e d u r e i n S r i L a n k a ······························································································· 7 2 2 . D e v e l o p m e n t o f K o r e a n C u s t o m s A d m i n i s t r a t i o n ································································· 8 3 3 . I m p l e m e n t a t i o n o f S i n g l e W i n d o w S y s t e m ············································································· 9 0 4 . P o l i c y R e c o m m e n d a t i o n ·············································································································· 1 0 6

Ⅳ. Strategies to Attract Foreign Investors ···························································· 113 1 . C u r r e n t S t a t e o f S r i L a n k a ········································································································ 1 1 5 2 . K o r e a ' s F D I P o l i c ·························································································································· 1 1 6 3. Determinants of FDI Location from Perspectives of Korean MNCs ····························· 1 2 5 4. Korea’s Policies to Utilize Trade Agreements to Make Korea Investor-Friendly ·····138 5 . P o l i c y R e c o m m e n d a t i o n ·············································································································· 1 4 6

Ⅴ. Strengthening the Competitiveness of Sri Lanka SMEs through Participation in GVC ······························································································ 155 1 . I n t r o d u c t i o n ····································································································································· 1 5 5 2 . S M E S t a t u s a n d G V C P a r t i c i p a t i o n i n S r i L a n k a ································································ 1 5 6 3. Competitiveness Enhancement through Korean SME's Participatio n i n G V C ··········· 1 6 1 4 . P o l i c y S u g g e s t i o n s ························································································································ 1 7 0

Ⅵ. Conclusions and Suggestions ·············································································· 172

References ························································································································ 174 ii List of Tables

Table 1 Global Competitiveness Index, Infrastructure Rankings ········································· 6 Table 2 Population Statistics and Population by Major ············································ 8 Table 3 Table of Summary Outlining the Transition of CNTP ········································· 2 0 T a b l e 4 I n c r e a s e i n U r b a n P o p u l a t i o n ······················································································ 2 1 T a b l e 5 T y p e s o f I n d u s t r i a l S i t e s ······························································································· 2 4 Table 6 Specialized Industrial Complexes for Each Business Cate g o r y ························· 2 7 Table 7 Operation Status of Ulsan National Industrial Complex ····································· 3 0 Table 8 Operation Status of Changwon National Industrial Comple x ···························· 3 2 Table 9 Five New Towns in Capital Region for Housing Provision ································ 3 6 Table 10 Changes in Industrial Location Policy and Related Insti t u t i o n s ························ 4 1 Table 11 Site Selection and Validation Procedure for Industrial Complex D e v e l o p m e n t ····················································································································· 4 2 Table 12 Osong BioHealth Science Technopolis Support Center­facilities a n d a r e a s ··························································································································· 4 5 Table 13 Stages of Development of Industrial Complexes ·················································· 4 7 T a b l e 1 4 L a n d u s e p l a n n i n g p r o c e d u r e s ··················································································· 4 8 T a b l e 1 5 E s t i m a t i n g d e m a n d f o r c o m m e r c i a l a r e a ································································ 4 8 T a b l e 1 6 E s t i m a t i n g d e m a n d f o r i n d u s t r i a l a r e a ···································································· 4 9 T a b l e 1 7 S t a n d a r d s f o r g r e e n s p a c e ·························································································· 5 0 T a b l e 1 8 L a n d P o o l i n g / R e a d j u s t m e n t I n d e x ············································································· 5 2 T a b l e 1 9 C o n s i d e r a t i o n s f o r S u p p l y P l a n n i n g ··········································································· 5 4 Table 20 Spatial Use Assessment Criteria by Items/Functions ·········································· 6 0 T a b l e 2 1 T h e B a s i c G u i d e l i n e ········································································································ 6 4 T a b l e 2 2 L P I C o u n t r y C o m p a r i s o n ······························································································· 73 Table 23 Documents and Agencies Needed for Imports and Exports against J a p a n i n S r i L a n k a : C a s e S t u d y ················································································· 7 5 T a b l e 2 4 K o r e a C u s t o m s S e r v i c e U N I - P A S S E x p o r t i n g L o g ·············································· 1 0 2 T a b l e 2 5 E c o n o m i c I m p a c t o f I m p l e m e n t a t i o n o f U N I - P A S S ············································ 1 0 5 T a b l e 2 6 S h a r e o f t h e T o t a l F D I I n f l o w s o v e r S e c t o r s ······················································ 1 1 8 T a b l e 2 7 S h a r e o f t h e T o t a l F D I I n f l o w s o v e r T e y p s e ······················································· 1 1 9 Table 28 FDI Tax Support: Reductions of National and Local Taxes ···························· 1 2 2 T a b l e 2 9 F r e e E c o n o m i c Z o n e s i n K o r e a ················································································ 1 2 4 T a b l e 3 0 K o r e a ’ s I n v e s t m e n t i n V i e t n a m ················································································ 1 2 6 Table 31 Stages and Characteristics of Korean Investment in ASEA N ························· 1 2 7 Table 32 Samsung’s Capacity to Produce Mobile Phones over Plants i n C o u n t r i e s ····· 1 2 8

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T a b l e 3 3 S a m s u n g E l e c t r o n i c s ’ S u b s i d i a r i e s i n V i e t n a m ···················································· 1 2 9 T a b l e 3 4 F T A s i n K o r e a ················································································································ 1 3 8 Table 35 Investment Chapters in Selected FTAs in Korea ················································ 1 4 5 Table 36 Export Processing Zones and Industrial Parks in Sri Lan k a ··························· 1 5 1 Table 37 Sri Lanka Small Business Classification Standard ·············································· 1 5 6 T a b l e 3 8 S r i L a n k a ' s B u s i n e s s S t a t u e ······················································································ 1 5 7 Table 39 Status of Sri Lanka Production, Employment by Industry ······························ 1 5 7 T a b l e 4 0 S r i L a n k a E x p o r t P r o m i s i n g I n d u s t r y ······································································ 1 5 9 T a b l e 4 1 C h a n g e o f K o r e a ' s V a l u e - A d d e d E x p o r t s ····························································· 1 6 2 Table 42 The Change of Value Added Ratio of Foreigners Generated by Exports b y I n d u s t r y i n K o r e a ···································································································· 1 6 4 Table 43 Korea Small Business GVC Participation Support Program ····························· 1 6 6

iv List of Figures

[Figure 1] Pattern of Annual Nighttime Light Growth of New Delh i a n d C o l o m b o ···· 7 [Figure 2] The Paradigm Shift in Urban Planning and Development S y s t e m ············ 1 2 [Figure 3] The formation of industries along the road network and the 1st C N T P ···· 1 4 [ F i g u r e 4 ] T h e 2 n d C N T P ············································································································· 1 5 [Figure 5] The 3rd C N T P ··············································································································· 1 6 [Figure 6] The 4th C N T P ··············································································································· 1 7 [Figure 7] The (7+1) National Territorial Structure and the π S t r u c t u r e ·················· 1 8 [ F i g u r e 8 ] T i m e l i n e o f I n d u s t r i a l B e l t s o f K o r e a ··································································· 2 2 [Figure 9] Gyeongbu Expressway of Korea, main industrial complexes and r e g i o n a l c l u s t e r s ·········································································································· 2 3 [ F i g u r e 1 0 ] S t r a t e g i c I n d u s t r i a l C l u s t e r s b y R e g i o n ······························································· 2 5 [ F i g u r e 1 1 ] U l s a n N a t i o n a l I n d u s t r i a l C o m p l e x ········································································ 2 8 [ F i g u r e 1 2 ] D r a w i n g o f U l s a n U r b a n P l a n n i n g ········································································ 2 9 [ F i g u r e 1 3 ] D r a w i n g o f C h a n g w o n U r b a n P l a n n i n g ( 1 9 7 7 ) ················································ 3 1 [Figure 14] Changwon National Industrial Complex Urban Planning ······························· 3 1 [Figure 15] Urban Planning of Gumi National Industrial Complex ··································· 3 4 [Figure 16] The of the 4th I n d u s t r i a l C o m p l e x o f G u m i ························································· 3 5 [Figure 17] Location of New Cities that Surround the Metropolis ( S e o u l ) ··················· 3 8 [Figure 18] Examples of Specific Industries (LQ) by Specific Reg i o n s ··························· 4 3 [Figure 19] Osong BioHealth Science Technopolis District Unit Planning and t h e A e r i a l V i e w ··········································································································· 4 5 [Figure 20] Iksan National Food Cluster District unit planning and the aerial view ··46 [ F i g u r e 2 1 ] I n f r a s t r u c t u r e P l a n n i n g ( d i a g r a m ) ········································································· 5 3 [ F i g u r e 2 2 ] S m a r t M a n a g e m e n t ( d i a g r a m ) ·············································································· 5 5 [Figure 23] Decision-making Processes in Industrial Area Designa t i o n ·························· 5 7 [Figure 24] The System and Hierarchy of the National Territory P l a n ·························· 6 3 [Figure 25] Land Use Pattern for Different Types of Industrial C o m p l e x e s ·················· 6 8 [Figure 26] An Example of Division between Industrial Area and t h e U r b a n ·············· 6 9 [ F i g u r e 2 7 ] D i a g r a m f o r A c h i e v i n g S m a r t C i t y P r i n c i p l e s ···················································· 7 1 [Figure 28] Comparison of Sri Lanka’s LPI by category: 2014 ········································· 7 4 [ F i g u r e 2 9 ] S r i L a n k a ’ s E x p o r t P r o c e d u r e ················································································· 7 8 [ F i g u r e 3 0 ] S r i L a n k a ’ s I m p o r t P r o c e d u r e ················································································· 8 0 [ F i g u r e 3 1 ] T e a E x p o r t e r w i t h A S Y C U D A W o r l d ····································································· 8 1 [Figure 32] Flow of Cross-Border Trade before and after Single W i n d o w ··················· 9 1 [ F i g u r e 3 3 ] C u s t o m s - O r i e n t e d S i n g l e W i n d o w ········································································ 9 3

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[ F i g u r e 3 4 ] S i n g l e W i n d o w I n f r a s t r u c t u r e M o d e l ···································································· 9 4 [ F i g u r e 3 5 ] L o g i s t i c s S i n g l e W i n d o w M o d e l ············································································· 9 5 [ F i g u r e 3 6 ] L o g i s t i c s S i n g l e W i n d o w M o d e l ············································································· 9 6 [ F i g u r e 3 7 ] L o g i s t i c s S i n g l e W i n d o w ··························································································· 99 [Figure 38] Improvement of Customs Procedure after Implementation of U N I - P A S S ···················································································································· 1 0 3 [Figure 39] Changes in Trade Volume, the Number of Overseas Travelers and C u s t o m s ····················································································································· 1 04 [Figure 40] Survey Result regarding Satisfaction of Korea’s Cust o m s P r o c e d u r e ···· 1 0 5 [ F i g u r e 4 1 ] C o n n e c t i v i t y t h r o u g h S i n g l e W i n d o w ································································· 1 0 6 [Figure 42] Gradual Construction of Korea’s Single Window System ··························· 1 1 0 [ F i g u r e 4 3 ] S i n g l e W i n d o w S e r v i c e P r o v i d e r ········································································· 1 1 1 [ F i g u r e 4 4 ] F D I I n f l o w s i n S r i L a n k a ························································································ 1 1 3 [ F i g u r e 4 5 ] K o r e a ’ s F D I P e r f o r m a n c e ······················································································· 1 1 7 [ F i g u r e 4 6 ] K o r e a ’ s F D I P r o m o t i o n R e g i m e ··········································································· 1 2 0 [ F i g u r e 4 7 ] K o r e a ’ s O n e - S t o p S o l u t i o n S y s t e m ··································································· 1 2 1 [ F i g u r e 4 8 ] A p p l i c a t i o n f o r C a s h G r a n t s ················································································· 1 2 3 [ F i g u r e 4 9 ] V i e t n a m ’ s E x p o r t s o v e r O w n e r s h i p ···································································· 1 3 3 [Figure 50] Value Added Ratio of Foreigners Generated by Exports by Industry i n K o r e a i n 2 0 1 1 ······································································································ 1 5 8 [ F i g u r e 5 1 ] S r i L a n k a T o p T e n V a l u e C r e a t i o n I n d u s t r y ··················································· 1 6 3

vi List of Abbreviations

ADB Asian Development Bank AP Advance Payment APTA Asia-Pacific Trade Agreement BTN Brussels Tariff Nomenclature BITs Bilateral Investment Treaties CCC Customs Cooperation Counci CCS Customs Clearance System CMT Cut, Make and Trim: CNTP Comprehensive National Territorial Plan COO Certificate of Origin CTEC Colombo-Trincomalee Economic Corridor CUSDEC Customs Declaration Message DA Documentary Acception DP Documentary Collections EDB Export Development Board EDI Electronic Data Interchange FCBU Foreign Currency Banking Unit FIZ Foreign Investment Zone FTZ Free Trade Zone FEZ Free Economic Zone GVC Global Value Chain IK Investment Korea IRD Inland Revenue Department KISC Korea Investment Service Center KOTRA Korea Trade-Investment Promotion Agency KSP Knowledge Sharing Program LADM Land Administration Domain Model LC Letter of Credit LPI Logistic Performance Index LQ Location Quotient MOUD Ministry of Urban Development NEDA National Economic and Develpment Authoruty NSO National One-Stop Services ODM Original Design Manufacturing: OEM Original Equipment Manufacturing

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OLOLI Ownership, Location, Internalization RCEP Regional Comprehensive Economic Partnership SAFTA South Asian Free Trade Agreement SLSI Sri Lanka Standard Institution. SOC Social Overhead Capital STDM Social Tenure Domain Model WTO World Trade Organization WCO World Customs Organization

viii Summary

Summary

Sri Lanka has its priority on rebuilding its economy ever since the end of civil war in 2009 and it has been experiencing rapid economic growth (e.g. 8% in 2010 and 2011) as a result. Also, Sri Lanka lies at the intersection among countries in , Asia, and ; therefore, its geographical location allows Sri Lanka to become the global hub for the distribution of goods.

Despite its continuous growth and potential, Sri Lanka suffers from problems like low Foreign Direct Investment (FDI), lack of competitiveness within small and medium sized industries, and inefficient customs clearance, which lead to low export rate and formed economic imbalance throughout the regions. Also, due to the civil war that lasted for a long time, Sri Lanka’s shipping infrastructure was limited in terms of expansion and maintenance, especially in the Eastern areas where much of the shipping infrastructure was destroyed. Even though the majority of the shipping and transport procedures take place on roads, Sri Lanka suffers from poor road infrastructure. Insufficient infrastructure and facilities lead to restricted economic growth due to lack of foreign investment and inefficiency in terms of economic activity. Therefore, the government of Sri Lanka is working to implement social infrastructure to achieve regional balance and sustainable development. Accordingly, the ADB has launched the Colombo-Trincomalee Economic Corridor (CTEC) project to form integrated social infrastructural network in Sri Lanka.

Under the purpose to establish the development plan for interregional economic balance in Sri Lanka, the KSP-ADB joint project contains policy implications for 1. applying urbanization strategy, 2. developing trade facilitation by implementing national Single Window, 3. enhancing FDI, and 4. increasing export from Small and Medium sized Enterprises (SMEs).

The Chapter One introduces successful examples of urbanization in Korea, and suggests policy implication for urbanization in Sri Lanka along with the Colombo-Trincomalee Economic Corridor. The project documented factors that led to successful urbanization in Korea. Korean government has connected Seoul with other cities like Ulsan and Busan where heavy/light

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industries were developed, and has considered ways to utilize human capital from the regions. In order to purse balanced development between regions, the Korean government considered the division of the industrial functions for each specific region and/or the allocation of specific functions into specific regions. Also, the Korean government responded to both the dramatic changing conditions within and abroad, and also accomplished the idea of sustainable development in the national territorial management and development processes.

Some policy implications for Sri Lanka urbanizations are as follows: first, in order to successfully launch economic corridor linking Colombo and Trincomalee in Sri Lanka, active policy formulation and implementation as well as consensus among countries and regions are required. In particular, the problems of hidden urbanization, messy urbanization, and air pollution that have direct impact on the citizen’s health should not be neglected. Policies to maintain the sustainable national territory and develop urban space should be considered together. Second, the government of Sri Lanka should take long-term perspective and take measures to reduce the social costs incurred between the development of urban and industrial complexes. Third, it is necessary to actively review Smart techniques to monitor environmental pollution, vulnerability of natural disasters due to urban development, energy and power management, and to improve traffic system. However, given the fact that specific planning indicators are different for the smart cities internationally, that the initial input costs for urbanization may be subject to increase, and that there is no national consensus on the smart cities, it is expected that localization of technology and planning techniques should be prepared from a long-term perspective by examining the efficiency of technologies and technologies that can be introduced later in the regional unit through a test bed (experiment project) and through anchor points between regional economic corridor development.

In Chapter Two, the project introduces the case study of Korean Single Window system in customs procedure, and explores ways to facilitate trade in Sri Lanka. The customs procedure’s roles are split amongst several agencies in Sri Lanka, and this disunity requires excessive documents. Also, lack of automation and computerization require costs and time, which place burden to traders. In order to solve this problem, implementing Single Window system that integrates necessary procedures for trade, and simplifying and integrating data are needed. Korean Single Window system, UNI-PASS, has become globally renowned for its capabilities and is now being actively exported to other countries.

To implement Single Window system effectively in Sri Lanka, it is important to consider following four points: first, the government should pursue strategically with mid- to long-term goals when implementing a Single Window system. Second, the construction of a Single Window system is the process of integrating the functions of various government agencies related to customs administration. Therefore, if problems arise due to differences in

x Summary

standardization, there is a need for a device to mitigate the conflicts between the governments by establishing standardization and revising laws and systems, which the ministries and agencies can follow. Lastly, it is necessary to continuously improve and adjust the system that reflects the opinions of the users in the step-by-step process to provide the maximum convenience to the users.

In Chapter Three, the project shares Korea’s experience of attracting FDI to provide implications for Sri Lanka. In Korea, Invest Korea (IK), the national investment promotion agency, provides all-round services for foreign investors including consultations, administrative assistance with investment notification and corporate establishment, support for business activities in Korea and conflict resolution. It also provides various investment promotion activities abroad using its own overseas network. Meanwhile, the Korean government has been providing various incentive programs to attract FDI such as tax support, cash grants, and industrial site support. Chapter Three also categorizes the FDI deciding factors considered by multi-national enterprises (MNEs) such as Samsung, and introduces the case study of Vietnam which is the top destination of Korea’s investment among ASEAN member countries. The Vietnamese government provides incentives for tax, land, and etc. to attract Korean MNEs; therefore, it increases trade and actively participates in Global Value Chains (GVCs).

To attract FDI to Sri Lanka effectively, four points should be considered. First, it is important for the Sri Lankan government to understand what industries to be developed further for the Sri Lankan economic prosperity and development, and how the benefits of FDI can be spread out into every area of the country and include all sectors and people in the country. Second, the Sri Lankan government needs to focus on how to diversify and differentiate incentive programs from rival countries in this region. Third, it is important to establish Industrial Cluster and the designate a specific zone or park to a specific industry, considering the zone’s infrastructure, environment, demographics, and industrial characteristics of the selected industry. Lastly, Sri Lanka needs to improve the existing FTAs to enhance business environment and increase greenfield investments from developed countries.

The Chapter Four investigates current situations and problems of Sri Lanka’s SMEs, and analyses methods to strengthen competitiveness of the MNEs in Sri Lanka by reflecting on Korean cases, and to increase Sri Lanka’s participation in the GVC. Like many developing countries, Sri Lanka is also concerned about how to strengthen the competitiveness of SMEs, which are the backbone of the industry. While it is possible to increase the competitiveness of SMEs through various methods such as inflow of FDI, securing of technological power, and strengthening export competitiveness, in this study we aimed to enhance the competitiveness of SMEs by participating in the GVC of SMEs in Sri Lanka. In a situation where the domestic market is limited, it is effective for the Sri Lankan government to let SMEs participate in export

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in order to increase industrial competitiveness.

In this chapter we take a look at Korea’s support for Sri Lankan SMEs to participate in the GVCs, see how Korea’s participation in GVC has changed overtime, and strategies that Korean SMEs took to participate in the GVCs. Based on the Korean experience, we suggest possible policies for Sri Lankan SMEs. First, it is necessary for the government to provide a virtual space where large foreign corporations and Sri Lankan SMEs can meet online to provide SMEs with the opportunity to participate in overseas GVCs. Second, as textiles, apparel, leather, footwear, and other industries are expected to reduce production costs the most in the global value chain, the government of Sri Lanka should prioritize the development of various policies to increase the participation of companies belonging to these industries in GVC. Third, by eliminating unnecessary trade barriers through the FTA and improving the investment environment of foreign companies, Sri Lankan government can attract global companies to invest in Sri Lanka. This will enable Sri Lankan SMEs to become more involved in GVCs. Lastly, as attracting FDI is essential for GVC participation, it is necessary to develop policies that provide additional incentives for foreign direct investors to encourage Sri Lankan SMEs to participate in the GVC.

Competition among countries and regions are fierce in the global market. The economies of Sri Lanka and Southwest Asia are expected to grow by following various ways to facilitate trade, FDI, or MNEs, and by benchmarking the experience of Korea as mentioned in this project. Korea can take advantages from this project as well by getting closer to Southwest Asian markets in advance. We expect this project to be the new stepping-stone for economic growth in Sri Lanka and expect Sri Lank to become the global logistic hub.

xii Ⅰ. Project Overview

Ⅰ. Project Overview

1. Project Background and Objective

1.1. Project Background

Sri Lanka has its priority on rebuilding its economy ever since the end of civil war in 2009; therefore, it has been experiencing a rapid economic growth as a result. The economic growth rates of Sri Lanka were 8% steadily from 2010 to 2011; furthermore, in 2013 its GDP per capita increased to 3,127 USD, which enabled Sri Lanka to be classified as low-middle income country rather than low-income country according to World Bank standards.

Despite the continuous growth of its economy, Sri Lanka still has some problems that must be dealt with. Low export rate and economic imbalance throughout the regions are problems caused by low Foreign Direct Investment compared to its potential, lack of competitiveness within small and medium sized industries, and inefficient customs clearance. When we take a look at the total amount of export, we can see its continuous decrease recently. Total amount of export in Sri Lanka decreased from 10.8 billion USD in 2014 to 9.7 billion USD in 2015. Sri Lanka, in 2016, experienced 1.8 billion USD of Foreign Direct Investment (FDI) which was 27% decrease of its 2.5 billion USD in 2015. Eastern, Southeastern and North-central regions occupied 6% each. The Northern regions occupied only 3%.

To overcome regional imbalance, Sri Lankan government has identified different ways such as encouraging the growth of the private sectors, building regional economic power and competitiveness, increasing trades, developing rural areas, and solving regional disparity. Along these efforts, the implementation of social infrastructure is necessary to achieve regional balance in Sri Lanka. Due to the civil war that lasted for a long time, Sri Lanka’s shipping infrastructure was limited in terms of expansion and maintenance, especially in the Eastern areas where many of the shipping infrastructures were destroyed.

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1.2. Objective

As a part of the solution to such issues, Sri Lankan government has proposed the project of Colombo-Trincomalee Economic Corridor (CTEC) to Asian Development Bank (ADB) in order to form an integrated social infrastructural network and to stimulate economic growth in the cities between Colombo and Trincomalee. CTEC will intersect from Colombo to Trincomalee of Sri Lanka, and the development of ports and transportation infrastructure will lead to the development of undeveloped regions. Through general industrial development methods, including the formation of high value added industrial clusters; therefore, the fundamental base for the national strategy that illustrates an export based economy structure will be formed. Therefore, CTEC is predicted to contribute to further growth by expanding economic opportunities in the urban hinterlands and connecting small towns or village centers with the industrial clusters.

To stimulate economic growth within the corridor, the Asian Development Bank (ADB) has launched projects that are associated with the implementation of economic corridors. Under the collaborated consulting works with the ADB and KSP, this project entitled ‘Support for Development of the Colombo-Trincomalee Economic Corridor in Sri Lanka’ seeks for the formation of new economic belt along Colombo-Trincomalee economic corridor allowing the exchange of human/physical assets with connection to multiple regions.

2. Project Activities and Expected Results

2.1. Project Activities

Under the purpose to establish the development plan for interregional economic balance in Sri Lanka, this project covers four research topics: 1. Urbanization Strategy, 2. Trade Facilitation, 3. Foreign Direct Investment, and 4. Small and Medium sized Enterprises.

First, through the analysis of the current status for the regions or key sites between Colombo and Trincomalee, KSP team explores urbanization strategies and methods for the production of small towns along with policies and systems of Korea’s urbanization and experiences of forming new cities.

Second, this project identifies and solves problems in Sri Lankan distribution industries by referring to the successful electronic customs clearance and Single Window customs system in Korea. The focus is on how to improve Sri Lanka’s environment of physical distribution

2 Ⅰ. Project Overview

and to facilitate trade activities.

Third, this project analyzes the obstacles that hinder Foreign Direct Investment in Sri Lanka, and explores methods to attract Foreign Direct Investment based on Korean cases.

Lastly, this project investigates current status and problems of Sri Lanka’s small and medium sized enterprises, and analyzes methods to strengthen competitiveness of the MNEs in Sri Lanka by considering Korean cases, and to increase Sri Lanka’s participation in the global value chain.

2.2. Expected Results

There are three main predicted effects from this project. First, we expect to suggest economic development plan for Sri Lanka's east-west regions by understanding the local demands in Sri Lanka.

Second, by sharing Korean successful experiences, we expect to establish strategies to enhance MNEs and to facilitate trade in Sri Lanka so that this project would lead to more regional balance, continuous economic growth, increasing middle class, and stronger domestic markets in Sri Lanka.

Lastly, Korea can be benefited from this project as well by getting closer to Sri Lankan markets in advance, which is the possible logistic hub in Southwest Asia, and by increasing trade and investment with Sri Lanka. Also, the network of human capital between Korea and Sri Lanka will be the foundation of industrial cooperation in the near future. In addition, as many cases from the previous growth experience of Korea are reconsidered in this project, it can also give ideas for further economic growth in Korea.

3. Project Implementation Plan

The details of this project are as follow: First, for urbanization strategy and for creation of small towns, this project is based on the industrial structure of Sri Lanka and to investigate the demand, location, shape, type, production and employment status. By looking at the formation of Korean industrial complexes that considered both regional balances and production/manufacture/distribution methods, models for Sri Lankan industrial complexes (country, foreign investment, general, agricultural, and etc.) are designed. Also, Korean land information systems and other foreign cases that are being the standards for the LADM (Land

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Administration Domain Model) and STDM (Social Tenure Domain Model) are considered to suggest improvement schemes for land registering systems and intellectual informatization efficiency in Sri Lanka. This project adopts a Smart City Index that is applicable to Sri Lanka’s current status and makes suggestions to implement smart-city-related technologies, functions and business models.

Second, this project introduces the case studies of National Single Window and explores ways to facilitate trade in Sri Lanka. After analyzing automation of Sri Lanka’s custom clearance and the state of computerization, this project identifies parts that require immediate improvement. Examining the success of Korea’s trade facilitation as the fundamental ground, this project illustrates a roadmap to enhance Sri Lankan customs system and procedure, and then suggests step-by-step improvement strategies. Through adopting commendable systems such as UNI-PASS in Korea, Sri Lanka can improve the efficiency of customs administration due to increase in trade. Also, distinct characteristics and specific factors of Sri Lanka are considered prior to the adoption of Korea’s experiences and technology.

Third, this project seeks the ways to increase Foreign Direct Investments (FDI) in Sri Lanka. We analyze Sri Lanka’s FDI records for each sector, find areas that need FDIs, examines the current Sri Lankan government policies on FDI, and discover ways to attract FDIs in Sri Lanka. Successful Korean cases of attracting FDIs are examined along with the process of liberalization, and the correlation between Korea’s FDI records and its economic development is studied as well. For Sri Lanka to effectively follow Korea’s FDI examples, distinct characteristics and current conditions of Sri Lanka are considered from taking local experts’ opinions. As a result, we devise rules and methods to attract FDIs that are suitable to the current situation of Sri Lanka’s policies and systems.

Lastly, this project investigates the method to increase competitiveness and GVC participation of small and medium sized enterprises (SMEs) in Sri Lanka. In precise, detailed analysis on ‘why’, ‘what’, ‘how’, ‘evaluation’ and ‘benchmarking’ are conducted to analyze competitiveness of Korean SMEs and to make implications for Sri Lankan SMEs.

To suggest methods for Sri Lanka's active involvement in GVC, this project examines Sri Lanka’s current participation in GVC for each industry as well as its competitiveness before choosing the particular field with the greatest industrial potentials. In details, we follow the work of Timmer et al (2016); moreover, the analysis of Sri Lanka’s levels of participation in GVC for each industry is identified with reference to the OECD World Input-output table and Sri Lanka’s National Input-output table.

4 Ⅱ. Urbanization Strategy

Ⅱ. Urbanization Strategy

1. Current status and the future of the urbanization of Sri Lanka

1.1. General Information of the Site

1.1.1. Introduction

The South Asian infrastructure (transportation/computer network) forms a medium and large scale clusters in Pakistan (Islamabad) ­ India (Delhi) ­ Southern India (Mumbai) ­ Bangladesh (Dhaka) and Sri Lanka (Colombo). Even though Sri Lanka displays high level of connectivity between countries, it lacks in connectivity at the national level [World Bank, (2016)].

Korea's regional road network construction and metropolitan urban development models are considered as one of the best practices by the World Bank and United Nations-Habitat (UN-Habitat). Korea’s examples can be applied to enhance intercity connectivity in East Asian regions. This report aims for the increased intra-connectivity between the key regions of Sri Lanka through expanding the infrastructure. The report analyzes the case studies of Korea, Japan and Taiwan to derive relevant implications, planning techniques, and other related factors.

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Table 1 Global Competitiveness Index, Infrastructure Rankings

GCI ranks Infrastructure Rank Percent of Roads paved

Sri Lanka 󰀺 65 󰀺 73 22%

India 󰀺 60 󰀺 85 18%

Butan 󰀺 109 󰀺 87 38%

Bangladesh 󰀺 110 󰀺 132 under 3%

Nepal 󰀺 117 󰀺 144 5%

Pakistan 󰀺 133 󰀺 121 under 3%

Source: World Bank (2016)

Accordingly, Sri Lanka’s Colombo-Trincomalee Economic Corridor (CTEC), is an extensive project that covers industries such as agriculture, service, tourism, and trade. Hence, Sri Lanka needs to review the current status and the locational conditions of strategic base areas (cities) prior to the construction of infrastructure and the allocation of functions. It is also necessary to identify the basic conditions involving the evaluation of existing physical, social, and natural conditions and related systems, as well as referring to the Sri Lanka Urban Vision 2030 when selecting the strategic base facilities (cities). In particular, this economic corridor requires the implementation of a complex internationalization plan that encompasses small and medium sized enterprises (SMEs), the National Single Window, and the Global Value Chain. The location of the facilities must be evaluated and reviewed thoroughly.

1.1.2. Current status of urbanization

According to the United Nations, by 2030, 250 million people are expected to live in Southwest Asia. The growing population will increase urban population inflow and the following are necessary in achieving sustainable urban environment: expansion of transportation, residential and environmental infrastructures.

Sri Lanka’s urbanized area is expected to increase from 17% in 1990 to 34% by 2050. This is relatively higher than other developing countries. It has also experienced the highest urban expansion rate between 1999 and 2000 which led to some of the main urbanization problems such as urban sprawl and ribbon/strip development.

6 Ⅱ. Urbanization Strategy

Figure 1 Pattern of Annual Nighttime Light Growth of New Delhi and Colombo

Urbanization Pattern (New Delhi, 1999-2000)/Urbanization Pattern (Colombo, 1999-2000) Source: World Bank, 2016, Leveraging Urbanization in South Asia, World Bank

In particular, the outskirts of Colombo, which is the center of the economic corridor, reflect high levels of congested urbanization along its major roads and railway networks. To be specific, the outskirts of Colombo’s hidden urbanization are beyond the usual statistical expectation; more than twice the existing urban area. The starting points of this project, Colombo, and /Matara, are confronted with the problem of overgrowing cities as their outskirt areas combine with the adjacent residential areas. Therefore, the economic corridor of Colombo and the construction of small cities should identify methods to prevent the congestion/hidden urbanization. At the same time, residential problems, employment issues, and living environment for the vulnerable population residing in the target area and the adjacent areas must be taken into account.

Meanwhile, World Bank's analysis shows how more than one-third of the population living in urban areas of Sri Lanka are statistically unclassified as a resident of 'urban areas'. This is not due to decrease in population in the national territorial/city in developed countries, but it is caused by the hidden urbanization in the process of urban planning and thereby requires most immediate attention. While the population density of Sri Lanka is approximately 300 per km2, Colombo has a population of 2,000 peopleper km2. , , Matara, and Kandy also have high population densities.

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From the industrial and economic perspective, Colombo-Kandy-Galle Belt is responsible for more than 80% of the country's total production, among which Colombo accounts for 50%. However, 50~75% of the low income (below 40% income level) groups of Colombo lives in the belt. Thus, urban problems due to industrialization and urbanization are continuously raised. Meanwhile, the primary industries are shrinking due to urbanization. Unlike other countries in Southwest Asia, the Sri Lankan government had continued to expand and supply basic infrastructure in rural areas. For such reasons, Sri Lanka is expected to have a relatively small incidence of farming related urban problems because comparatively less number of people tend to give up farming in Sri Lanka.

Table 2 Population Statistics and Population by Major Cities

Population distribution states Region Population(2008)

Colombo 2,488,000 Gampaha 2,152,000 Kaluthera 1,118,000 Kandy 1,396,000 483,000 749,000 Galle 1,063,000 Matara 822,000 Hamabanthota 558,000 Jaffina 603,000 Mannar 102,000 Vauniya 167,000 Mullaitivy 150,000 Kilinochchi 150,000 530,000 624,000 Trincomalee 361,000 1,535,000

Source: Kurukulasuriya, 2012, Sri Lanka 2011-2030 National Physical Plan and Project Proposals, National Physical Planning Department

8 Ⅱ. Urbanization Strategy

The major environmental pollution source in Sri Lanka is air pollution caused by transportation. The number of registered vehicles has surged from 4.4 million (2011) to 6.3 million (2016). Also, 70% of the total registered vehicles in Sri Lanka are motor vehicles with unspecified emission regulations, which contributes to exacerbating air pollution problem. The air pollution index exceeds 3.6 times the World Health Organization (WHO) regulatory standards, and about 7,792 people died from air pollution related diseases in 2016. Colombo is the fourth worst city in the world to live in, not only because of lacking architectural/transportation infrastructure, but also due to accelerated heat island effect caused by growing greenhouse gas emissions (GHSs).

During the last 30 years, Colombo experienced rapid industrialization and urbanization which created illegal landfills and residential areas. As a consequence, 68,800 residential areas of Colombo are considered to be extremely vulnerable to natural disasters such as heavy rain. The Sri Lankan government provided various measures to solve this problem in 2012. However, implementation of a system that can effectively and systematically manage the measures as well as the residential areas is necessary.

1.2. Methodologies and Vision

Sri Lanka has set up a plan to build a transportation infrastructure by 2030. The plan aims to extend the railroads by 50% (2,179km extension when completed) and the roads by 1,000km (12,679km when completed). Fortunately, the starting point and destination of the economic corridor, the Colombo-Trincomalee, already has a wide road network. This allows efficient use of transportation facilities, especially when the new construction (Kuruneglal-Harbana) is complete and the transfer for the new railway improves.

The final destination of the economic corridor, eastern Trincomalee, has regional industries which are highly concentrated on eco-tourism that utilizes natural resources. Current plans outline the establishment of strategic areas and/or facilities for export as well as improving the living environment, conservation management, and port-related industries. The current plan implies that Colombo (the starting point of the economic corridor) will maintain its role as the center of economy, industry, finance, production and export. Moreover, the North Central Metro Regional Area Plan of India and nearby area will cater for tourism, trade, and the residential improvement. The South will be responsible for the protection of historical and natural resources/environment, as well as the development of the strategic belt through the efficient use of subway. Moreover, the South (Mahiyanganaya, Padiyatalawa, Bibile) will become the hub for the formation of living environment.

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When looking at the integrated industrial portfolio that outlines the direct and indirect impacts of Sri Lanka’s exports, the main industry of Sri Lanka is tourism, textile (clothing), and agriculture which includes tea and rice. The clothing industry has a share (22.5%) of the European market (45% of the total exports), but lacks product diversity and the price competitiveness is lower than that of India and Pakistan [World Bank, (2015)]. Therefore, by looking at the current industrial structure in the establishment of the main business plans and evaluating the mid to long term industrial portfolio, the step-by-step procedure that is applicable for each industry as well as national/regional territorial plans is required.

National territorial planning and development must consider the mid to long term perspective, the key industry of the country and national development. Also, Sri Lanka must actively cope with the future changes of its neighboring countries such as the development of smart cities in India. The development of the economic corridor aimed at Sri Lanka in the mid to long term particularly requires the establishment of plans and the consideration of many different aspects. These include designating key industry at the national level and establishing industrial infrastructure based on industrial portfolio, along with the development of national infrastructure for the benefit of mid and long-term development and growth of the country. The economic development of under-developed countries and the countries with emerging economies is based on industries. Thus, the formation and regulation of industrial complexes and the surrounding facilities are regarded essential for sustainable management of the national territory.

2. The Development of Korea’s National Regional Plan

2.1. The Characteristics of Korea’s National Regional Plan

2.1.1. Overview

From the perspective of the national territorial development and urbanization, South Korea has more than 90% of the population living within 8 cities, accounting over 1 million. The national GDP in 2015 is estimated to be 1.38 trillion U.S. dollars with GDP per capita of 27 thousand U.S. dollars and most people live within ‘a half-day life zone’ in terms of connectivity to other regions.

Since the 1960s, such growth has been enabled by the implementation of national territorial and urban planning methods that resulted in the development of the national territory and in the industrial advancement. Especially through the establishment and improvement of

10 Ⅱ. Urbanization Strategy

Korea’s Comprehensive National Territorial Plan (CNTP), which were strategically managed and administrated by the government, Korea was able to experience industrial growth. These implications regarding the growth of Korea’s national territory and urban planning as well as the CNTPs can be provided to the developing countries or countries with emerging economies.

The CNTP sets up the basic blueprint for the use, development and conservation of the Korean national territory. CNTP was first designed and applied in 1972 and was active until 1999. The Korean government monitored and reviewed the CNTP every 5 years and when necessary, made changes to fit to social and economic changes that manifested at the time. CNTP carried the title of “the Comprehensive Plan for the Construction of National Territory” until 1999, and a year later it was given a new name as “Comprehensive National Territorial Plan”. This plan considers the changes in the circumstances abroad and within, thus it is susceptible to change. At the same time, it is an upper plan for the related laws. In the past 40 years of rapid growth, the main role of the Korean land use plan was to concentrate the limited capital and technology into a specified region for maximized economic growth. This was powerful in the sense that the government-centered decisions had influenced the urban area as well as land use planning and management.

In order to construct and develop the local government system as well as to solve urban problems, Korean government introduced "The Urban Master Plan". The Urban Master Plan was first introduced in 1981 to prevent inappropriate or arbitrary changes in zoning. By involving the mayor and the governor in the urban planning processes, the limitations of the initial Urban Master Plan (1962), such as the future-oriented national territory and/or land development as well as the lack of flexibility in the use of land, were considered in the local government’s pursuit for maximized efficiency in the use of urban space.

Since the 1990s, the introduction of the various paradigms for the strengthening of local governmental systems, the utilization of future-oriented national territory, and the participation of the citizens has enabled Korea to establish the current system of national land use management. In 2002, Korea enacted the "National Land Planning and Utilization Act" which integrates the Urban Planning Act and the Act on The Utilization and Management of the National Territory. This Act is meaningful because it separated urban planning into the Urban Master Plan and The Urban Management Plan. In the past, the urban area and the non-urban area were divided into the Urban Planning Act and the Act on The Utilization and Management of the National Territory respectively. The introduction of the National Land Planning and Utilization Act enabled unification of the two previous laws and thereby facilitated efficient management and operation of the system.

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Therefore, Korea’s integrated land use management system pursued maximized economic development with the efficient use of limited national territory. This was a top-down approach that could be applied to undeveloped land, prevent overpopulation in metropolitan areas, and promote government-centered economic growth.

The shifts in the paradigm, such as the changes in domestic and external circumstances in the related plans of Korea, the demands for sustainability of the national territory and urban space, or the implementation of plans at the local level were reorganized into a triangular horizontal structure as shown in Figure 2. The paradigm is expected to continuously change into the future.

Figure 2 The Paradigm Shift in Urban Planning and Development System

Source: Park (2004)

12 Ⅱ. Urbanization Strategy

2.2. Transition of the CNTPs

2.2.1. The 1st CNTP (1972~1981)

The beginning of the contemporary Korean urban planning is marked as the 1934 Town Planning Law of the Japanese Colonial era. In January 1971, the Urban Planning Act was completely revised for industrialization/urbanization. The main reason for the complete revision was because the existing planning act and regulations could not solve various urban problems caused by rapid industrialization and overcrowded population. Overcrowding was common in large cities such as Seoul where the rate of urbanization struck over 50% at the time and in the 1970s, the national income had rose to 437 dollars with a dramatic increase in export of 1,133 million dollars. The economic development of the 1960s had brought about the necessity for the expansion of Social Overhead Capital (SOC) in terms of transportation, electricity and communication.

The Revised Urban Planning Act responded to the changes in social and economic changes and included policies for limited facilities area, development restriction area, as well as prearranged urban development zone. Through the 1st CNTP (1972-1981), which was enacted on October 1971, the Korean government not only sought for solutions to the problems related to overpopulation and overconcentration of industrial buildings in Seoul, but also created nodes to maximize the efficiency of use with limited resources which were intended to support Korea’s industrialization and economic growth. Through connecting the nodes (specific areas) using transport and expanding SOCs at the same time, the government pursued abundant supply and efficient use of land and environment. The government also aimed to enhance in the quality of the living environment which showed that the government had considered cultural and environmental aspects as well as the urban.

The construction of Gyeongbu expressway (1968) emphasized the connection of Seoul and Busan in one-day life zone as well as the formation of main industrial complexes along the southeastern coastal industrial belts. Through building highways (expressways), roads, and ports to link major industrial estate and metropolitan regions, it was possible to connect the relevant regional infrastructures which led to the development and growth of industrial cities and metropolis. The construction of the Gyeongbu expressway was completed on July 7, 1970, with the length of 428km (currently 413km), width 22.4m, and under the budget of 42.9 billion KRW which was 23.6% of the national budget of that time. This not only strengthened connectivity and network by encompassing regions like Suwon, Cheonan, Daejeon, Yeongdong, Hwanggan, Gimcheon, Daegu and Gyeongju, but allowed Ulsan, Pohang, Masan, Changwon, Yeosu to prosper industrially through direct/indirect impacts.

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Figure 3 The Formation of Industries along the Road Network and the 1st CNTP

Source: Korea Research Institute for Human Settlements (2012)

In the pursuit for the efficient management of the national territory, the 1st CNTP defined the nation with Han river, Geum river, Yeongsang river and Nakdong river as the catchment areas. Urbanization method focused on the river enabled the efficient supply of public /agricultural water catered for each region. This shows efficient use in the division of limited national territorial resources. Based on the growth of rural provinces through the development of the key areas/sites along the Gyeongbu expressway, it is meaningful in the sense that this urbanization method had partially contributed to the dispersal of overcrowded population, which is one of the problems experienced in undeveloped countries.

2.2.2. The 2nd CNTP (1982~1991)

The 2nd CNTP aimed to improve the national territorial balance as well as the national welfare under the similar context as the 1st CNTP; it initially grew with the development of the local regions but expanded further to the metropolitan areas, the central, the south western and the south eastern regions, creating regional economy. Reflecting on the success story of the southeastern industrial belt of the 1970s, the 2nd CNTP aimed to expand that effect to the other regions of the national territory. Through the expansion of SOCs, improved transportation and communication for balanced regional development, which were the main characteristics of the 1st CNTP, it sought to designate key areas in order to create a basis for the regional

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growth of each region. This emphasized the notions of sustainability of the region and the formation of economy in order to enhance the position on the global level.

On the other hand, it became evident that the issues concentrated on metropolitan areas, such as air pollution, water resources, residential environment and the loss in the motivation to pursue balanced regional development, collectively rendered the government to seek for the installation of industrial and related facilities based on location analysis. The main objectives set by the government was to prevent environmental pollution due to industrialization. Along with the attempt to solve environmental problems, unqualified factories of the metropolis were transferred to the outskirt areas. The storage site for raw materials was formed for stable and sustainable supply and the rural-based industries that were engaged in the active use of raw materials of the rural area were encouraged and supported for the growth and prosperity of the primary industries.

However, the plan had to be revised in the 2nd CNTP of 1987 due to the lack of action programs, the aggravation of regional gap, and the Olympic Games that were expected to be held in 1988. Responding to the changes in the circumstances within and abroad, the national territorial development encompassed Jeju, Taebaek, Dadohae, and 88 Olympics Expressway. At the same time, it pursued regional development in areas including Jeonju and Gwangju for balanced development, and rejected large scale industrial complex but allocated small and medium sized industries in rural province. This plan is perceived to have contributed to the 1st CNTP and the efficient planning and use of the national territory.

Figure 4 The 2nd CNTP

Source: Korea Research Institute for Human Settlements (2012)

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2.2.3. The 3rd CNTP (1992~2001)

The objectives of the 3rd CNTP’s detailed strategy enabled facilitation in the growth of the rural area, the restriction in the growth of the metropolis, and the increase in the exchange and cooperation between the South and the North. Embracing the notions of growth, balance, stability and independent economic structure, the 3rd CNTP (1992-1999) sought to construct the new industrial areas in the form of clusters. With a great emphasis on balanced and decentralized national development, the 3rd CNTP was designed to create multi-centered national territorial structure and to improve the central function of large cities, as well as to manage such cities and their surrounding areas located outside the metropolitan areas of Korea.

The 3rd CNTP attempted to improve the limitations of the previous CNTPs and create decentralized structure of the rural national territories. One of its important results was the growth of the rural areas due to the restricted growth in the metropolitan areas. The diversification in the industrial portfolio that responded to globalization and in the locations of the industries were also meaningful results. To be specific, five new cities of the 1stst development phase (Bundang, Ilsan, Pyeongchon, Sanbon and Jungdong) facilitated the dispersal of the metropolitan population of 1.17 million, through which the housing supply increased from 69.8% in 1985 to 74.2% in 1991.

Figure 5 The 3rd CNTP

Source: Korea Research Institute for Human Settlements (2012)

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By developing and interconnecting the eastern, southern, and western coasts with a U-shaped model of industrialized and localized city network, the 3rd CNTP aimed to build a sustainable and comprehensive transportation network (7x9 arterial road network) that would help facilitate South-North exchanges and prepare for the unified Korea in the long future. Such transportation network was also perceived to enhance connectivity in order to support accelerated exchange of goods (trade). Moreover, along with the expansion of the investment for housing, waterworks/sewerage, and environment orientated towards the increase in livability for the citizens, management systems related to environmental preservation and national territorial use were implemented and exercised.

2.2.4. The 4th CNTP (2002~2020)

The 4th CNTP emphasized notions of balance, greenery, openness and unity. The Korean government made these shifts in the face of the economic crisis of the late 1990s which allowed the 4th CNTP to set up the open integration among the main regions—Northeast Asia, South Korea, and North Korea. This led to cooperative development of the Korean national territory.

Figure 6 The 4th CNTP

Source: Korea Research Institute for Human Settlements (2012)

The 4th CNTP (2006-2020) has been oriented towards the multi-nucleus networked spatial structure of the national territory, which embraced integrated development and environmental preservation. The planning period was extended from 10 years to 20 years. As a response

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to the changing paradigm of government administrative activities, the plan was predominantly designed to achieve balanced development of the national territory and to emphasize the multi-functional administrative city plan. The multi-functional administrative city plan refers to the relocation of public agencies outside the Capital Region of Korea and related Innovative Cities. To be specific, the planning for administrative city involves moving the main public agencies to in Seoul and Gwacheon to Chungnam Yeongi-gun (currently Sejong Metropolitan Autonomous City) in order to pursue balanced development achieved through the division of urban functions.

Figure 7 The (7+1) National Territorial Structure and the π Structure

Source: Ministry of Land, Infrastructure, and Transport

Since 2008, President Lee’s administration has been trying to revise the Revised 4th CNTP in order to make the plan to set its base on greenery (environmentally-friendly) growth and ‘5+2’ area-wide economic region. Greenery growth stressed the ideas of competitiveness, welfare, sustainability and unity. Moreover, it emphasized balanced regional development through building pi-shape territorial axis open towards Pan Yellow & Pan East Sea Regions (to serve as “strategic gateway”) and also functioned to promote the regional competitiveness. For regional competitiveness, the (7+1) economic belt/region encompassing the metropolitan areas, Kangwon province, Chungcheong province, Jeonbuk province, Gwangju province, Daegu province, Busan Province and Jeju Province was constructed to form the strategic basis of development. The strategic development refers to the fact that the 4th CNTP had created 163 innovative cities and enterprise cities through the approach which considered the specialization of the different regions.

In brief, CNTP has acted as a framework that considered development in an environmentally friendly perspective. It is also halfway through the change between a plan of centralist/

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top-down nature to a plan based on the effective and active participation of regional interest groups and stakeholders. This means selecting the bottom-up approach rather than the top-down approach so that local citizens can also be involved in the national territory planning processes.

2.2.5. Summary and Implications

From looking at how the Korean government was involved in the establishment and implementation of CNTP, it is possible to draw a strategy that explains how the division of the industrial functions for each specific region and/or the allocation of specific functions into specific regions had pursued balanced development between regions. Not only had the Korean government responded to the dramatic changing conditions within and abroad, but also accomplished the idea of sustainable development in the national territorial management and development processes. Thus, it is recommended that the strategy and implementation of Sri Lanka’s Economic Corridor Development adopt such techniques if necessary. Throughout the history, Korea’s CNTP has acted as a blueprint or a milestone in the growth and development for many developing countries. The characteristics of the CNTP can be divided into three key aspects.

Firstly, during the period from 1960 to 1980, Korea’s territorial development policies were centered on economic development in terms of supplying infrastructure such as roads, railways and industrial complexes. After the 1990s, and after the introduction of the provincial/local government, the focus was mainly narrowed down to the detailed and practical regional development. Throughout the 2000s, the balanced national territorial development had formed the basis to contribute to actual growth.

Secondly, CNTP responded to the situations and changes at the time. The changes in circumstances at both the national and international level were considered and appropriate responses were prepared. In particular, the industrialization of Korea between the 1960s and the 1970s had brought many changes to the table. These changes include the diversification in the supply of investment and the expansion of SOC that were tailored to the goal of increasing exports aimed at the development of the national economy. Unfortunately, the global oil crisis had induced the degradation in the macroeconomics. The policies then had to be shaped and molded to fit to the idea of improving the quality of the structure which were described by the notions of growth, equilibrium and efficiency. After the 2000s, plans were tailored to meet the needs of the environment preservation and protection. It also emphasized accompanied growth at the regional and national level; and responded appropriately to the changes in global circumstances operating at the time.

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Table 3 Table of Summary Outlining the Transition of CNTP

Category 1stCNTP 2ndCNTP 3rdCNTP 4thCNTP Duration 1972-1981 1982-1991 1992-1999 2000-2020 The point of establishment 319 USD 1,824 USD 7,007 USD 10,841 USD GNP (per capita) - response to the changes in 21stcentury - growth in the national - improvement in the - lack of SOC and lack of - new national vision for living environment Background power competitiveness the prosperity of the - promotion of - solve overcrowded autonomous regional country and the industrialization population in the development enhancement in the metropolis areas life quality of the citizens Method growth based development regional development balanced development balanced development 4 economic belts Area 4 Major Rivers 4 specific areas 7 regions 10 regions - formation of a - maximize land use decentralized national planning efficiency structure Point: execute - pursue production and st - increase in the basis of - population dispersal 21 centurynationa national territorial - expand development resource efficient lterritorial plan national territorial Objectives development potential - development/ - improve social welfare management Goals: preservation of the - preserve national - improve social welfare balance/greenery/ope national resources territory and preserve national nness/unity - improvement in the territory living environment - prepare for the possible unity of South and North Korea - growth of the rural - form open and - form multi-nucleus areas/restrain growth integrated national - create large scaled structure in the of the metropolis territory industrial basis national territory with - creation of new - encourage regional - maintenance of development of the industry and competitiveness transport, surrounding regions advancement of the - form healthy and Development communication and - restrain growth in industrial structure pleasant national strategy and the supply of water metropolises such as - form integrated and territory policies and energy resources Seoul, Busan, rapid logistics network - build rapid transport - develop less developed - expand SOC for - increase in investment and information areas and promote regional development in living and exchange networks regional scale purposes environment - manage areas of development - promote and facilitate - manage areas of cooperation and development in less exchange between exchange between developed areas South Korea and the South Korea and the North Korea North Korea - growth of the west - open and integrated - establish an industrial national territory ­ - encourage balanced coast new industrial belt in the metropolis areas and rural build coastal axis + the area and the southeast development across provinces east and west inland coast the national territory axis - lack of specific and - development Characteristics - pursue growth based orientated approach - promote balanced and limitations development detailed enforcement and prevent improper- regional development - concentration of plans led to continuous - enforce strategies that regional disparity and development population and - poor response to create a harmony industry along the environmental between development problems globalization, Gyeongbu expressway openness, and and environment for the active preservation localization of the national territory Source: Local business manual, Ministry of Construction and Transportation (2007)

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Lastly, the government pursued diversity in the level of development with respect to the changes in the implementation methods. To be specific, the 1st CNTP and the 2nd CNTP aimed for the interconnectivity between cities as well as the development of the local economy through the allocation of functions of the industrial and manufacturing complexes. Meanwhile, the 3rd CNTP and the 4nd CNTP discussed the formation of the new administrative capital, the innovative cities and the enterprise cities. These were predominantly based on leading industries of the broader regional economic belt with region-specific and strategic businesses and highlighted the importance of achieving locational balance. This was the most important factor that explained the success in the variety of different businesses that were ultimately based on the selection of a ‘key point’ or a ‘strategic area’.

3. Emergence and Growth of Industries and Industrial Comples

3.1. Overview

Table 4 Increase in Urban Population

(Unit %, 10,000 people) Category 1960 1970 1980 1990 2000 2005 2010 2012 Total 2498.9 3143.5 4339.0 4796.4 4896.4 4878.3 5051.5 5094.8 Population Urban 978.4 1575.0 2573.8 3555.8 4237.5 4398.2 4593.3 4638.2 Population Rural 1520.5 1568.5 1171.1 783.2 557.9 480.1 458.2 456.6 Population Urbanization 39.1 50.1 68.7 81.9 88.3 90.2 90.9 91.0 Ratio

Source: Korea Industrial Complex Corporation (2015)

Source: Korea Industrial Complex Corporation (2015)

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Urbanization rate of Korea increased rapidly from 39.1% in 1960 to 88.3% in 2000. Nevertheless, many reports reflect positively towards industrialization and urbanization which have arguably enabled Korea's economic growth. In particular, the expansion of urban infrastructures such as the Gyeongbu Expressway, along with the urbanization and fostering the growth of the national key industries, are considered as important case studies for developing countries.

Figure 8 Timeline of Industrial Belts of Korea

Source: Summarized by the author(s)

Especially until the 1970s, the light industry-based development contributed to the increase in production and exports in the short term. This led to greater reliance on imported raw materials and equipment, eventually resulting in the increased international trade surplus and investment was centered on the Gyeongi-Busan axis along the Gyeongbu (Seoul to Busan) expressway (highway).

Along with the 1st and 2nd CNTP, the weakening of global competitiveness of the light industries triggered the government to create and promote heavy and chemical industries. Under government-led plans and policies, large-scale coastal industrial complexes were developed along southeastern coastal areas in the form of massive clusters and the related industries led to increase in exports which resulted in development of the national economy. Moreover, each export/import based regions in the surrounding cities as well as the growth of industrial cities gave opportunities for the industry and the city to grow together as one.

The southeastern industrial belt of Korea and the start of industrial development was fueled by the construction of Gyeongbu Expressway. The industrial clusters formed along the Gyeongbu Expressway of the southeastern national territory allowed the economic development as well as the formation of one-day life zone. Also, coastal specialized industrial complexes such as Gumi, Ulsan, Changwon, and Pohang are some of the examples that were made possible by the Gyeongbu Expressway. These areas and neighboring areas were directly and indirectly linked to the Gyeongbu Expressway as well as the development of industrial cities, which reinforces the importance of location in the development and formation of industrial complex.

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Gyeongbu Expressway of Korea, main industrial Figure 9 complexes and regional clusters

Expressway Network (2015) 7 Pilot Complexes (2005)

12 Industrial Complexes 5+2 Pan Regional Clusters (2014)

Korea, with respect to the Industrial Location and Development Act (Article 2, paragraph 2), defines industrial complex as “complexes planned and developed according to a comprehensive plan for the collective establishment and development of factories.” In paragraph 8 of Article 2, an industrial complex is defined as “a collective land designated and developed according to a comprehensive plan in order to install factories, facilities related to

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knowledge-based/cultural industry, information and tele-communications/recycling industry, resource accumulation, and logistics, along with related facilities such as education/research /business/support/information processing/logistics, and affiliated facilities for enhancing the functions of the facilities stated above including residential/cultural/environmental/park/ medical/tourism/sports/welfare facilities”.

In particular, the role of the public is very important in the sense that the Korean government led the development of industrial complexes. In general, industrial complexes are private industrial complexes founded by capital contributions from major domestic or foreign firms. This is one of the most common form of overseas entry made possible by attracting or investing in developed countries or using foreign capital. The second is a private joint-venture industrial complex developed by the private sector with support from the government subsidies or long-term loans. The third is a government industrial complex developed by the central government or the local government. The countries with emerging economies or developing countries have particularly undertaken a number of government-led industrial complex and industrial city projects to promote industrialization.

Table 5 Types of Industrial Sites

Type Purpose of Development Developer

National-scale industrial National industrial development promoted by MLTM complex the central government

General (Regional) Stimulus of regional City/Provincial Govt. industrial complex economies Planned Site (Industrial Site) Fostering of high-tech Urban High-Tech industries, including City/Provincial Govt. industrial complex knowledge, culture and IT industries

Agricultural Increased income of farming City/County/Provincial industrial complex and fishing towns Govt.

Increased productivity Individual Sites through the flexible Private corporations operation of industrial sites

Source: Industrial Location and Development Act

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In the formation of the public led industrial complexes Korea currently categorizes the types of industrial sites under the concept of planned sites as national complexes, general industrial complexes, and agricultural industrial complexes. This is also based on the location of the industry. Much of the focus in the past were centered on developing national industrial complexes for the growth of the national industrial complex. The establishment of the Urban/Town planning and the person in charge of designating such as the mayor or the governor were able to designate the industrial complex for the activation of each region. Such methods allowed the establishment and creativity to persist in the businesses that are catered for each region. But recently, the need for a system of categorization based on function, rather than the discretion of the designating authority, is being raised by some.

Figure below exhibits a summary of the specialized industrial complexes with their locations. They will be discussed further in the next Korean case studies section.

Figure 10 Strategic Industrial Clusters by Region

Source: Ministry of Knowledge Economy and Korea Industrial Technology Foundation “National Territorial and Regional Development Policy : Focusing on Comprehensive National Territorial Plan” (2012)

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3.2. The growth of the Korean Industrial Complexes and Urbanization

3.2.1. The Introduction and Growth of the Industrial Cities

Korea’s industrial complexes have fueled Korea’s economic development where 7 initial industrial complexes expanded nationwide during the ten-year period, forming 78 mini clusters with active network. Recently, the demand for hi-tech industry for future development and the decrease in size of the industries had acted as the basis for the 76 small sized industrial clusters. Gumi's electronics and machinery cluster, Changwon's machinery cluster, Gwangju's photonics cluster and Ulsan's automobile cluster are only few of the many success stories of Korea’s industrial clusters.

From the economic perspective, Korea’s 7 representative industrial clusters can be analyzed to show the trend of the economic growth. Total production of the seven clusters in 2014 was 387.4 billion KRW1), export amount was 1,560 billion dollars, and employment was 658,000. These figures­compared to those of 2004­have increased by 2 folds, 1.7 folds, and 1.6 folds respectively, reflecting a great increase over the decade.

The most prominent change is the 12% annual increase in the number of cluster participating firms led by the government; the number of firms increased from 2,706 in 2005 to 7,512 firms by the end of 2014. This is due to the active exchange of information and social network between the firms. Along with the increase in the number of participating firms, number of network activities also increased to 7,846 activities in 2014, which is a consequence of 16.3% annual increase since 2005. Korea’s industrial complex is still growing.

The Korean government has been most actively involved in the growth and improving the industry from the past with the development of the CNTP, which led to the formation of surrounding (hinterland) cities for the industrial workers and through which the government attempted to achieve the ultimate goal of balanced regional development. However, changes in economic structure and structural changes in domestic and foreign exports and imports affected not only the growth and the saturation of the city but also cause the life cycle of the city to decline. Thus, it is crucial to focus on the introduction of industries as well as the specific characteristics and changes in the industrial city planning. Referring to the early stages of industrialization and urbanization, examples from the southeastern industrial belt provide suggestions and implications for the future of the East-West economic corridor that links Colombo-Trincomalee.

1) 343.8 million USD (2017.08.05)

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Table 6 Specialized Industrial Complexes for Each Business Category

Category Region Remarks

Chemical Industries Ulsan, Yeosu - Light Industries Free Export Free Export Zone 2 in Biin and Gunsan Biin, Gunsan Zones areas not developed as planned Pohang, Nakdong River Steel industrial base as Nakdong River Steel Estuary estuary not developed as planned Electronic Industry Gumi - Shipbuilding Busan, Ulsan, Geojae - Heavy and Chemical Not developed as Free Export Zone Onsan Industries Free Export Zone due to change in business category

Source: Korea Industrial Complex Corporation (2011)

The southeast industrial belt or the southeast coast industrial zone are the coastal cities which are collectively referred to as cities with industrial complexes that are based on geographical conditions favorable for the import and export of raw materials. This concept can be applied to Busan district, Ulsan district, Masan (Changwon) district, Pohang district and Yeocheon district where these districts are designed for the dispersion of population and industrial functions outlined in the 1 CNTP. In the economic perspective, these regions have adopted export-oriented initiatives rather than domestic ones, and were developed and promoted as centers of heavy-chemical industrial complexes where raw materials are imported and exported smoothly.

In the 1970s, the Korean government focused its industrial policies on the heavy and chemical industry. In order to foster the heavy and chemical industry and to construct large-scale industrial bases, the government enacted the Industrial Base Development Enhancement Act and the Industrial Base Development Corporation Act in 1973. They were responsible for developing industrial bases. By using these Acts, Changwon Mechanical Industry Complex (1974), Yeocheon Chemical Industry Base (1973), Pohang Steel Industry Base (1975) and Banwol Industry City were constructed.

Case Study 1) Introduction and Development to the Ulsan Industrial City

Ulsan is a successful port city that benefited from the 5-year Economic Development Plan. Towards the end of 1961, a policy for the development of Ulsan new town was proposed. This policy declared Ulsan as a specific industrial district on January 27, 1962 and the groundbreaking ceremony took place one week later on February 3, 1962.

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The government’s plan was to create an industrial cluster based on its industrial fostering strategy aiming at reducing dependence on foreign aids and securing economic independence. Ulsan was perceived as the most adequate place to build the first industrial cluster since it was located near the ports. This location made Ulsan ideal for export activities and enabled the industry focused growth, which had been confirmed over the history of Koryo Dynasty and the Japanese colonial era.

Figure 11 Ulsan National Industrial Complex

Source: Invest Korea (http://www.investkorea.org/)

Undeniably, Ulsan’s locational advantages enabled it to become the first domestic industrial complex despite its lacking industrial foundation. Ulsan was located not only within proximity to the Gyeongbu Expressway but also the import/export market of each region that allowed Ulsan to act as a domestic transportation hub equipped with both marine and inland transportations. Ulsan had the ideal conditions for industrial location in terms of transportation and logistics.

The development of Ulsan City followed the same procedure as Ulsan Industrial Center. Before 1962, the Ulsan City was a small fishing village and a majority of the jobs were occupied by primary industry workers (23,482), which accounted for 71.4% of the total workers. Initially, the oil refinery and fertilizer factory were constructed in the central Ulsan area, then followed the related petrochemical industries. More job opportunities were present especially after 1964 when the construction of Ulsan refinery factory was completed, and the production volume of Ulsan City increased dramatically. The growth was accelerated as large companies decided to move to Ulsan Industrial Center, such as Hyundai Motor Company who started the operation of its factory at the center in November, 1968 and Hyundai Ulsan Shipyard which was completed in March, 1972.

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Figure 12 Drawing of Ulsan Urban Planning

Source: Ulsan City (https://www.ulsan.go.kr/)

One of the key characteristics of the urban planning for the southeast coastal industrial belt at the time was the clear division between industrial facilities and the residential (and surrounding facilities), including Ulsan. Shipbuilding and petrochemical industries, which reflected relatively high employment rates due to large export/import activities, triggered the formation of the surrounding facilities. Urban planning responded by installing green area among industrial complexes and the residential to pursue satisfactory living environment.

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Table 7 Operation Status of Ulsan National Industrial Complex

Items 1963 1980 2000 2009

Number of Resident 23 154 488 806 Enterprises Number of 7.3 43,298 458,270 976,562 Employees Production 0.3 1,699 19,328 44,651 (KRW 100 million) Export 1,236 67,587 87,529 88,278 (USD 1 million)

Source: Statistics Korea (2016)

Case Study 2) The Growth and Development of Changwon

Having designated as a machine industrial base in 1973, Changwon−located in Gyeongnam-do (Gyeongnam province) was assigned as the development district for the machinery related industrial base by 1974 and the construction of an industrial complex commenced. When Changwon industrial complex was first created, large enterprises of Korea grew through operating the trading business, the construction business or the light industries including fabrics, textiles, sugar, wigs and plywood manufacturing businesses. On the contrary, as the machinery industry required a greater amount of capital investment, advanced technology, as well as a long period for return of capital, it was difficult to expect domestic firms to make new investments.

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Figure 13 Drawing of Changwon Urban Planning (1977)

Source: Changwon City (http://www.changwon.go.kr/main/main.jsp

Figure 14 Changwon National Industrial Complex Urban Planning

Source: Changwon City (http://www.changwon.go.kr/main/main.jsp)

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Initially, the target development area was approximately 21km2 with the target population of 300,000. Since 1973, the population rose to 509,000 in 10 years; as of the end of 2003, the population stood at 514,463. The city started to serve as a central city of the Gyeongnam area (southern coastal region of Korea) with the population twice its target population.

Changwon was selected for development as its location could help reduce regional imbalances, which was fundamentally caused by industrial concentration on specific regions. Changwon also linked the existing facilities in the Gyeongnam region and satisfied needs for national security. Moreover, Changwon met the conditions and objectives that were proposed by the government at that time which aimed to create a large-scale general machinery industrial complex, to foster capable technicians and skilled labor forces, develop an industrial education base that can accommodate laboratories, and to construct a new industrial city that could facilitate an industrial complex.

Furthermore, since firms from developed countries were not making overseas investment due to a recession caused by an oil crisis, the biggest challenge was to attract domestic firms to Changwon industrial complex. In order to overcome this challenge, the government adopted exceptional strategies to attract resident enterprises by giving financing and taxation benefits, and the president declared the strong commitment to promoting the machinery industry. Finally, the government successfully attracted enterprises in the complex.

Table 8 Operation Status of Changwon National Industrial Complex

Items 1975 1990 2000 2009

Number of Resident 44 315 1,026 1,893 Enterprises Number of 1,151 80,084 71,554 80,015 Employees Production 15 59,690 182,770 494,398 (KRW 100 million) Export 0.61 1,446 6,522 17,542 (USD 1 million)

Source: Statistics Korea

A development plan was established while taking into account the comprehensive national territory development plan and Busan regional development plan. Through efficient land use and development of transport routes, Masan and Changwon were set as a broad city region that shared Masan’s urban functions. A new industrial city environment was planned, designed and created through the residential environment formation for the employees of the industrial

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complexes; the plan for adequate support facilities and industrial complex environmental reorganization followed. In the structural perspective, the case study of Changwon shows similarities with Ulsan in terms of separating the industrial facility and the surrounding facilities.

Land use was planned as follows: Changwon new town’s total area was 53.12km2, with the industrial area making up 22.6km2, semi-industrial area 1.17km, residential area 14km2, commercial area 2.8km2, and green area 12.43km2. The road connecting Masan-Changwon- Jinhae and Busan was planned with the minimum width of 35m, and the main roads of the industrial complex were planned to be wider (50m, 70m); the street within the area was planned to have minimum width of 25m. Green area was considered essential to the quality of the living environment and since it contributes to industrial complex environmental reconstruction. The green area was classified as park, facility green area, cultural asset preservation district, and natural green area. The industrial area that could not be used for a factory site was partially converted into a green area. A stable residential and living environment was generated as a result of successful formation of a national industrial complex. Housing supply was critical in the growth of the Changwon National Industrial Complex to transform itself into a global machine industry complex.

Case Study 3) Gumi New Town and Industrial development

Gumi, a small “eup” (unit area), was far from an industrial city until 1968. As the Gyeongbu Expressway construction commenced, the government sought for desirable sites to build industrial complexes along the expressway. Despite having none of the preconditions for the development of the electronics industry, that is, technology, capital and a market, Gumi was selected and developed as a local industrial complex in March 1969 with a specific goal to trigger the export growth. In 1973, the construction of a general industrial complex and an electronic industrial complex was completed.

Gumi National Industrial Complex has led the success story of Korea's electronics industry for the past 40 years, by changing its major production item from black and white TV in the 1970s to color TV and VCR in the 1980s, LCD and PDP in the 1990s, and mobile phone products in the 2000s. The production activity of Gumi was fueled by the introduction of companies like Korea Polyester, Toshiba Korea and Youngjin Electric Co. Goldstar (previous name for LG Electronics Co.), the pioneer of the domestic electronic industry, was also one of the first companies to move in. It moved into the complex on September 18, 1973.

Gumi is the outpost area for Korea’s electronics industry related exports. The export volume of Gumi complex in 1971 was 8.24 million USD, but it grew to 8.12 billion USD in 1980, growing about 1000 times in 10 years. This growth was equivalent to annual growth of 53%,

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representing a surprising export growth of about twice as high as domestic export growth rate of 28%. The complex still contributes to export. Its export has accounted for more than 4% of the total domestic export volume since the 1980s, recording 7% in the 1990s and 11.6% (3.76 billion USD) in 2006 of the total export volume (325.5 billion USD).

The introduction of such industrial complexes and economic gains from the introduction resulted in the gradual increase in population and the government had to propose a solution for the growing population. On July 23rd 1977, the Gumi New Town Project Plan was approved by the President of Korea, and the housing site development project was implemented in December 1977. The development period took 8 years from 1977 to 1985, the planned development area was about 3.5 million m2, and the target population was around 54,000. At the end of 2007, the population of Gumi City was around 390,000. This population of Gumi and the surrounding area grew about 8 times larger than initially planned.

Figure 15 Urban Planning of Gumi National Industrial Complex

Source: Gumi City (http://www.gumi.go.kr/main.do)

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Figure 16 The of the 4th IndustrialComplexofGumi

Source: Gumi City (http://www.gumi.go.kr/main.do)

Recently, the complex, which has grown into a global digital cluster, is gaining attention as a global hub of mobile R&D, test and production. In addition, as large domestic firms are expanding into new energy industry such as secondary battery and solar energy industries, the complex is leading the economic development of not only Gumi but also Daegu and Gyeongbuk areas with a focus on electronics and next-generation energy industries. When its fifth complex is completed, the total area of the Gumi Complex will reach 34.6 million m2. If the reconstruction of the deteriorated 1st complex is carried out, the Gumi complex is expected to emerge as the world's largest display and mobile cluster.

3.2.2. Industrial Belts and Networks

Industrial belt, industrial cities, and the specialization of industries were implemented for economic growth and balanced regional development along with policies related to national territory such as the economic development plan and the CNTP. The policies were focused on dispersing the growth effects of Seoul and Busan to other big cities including Ulsan and Changwon while developing medium sized clusters, i.e., industrial belts.

Unfortunately, most industries were focused on medium to large scaled shipbuilding, machinery and petrochemical industries. This made the northwestern areas to be undeveloped since the majority of development was concentrated on the metropolitan areas and southeastern regions. Despite the government’s efforts to disperse the urban population, urban population to total population ratio in Korea increased from 59.17% (population of Seoul 6.88 million) in 1975 to 69.4% in 1980 (Seoul 8.36 million). In particular, urban population was concentrated in the capital and southeast regions, whereas middle and southwest regions were excluded from economic growth and development.

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To prevent population concentration in Seoul, the government established the Population Relocation Plan in the Capital Area (1977~1986). The government also established the Industry Base Relocation Act in 1977 to restrict construction of new heavy and chemical factories in the capital area and to build appropriate industry complexes in five local metropolitan cities (Busan, Daegu, Incheon, Daejeon, and Kwangju) and in new industrial bases such as Yeocheon and Pohang.

The New Administrative Capital Development Plan, which was proposed in February 1977 but cancelled, was another strategy for the Korean government to reduce urban sprawl in Seoul as well as to form the basis for the construction of new cities. Nevertheless, the population of Seoul still increased.

3.2.3. Expansion of the Industrial Cities and the Construction of the New Cities of the First Development Phase

Urbanization and the growth of industrial cities that were focused on metropolitan areas had contributed to the growth of the main cities. The metropolitan population including Seoul continuously increased beyond the expectation and brought greater demand for the housing. This induced the government to construct large scale new cities to increase the housing supply.

Table 9 Five New Towns in Capital Region for Housing Provision

Category Total Bundang Ilsan Pyeongchon Sanbon Jungdong

Area (km2) 50.1 19.6 15.7 5.1 4.2 5.5

Housing units 292.0 97.6 69.0 42.0 42.0 41.4 (thousand)

Population 1,168 390 276 168 168 166 (thousand)

Green areas (%) 19.0 19.4 23.5 15.7 15.4 10.7

Construction 1989~1996 1989~1996 1990~1995 1989~1995 1989~1995 1990~1996 period

Costs (US$, 9,753 9,875 2,478 1,099 587 1,714 10thousands

Source: Korea Industrial Complex Corporation (www.kicox.or.kr)

36 Ⅱ. Urbanization Strategy

The Residential Site Development Promotion Act, enacted in December 1980, provided a legal basis for acquiring large amounts of land to be used to fulfill residential supply at a cheap price. Seoul announced the plan of new cities to be located within 10km from the downtown Seoul area. Based on this criteria, Mok-dong and Sinjeong-dong were built as sub-centers of Seoul. Seoul also developed large-scale residential districts such as Sangye, Junggye, Godeok, and Gaepo districts.

In 1985, the urban population ratio in Korea scored 77.2% which brought greater necessity to increase housing supply for the employees who lived in Seoul and the adjacent regions. The President Taewoo Noh’s administration, launched in 1988, introduced the “2 Million Housing Construction Plan” and designated many proposed residential site development districts throughout cities in order to satisfy the increasing demand of urban settlement. Large-scale residential development projects were conducted by the central government and public development agencies.

By 1989, the government began to construct five new cities around Seoul with three locational criteria that emphasized accessibility, convenience and affordability. First, the five new cities needed to be located in areas where people could commute to Seoul within one hour. Second, the development area needed to be easy to connect to existing urban infrastructure systems. Third, the area had to be economically affordable and reflect environmentally friendly features.

As centers of the Southeast (Bundang) and the Northwest (Ilsan), Bundang and Ilsan new cities were developed with the areas ranging from 15km2 to 20km2. Pyoungchon, Sanbon, and Jundong new cities were built with smaller areas, from 4km2 to 6km, as they were spatially connected with existing urban areas.

Those five new city development projects were initiated by using the public development scheme in the Residential Site Development Promotion Act. Designation of proposed residential site development districts started between February and June, 1989 as the first development phase; it took only four to nine months to get development approvals from the government. Construction of the new cities began between November 1989 (Bundang New City) and July 1990 (Ilsan New City). In November 1989, residential units (apartments) were sold to the public in the Bundang New City, and people started moving in from September 1991. As of 2008, moving and infrastructure construction in the new cities were completed.

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Figure 17 Location of New Cities that Surround the Metropolis (Seoul)

Source: Ministry of Land, Transport and Maritime Affairs (www.molit.go.kr/), LH (www.lh.or.kr)

38 Ⅱ. Urbanization Strategy

At that time, the first development phase of new cities was aimed at preventing population inflow into the metropolitan area by means of urban planning techniques as well as creating a comfortable living environment within the area. In particular, it aimed to present a model of Korean new city development, where the objectives were to provide a self-sufficient city that considers proximity, to carry out step-by-step stages in the development projects that are based on demand and supply forecasts, and to utilize the private sector to maximize creativity and efficiency. In terms of urban planning, the establishment of the road network and the formation of an urban axis that conforms to the natural terrain as well as the connection to the surrounding area, setting the function of the city, and the basic direction of the housing plan are essential in order to secure flexibility that caters for the increase in demand.

The specifics of plan differed for each area. Bundang City, which was one of the initial attempts ever made, is regarded as a representative example of Korea's new city planning. This is because it created a wide-area arterial road network and green axis. Then the living/residential zone was planned and designed to surround the road network and green space. Using this as the focal point, commercial area was created and specialized. Especially, it is perceived to be meaningful in the sense that it was developed against the notions of modernism which was an urban planning method of centering the city on the super block which had dominated during the past 1900s. Instead, it arranged basic units of blocks that were suitable for the small sized living area. To be specific, through overcoming the limitations of previously planned new towns such as Banwol, Sanbon and Changwon, the plan strived to improve the urban environment and the quality of life.

Most importantly, the new cities of the first development phase share a common characteristic of population dispersion of the metropolitan area and improved connectivity between adjacent areas. In the case of Bundang new city mentioned above, though it is a residential city, some functions of public institutions related to high-tech industry were partially included. This was mainly to pursue accessibility to the Gangnam area in Seoul where business, commerce, knowledge and financial industry are concentrated. Private enterprises have also moved to the area, and by separating and expanding the function of the business together with the function of the residence, it has emerged as a self-sufficient city.

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4. Policies for Industrial Complex Planning System

4.1. Designation of Industrial Complex

4.1.1. Geographical Condition and Location Quotient

The location and development policies for Korean industrial complexes have considered both the CNTP and the economic development plan. National territorial management has been involved in heavy chemical industry growth of the 1970-1980s, balanced national territorial development of the 1980-1990s, and introduction of new industries or promotion of knowledge-based industries of the 1990-2000s.

Korea’s industry location policies take the limited national territory into account and pursue maximized land use and efficiency. It is a policy that aims for effective provision of land, reasonable allocation of the industry, balanced national territorial development, and harmony of industry and environment.

The development of the Korean industrial complex consists of selecting site, establishing plan, achieving permit or license, granting land and compensation, and establishing businesses and selling permits. The most important step in the early stage of industrial complex development is the selection of location. The step includes balanced development according to the upper plan, distribution of industrial functions in each region, and verification of industrial function.

At the stage of selecting the detailed location and verifying the feasibility of the industrial complex, the distribution of the industry in each city or region was led by the government. In particular, the Korean government continues to analyze the status and trends of specialized local industries based on its four national comprehensive plans. In the field of policy development and research for diversification of industry, the status of local industries has been analyzed through the location quotient (LQ). The analysis has been the basis for the development of specialized industries.

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Table 10 Changes in Industrial Location Policy and Related Institutions

1960s 1970s 1980s 1990s 2000s

-Increase in - Industrial individual - Knowledge concentration Subject of - Attempt to - Greater regional locations based industrial within the the policy develop LQ imbalance -Demand for location demand metropolitan high-tech supply area industries - Innovation - Improvement of - Suppression of -Variety of cluster industrial the metropolitan location types promotion - Export oriented complex Mainstream area - Deregulation of - Specialized light industry - Development of of policy -Construction of location district (location) agricultural and large industrial -Promotion of - Establishment of industrial complex restructuring small industrial complex complex -Act on Comprehensive Plans for Construction in - Industrial sites the National -Seoul and Territory Metropolitan development Act -Act on Export Area - Revised Act on - Revised and Industry Readjustment placement of Industrial sites -Promotion of -Act on the Planning Act Industry and Distribution Development of - Small and - Revised Act on development Act Complex Rural Industry Medium the Utilization -Promotion of Development Related - Industrial Enterprises and Cultural Industry Act laws Complex Promotion Act Management of - National Land - Machinery Promotion Law - Agricultural and the National Planning and Industry -Act on placement Fishing villages Territory (`93, Utilization Act Promotion Law of Industry Income `95) - Revised Act on -Act on the Promotion Act - Act on Special Integration of Establishment of - Industrial Cases Industry Industrial and Development concerning Energy Act Support for Technology Technoparks Foundation - Electronics Industry Promotion Law - Local Industrial -Urban high-tech Development - Establishment of industrial Encouragement - Name change of a large industrial complex District industrial complex in the -Cultural (encouraged/su complex southwestern Industrial - Ulsan Industrial pported zone) - Simplification of region Complex Center - Establishment of development Explanatory - Development of -Software - Development of large scale procedures note agricultural and Promotion export industrial industrial -Increase in industrial Complex complex complex in individual complex - Regeneration of Southeast locations - Establishment of industrial Region - Composition of apartment type complex and - Development of Techno Park factory improvement of Export Free structure Zone

Source: Ministry of Land Transportation (2011)

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Site Selection and Validation Procedure for Industrial Table 11 Complex Development

Procedure Details

Analysis of project conditions including location, transportation Analysis of location condition and surrounding environment

Review of development possibility of industrial complex through Survey of location demand survey of location demand

General analysis of location demand, profitability and ripple Feasibility study effect including economic feasibility study through project cost estimation

Selection of business types to Reflecting the level of supplied price, forecasting sales prospect, be invited and preparation of set-up of business types to be attracted and consumer needs basic plan based on the location demand of the enterprises

Decision of project promotion Development decision based on location condition, demand, feasibility feasibility, business types to be attracted and basic program

Source: Industrial Complex Development in Korean Economy (KICC, 2011)

LQ is an index that measures specialization of the regions by comparing the proportion occupied by a specific industry within the region to that of the whole country. The change of specialized industry for each region can reflect a certain pattern. Based on this, it is possible to measure the weight and the level of specialization for each specialized industry as well as the level of specialization for each city's manufacturing industry. These measurements and results can be used to establish or change the policy of industrial location in order to foster specialized industries for different regions.

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Figure 18 Examples of Specific Industries (LQ) by Specific Regions

Seoul Daegu

Ulsan Chungbuk

Source: Industrial location policy to foster localized industries (Ministry of Land Transport and Transportation, 2013)

Based on such methods, the government and related governmental bodies have proposed a framework for managing local industries by dividing the regional industrial support projects into two broad categories. These are six metropolitan economic regions (belts) and specialized regions (cities and provinces within the metropolitan economic regions). Based on this categorization the government is encouraging the participation of industries that can contribute to creating jobs and boosting local economy and that can be fostered and developed at the city or provincial level.

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In particular, Korea is actively reflecting the current status of regional manufacturing/ specialized industries, regional changes in the trends of the industrial land uses, and demand forecast on the national industrial development roadmap. Moreover, Korea is establishing various policies to reflect the present and future of the region through building specialized industrial complexes and selecting businesses for the complexes. In terms of the methods for development and management of the industries, Korea is developing the industrial complex with respect to the laws of industrial location and on the public initiative. This refers to the public development method that is being led by the public. During these processes, LQ influences the trend of the changes in industrial weight for each region, the distribution of industrial functions, and the designation of location.

In this study, we introduce the Osong Bioscience Complex (Osong Life Science Park) and Iksan National Food Cluster, which are considered to be representative examples of the selection and support of specific industrial sites that are formed through the cooperative bonds between major ministries in Korea.

1) Formation and Urbanization Strategy of Osong Bioscience Complex (Osong Life Science Park)

Chungbuk province used to have high proportion of manufacturing of electronic components, computers, video, sound and communication equipment. The transfer of the administrative capital allowed location advantage and, in 1997 and 2008, it was designated by the Ministry of Health, Labor and Welfare as a national industrial complex and a high-tech medical complex in order to specialize in research within the field of medicine. Currently, the degree of manufacturing medicinal goods is 3.3, which is an extremely high figure.

In particular, the Osong Biotechnology Complex is one of Korea's leading national growth initiatives designed to cope with the changes in the industrial structure. It is actively supported by the Ministry of Health and Welfare, and designated by the Ministry of Land and Transportation as the national industrial complex. The complex is meaningful in the sense that the integration of public institution and research facilities within the complex have collectively established industry-academic-research clusters.

As shown in the figure below, the key areas were divided into areas such as healthcare administration area and the area that is connected with the high-speed railway, so that collaboration of research, education, and industry could be achieved. Ranging from land use, residential, commercial to green space, the plan was fundamentally designed to allow multidimensional industries to coexist.

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Table 12 Osong BioHealth Science Technopolis Support Center­facilities and areas

Medical device field Food Related Pharmaceutical field Total Category No. of Site area No. of Site area No. of Site area No. of Site area firms (m2) firms (m2) firms (m2) firms (m2)

In operation 13 153,545.5 3 112,324.6 17 545,935.2 33 811,805.3

Under 5 62,747.4 1 18,216.6 13 242,077.7 19 323,039.7 construction

Preparing 2 22,172.8 - - 6 163,693.6 8 185,866.4

Total 20 238,465.37 4 130,539.2 36 951,706.5 60 1,320,711.4

Source: Industrial location policy to foster localized industries (Ministry of Land Transport and Transportation, 2013)

Osong BioHealth Science Technopolis District Unit Figure 19 Planning and the Aerial View

Source: Ministry of Land, Infrastructure and Transport (http://korealand.tistory.com/940)

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2) Formation and Urbanization Strategy of Iksan National Food Cluster

Since 2008, the Iksan National Food Cluster was collectively managed by the Ministry of Agriculture, Food and Rural Affairs, Jeollabuk-do (province), Iksan-si (Iksan city) and the Ministry of Land, Infrastructure and Transport for the development of specialized industrial clusters. The percentage of employees in the manufacturing industry for food and drinks were 18.8% with LQ of 2.4 (food) and 2.9 (drinks), which reflected high proportion of industrial weight. The evaluation of the preliminary feasibility of the formation of this cluster took place in 2008, the proposal for the summarized business plan by the Ministry of Agriculture, Food and Rural Affairs was completed in 2012.

ksan National Food Cluster District unit planning Figure 20 and the aerial view

Source: Iksan National Food Cluster (http://www.iksan.go.kr/food/index.iksan)

According to the plan for the National Food Cluster, Food Polis is created with the integration of businesses, research institutes and manufacturing facilities as well as the surrounding facilities of the residential areas and educational facilities. The planned area is 3.48 million m2withfood-specializedcomplexesoccupying2.32millionm2and1.26millionm2forthesurrounding cities.

Korea’s overall plan for the formation and operation of the industrial complexes under the name of ‘cluster’ had intertwined the industry-academic-research bond through integrating

46 Ⅱ. Urbanization Strategy

industries, residential, commercial, greenery and cultural space, including the example (case study) of Osong Biotechnology Complex mentioned previously. The analysis of the industrial site through the use of LQ, the prospects of the upper plan and the consideration of the regional trade activity, export, production and consumption gave greater meaning to the plan.

4.1.2. Integrated Methodology of Urbanization and Industrialization

Table 13 Stages of Development of Industrial Complexes

Stages Context

Establishment of overall schedule and survey for project promotion Development Plan Establishment of development plan including development area, method and land use Preliminary Examination Review of location feasibility and matching with surrounding (Environmental Analysis) environment Assessment of impact over environment, transportation, disaster and Impact Assessment population caused by creation of industrial complex Establishment of plans for land use, infrastructure, supporting facility, Land use & Facility Plan and hinterland development

Source: Summarized by the author(s)

In general, the land use planning is completed via a series of steps which involve the selection of site with the consideration of the locational factors, analysis and prediction of demand (infrastructure and planned scale), location-allocation planning and implementation plan. Depending on the type of business, different goals and objectives are set and then locational factors determine the site. Through predicting the type and size of appropriate facilities based on the population and economic activity, the scale is determined.

The demand in land use refers to the expectation of the land requirement based on four different types of land use. The four types are the residential, commercial, industrial and green area. The demand for each type of land use can be analyzed in three stages where stage one involves the prediction of economic activity and population; stage two involves setting the density of the land use for each purpose and finally; stage three involves the calculation of the demand for land use for each purpose.

Depending on what the purpose is, there are different ways of estimating the demand. For instance, determining the demand for commercial area requires calculation of the commercial area ratio which is the total commercial area divided by the floor area. As a mathematical

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formula, this can be shown as an equation; “total commercial area ÷ [N ∙ r ∙ (1-e)]”, where N is the number of floors, r is the building coverage ratio (%) and e is the ratio of public land.

Table 14 Land use planning procedures

1. Main 3. Estimate 4. Location 5. Execution and 2. Site selection direction demand distribution implementation

Business Use district and Selecting candidate Predict facilities Spatial structure prospect zoning

Setting Finalize the planning Interconnecting Urban development Predict scale/size objectives area/district system projects

Paradigm General analysis of Marketing Locational analysis Policies/regulations analysis the site analysis for each land use and inducement

Trend Basic unit/Metric Setting alternatives Development SWOT analysis analysis model method and evaluate projects

Source: Korea Planners Association “Urban Development”, bosungak (2008)

Table 15 Estimating demand for commercial area

Method 1 Method 2 Method 3

Total commercial area

Number of employees × Stage 1 Population × Total Sales × Total commercial Total commercial area commercial area basic unit area basic unit per amount basic unit per employee per person (ha/person) of sales (ha/won) (ha/person)

The floor area ratio (%) The floor area ratio (%) The floor area ratio (%) N: the number of floors N: the number of floors N: the number of floors Stage 2 r: the building coverage r: the building coverage r: the building coverage ratio (%) ratio (%) ratio (%) e: the ratio of public land e: the ratio of public land e: the ratio of public land

Total commercial area ÷ The floor area ratio Stage 3 Total commercial area ÷ [N ∙ r ∙ (1-e)]

Source: Korea Planners Association ““Urban Development”, bosungak (2008)

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In determining the demand for the industrial areas, the size of the economic activity of the site, especially secondary industries such as manufacturing industries, are taken into account. The land use pattern of industrial areas tends to be two-dimensional. Thus three-dimensional calculations will not be very significant. The demand for industrial areas are predicted through the scale of economic activity, density and the industrial land/area. The anticipation of the scale of economic activity can be approached by using the number of employees/staff or the amount of production. When calculating density in the second stage, the average employment rate (density) or the amount of production per area of the industrial facility (KRW per unit) can be used to predict and estimate demand. The third stage involves the prediction of the area (size) of industrial use. This can be estimated by the number of employees or the value of employed population divided by the employment density or through the value achieved by dividing amount of production and by industrial land (per unit). The ratio of public land can also be used to increase accuracy of the prediction.

Table 16 Estimating demand for industrial area

Method 1 Method 2

Employment population Amount of sales Stage 1 Estimate the employment population for Estimate the amount of sales for the the target year target year

Employment density Industrial area base unit

Stage 2 Average employment density or Industrial area base unit (won/ha) per Employment density for each sector average amount of sales (person/ha)

Employment population÷Employment Amount of sales÷Industrial area base Stage 3 density unit

It is arguable that the demand for industrial area has two-dimensional characteristics in terms of land use. However, the estimation for the recent apartment type factories and urban industrial areas are growingly using three-dimensional density indexes for deriving calculations such as the floor area ratio. The density index for industrial areas/lands must account for the characteristics of the industry. That is, the labor-intensive industry, capital-intensive industry, urban type industry, high-tech industry. Alternatively, the density index for industrial areas/lands can also undertake density analysis for different sectors or fields, depending on whether the industrial areas are located in the preexisting lands or newly built industrial areas.

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Table 17 Standards for green space

Rate of Category Standards for installing Width green area

Areas that demand quietness such as the residential-only zone, At least 50% At least 10m education and research facilities Protection from pollution Refuge in the event of (e.g. factories) At least 70% At least 10m Buffer natural disaster green area Security, restricted access, control contradicting land At least 80% At least 10m use

Protection from all sorts of pollution from transportation facilities such as railways and At least 80% At least 10m expressways

Preservation of the natural Within the area required for environment within the preservation of the natural Expand and urban area (city) environment Landscape improve urban green area landscape Allow pleasant experience Within the area required for the and safety in the daily lives installation of landscape facilities of the residents

Green network and eco-corridor along the rivers, streams and relatively large-sized forests

Connecting Consideration Network that links to At least 70% At least 10m green area of functions residential areas, industrial areas, schools and other public facilities

Small sized street parks for walking and relaxing

Source: Article 18 of the Act on Urban Parks, Greenbelts, Etc

50 Ⅱ. Urbanization Strategy

Estimating the demand for green areas depends on the function as well as the frequency of use. For instance, the green areas that are fundamentally designed for the protection or preservation of the ecosystem do not need to have demand estimated, instead, it is more of an issue of how to protect and preserve the green space. Meanwhile, the parks in the urban areas are built for urban citizens to interact with the nature in the city. Hence, population analysis needs to be conducted as the first step for urban parks.

The residential lands are subject to many different aspects such as proximity to a commercial facility, public facilities like schools, streets and public parks. The density of the residents can be estimated by not only including the residence itself, but also the commercial facility, educational facility, roads, parks, and many more that are closely located to the residence so that more accurate estimation can be made.

4.2. Land Use and Infrastructure Plan

4.2.1. Land Pooling (Land Readjustment)

Land pooling and readjustment are methods that pursue pleasant urban environment. They adjust blocks for the areas that have high density of non-rectangular lots so that followings can be achieved: the dispersion of population and/or the distribution of the function of the city, and the effective supply of infrastructure.

Korea utilized land pooling and readjustment techniques in order to recover from the Korean War of 1950. These techniques are still frequently used today in the field of urban planning and management such as the land use planning and district planning.

The method of land pooling and readjustment are often adopted during the designation and the formation of industrial areas or complexes. The procedure for the selection and the creation of industrial complexes are specified in [Table 18].

The formation of industrial complexes begins off with the division of large areas/regions due to land use planning. This is because the lands that are owned by private sector must undergo consultation and expropriation compensation procedures prior to land use planning.

In the past, Korea initiated land readjustment projects where the association of land owners were able to substitute land for the provision of detached housing. However, this was suspended due to the privatization of profits accrued from development, increase in land price and demand for apartment housing.

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Table 18 Land Pooling/Readjustment Index

Direction Description

The lower the development pressure

The better the cooperation of the landlord

The more legitimate is the occupation of the land by the slum dwellers

The earlier the stage in the eviction process

The stronger the community leadership

The stronger the support from outside agencies

The lower the existing residential density

The smaller the existing size of houses

The lower the value of existing houses

The higher the ability to pay for housing

The better the access to sources of housing finance

Source: http://web.mit.edu/urbanplanning/upgrading

However, these methods required relatively low budget in general. Therefore, it is recommended that such methods should be considered and examined in the selection and creation of industrial complexes and residential areas in the surrounding environment. Currently, Korea’s policies regarding industrial/distribution complexes do not focus on producing maximum output (efficiency) from minimum input (investment). Rather, it is tailored to drawing solutions for lack of infrastructure, especially in areas with poor locational conditions. By supplying or providing higher quality infrastructure, Korea aims to improve the geographic locational conditions and to attract businesses and firms in order to promote national industrialization and achieve regional balance.

Moreover, the surrounding areas of the industrial complexes must meet the satisfactory environmental standards since those areas are critical in dealing with increasing population due to the growth and development of the industries. In the theoretical view, the following land pooling/readjustment index should be adopted.

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4.2.2. Infrastructural Facilities Planning

Figure 21 Infrastructure Planning (diagram)

Source: Korea Industrial Complex Corporation, “Industrial Park Development in Korean Economy”, 2011 (translated)

For sustainable industrial ecosystem, the geographic locational characteristics generally suggest that industrial clusters be formed between cities. Each industrial complex and city supports the cluster through supporting the policy, special economic zones, and contributes to maintaining regional characteristic and sharing infrastructures in order to achieve a balanced development strategy. The sustainable industrial ecosystem should also reflect the case studies of the spatial structure plan for the industrial complexes and the new cities, and also the plans for living environments, streets, parks and green areas.

In terms of the transportation facilities, the estimated demand for transportation for industrial complexes is derived from the analysis of the amount of shipped goods (cargo), the raw materials from the factory, the workers (staff) as well as the residents and/or passengers from the surrounding/hinterland facilities. A regional traffic network expansion plan should be established by reflecting traffic increases caused by new construction and expansion of expressways, national highways, local roads, access roads, ports, airports and railways, after verifying whether increases of the passenger traffic volume and the cargo traffic volume caused by industrial complex development would be handled successfully. For efficient handling of the cargo traffic volume, a comprehensive traffic network should be established, linked with roads, ports, railways and airports.

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Table 19 Considerations for Supply Planning

Category for Planning Context

- A regional traffic network expansion plan should be established and road should be widened for medium to large size autovehicles such as trailers Transportation - For efficient handling of the cargo traffic volume, a comprehensive traffic network should be established, linked with roads, ports, railways and airports.

- Volume of industrial water to be used, water treatment (purification facility) Industrial Water Supply - The location of the industrial water source and the applicability of the related facilities

- The method of treatment and the location are selected considering the convenient expansion, conditions of the areas of water discharge Sewage Treatment and environmental and hygienic conditions - Consideration of flooding and minimization of impacts such as air pollution and noise on the surrounding areas are necessary

-Demand for energy such as gas and electricity needs to be estimated for each industry Energy Supply - The location of gas supply facility should consider safety and the land use plan of the surrounding areas

- Consideration of the connection of the industrial facility to the Wastes Treatment residential facility, the supply of water, various environmental Facility problems including air and water pollutions and wind direction are necessary

- Installation of green buffer is necessary for the connection between the residential and the industrial functions Park and Green Area - Size, area, location of the green space should consider the most optimistic experience within the region

Source: Korea Industrial Complex Corporation, “Industrial Park Development in Korean Economy”, 2011 (translated)

54 Ⅱ. Urbanization Strategy

4.2.3. Smart Management and The Other Related Planning Systems and Methodologies

Figure 22 Smart Management (diagram)

Source: Summarized by the author(s)

Although the concept of smart city and its development plans have not yet been fully established at present, it is necessary to raise the performance of each city urban functions and to improve the connectivity between cities. In the future, environment and industrial problems are expected to be solved through utilizing information and communications technology.

Smart cities, which are beginning to be introduced in developing countries and countries with emerging economies, have followed strategic point based development methods until present. In the long term, it creates the suitable indicators for each country or city through the evaluation of the techniques and skills each country or city has.

- Within the field of transport, roads (traffic volume, car accidents, traffic information), railways (management, traffic information, condition of the train) and parking (parking location, fees, condition) can be subdivisions. Also, through using the integrated control center, it is possible to establish a system to exchange information via use of data and network as well as to obtain and provide traffic information regarding traffic congestion in metropolitan areas, car-only roads and for each section of the expressways.

- In the area of water resources management, the state of comprehensive facilities such as power generation, safety, and operation of dams and beams, and the status of water

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level, water quality and water quality of the river, ground and underground water are collected and transferred to the control towers in each region. Moreover, the smart city planning method can be implemented for the related organizations to share and utilize information such as the water level, water quality and monitor water quality according to seasonal variations and other natural conditions of ground water and river. Also, smart city techniques allow real time updates on the location of each water supply and the sewerage system, as well as to share information on the quality of water supply with the integrated control center. The above information can be collected and transferred to the integrated control center and visualized so that the relevant situation can be monitored in real time and an active system such as a public information service (disaster/natural hazard alert service) can be established.

- In the field of architecture and complexes, the use and management of heat gird, temperature-supply and management status, the introduction of BEMs, which are intelligent building managers that collect and integrate internal information of the buildings and information related to energy use within buildings, including the installation of renewable energy, electricity management and the transactions for excess energy.

- In terms of planning and efficient management of land, information and computerization of each land using GIS technique can greatly reduce the social cost of land surveying and responding to land related complaints. Also, it is possible to reduce costs and expenses for the development of the small and large projects. Through connection to GIS data and related information, it is also possible to implement a system that predicts and responds to various problems that may occur in the national territory and/or the city.

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5. Frameworks for Urbanization and Regional Planning

5.1. Urban, Land, and Complex Planning Strategy

5.1.1. Designation of (Special) Planning Zones

Figure 23 Decision-making Processes in Industrial Area Designation

Source: Korea Industrial Complex Cprporation, “Industrial Park Development in Korean Economy”, 2011 (translated)

1) Analysis of Location Condition

Selection of location directly affects the sales price of an industrial complex (area/zone) as well as the possibility and easiness of industrial complex development. Therefore, the location is considered as a primary factor by enterprises when they select industrial complex to move to. In order to select an adequate location, a comprehensive review should be carried out, which includes analysis on general social/economic conditions such as physical conditions, easy securing of lands, R&D facilities and transportation facilities; analysis on factors disturbing development including limitations on development; and other development plans applicable to the industrial complex. Industrial complex development affects development of the region significantly, so it is crucial to select the location to drive the most effective regional development.

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2) Survey of Location Demand

The location demand survey is intended to predict sales possibility of an industrial complex. It is an important factor to consider when determining the development of an industrial complex, however, a conservative analysis on the survey result is deemed essential, because high interests of the enterprises shown at the point of the demand survey are not always translated into successful sales results. The demand survey at times reflects the cause-and-effect relationship with the selection of business types which are determined through a demand survey at some planned industrial locations, or happens in the backward order where it is selected first and then the demand survey for the target businesses is carried out. The results of the demand survey can be referred during the discussion of the elements like the sales prices, outlook for sales, business types and the size of a park, and users' requirements can be identified through the process of the survey.

3) Feasibility Study

Analysis of development necessity: When analyzing development necessity of an industrial complex or area, the necessity to supply a new industrial location and the possibility of sufficient location demand should be reviewed first. When developing an industrial complex with goals to provide a regional development base, actual effects on regional development should be assessed. When an industrial complex is built and new enterprises are placed, the region will have the following benefits: creation of jobs, ripple effects of relevant industries, stimulation of the local construction market and expansion of the urban infrastructure. Analysis of feasibility: The economic feasibility of the project itself as well as the future economic ripple effects from the industrial complex development should be reviewed. The economic feasibility analysis comprehensively assesses location demand and ripple effects, and the scope of analysis includes profitability analysis based on project cost analysis. Regarding the estimated costs of industrial complex development and the sales price, the difference between the time of expenditure and the time of profit generation should be considered for estimation of profitability. Profitability should be estimated as the current value or the future value.

4) Selection of Business Types to be Invited and Preparation of Basic Plan

Business types to be invited are selected considering the geographical characteristics, social/economic factors, applicable master plans or local development plans, and the characteristics

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of each business type. Growth potentials are included to the selection criteria as well. Attracting the business types with high growth potentials is crucial in the long term even if their production output and job creation effects are currently low since they will enable long-term development of the regions. As the awareness on the environment is improved, the environmental effect of each business type can be a critical factor for the selection of business types. Enterprises prioritize economic factors such as labor force, land price, market condition, transportation condition and growth possibility of the business types when they decide to move to an industrial complex. This is the reason for the gaps between the view of enterprises and the decisions made by local authorities. The demand for enterprises and industrial and environmental ripple effects on the region should be considered thoroughly.

5) Decision of Project Promotion Feasibility

The feasibility of an industrial complex development plan is reviewed considering diverse aspects, but in general, the most important factors are firstly, the necessity to supply a new industrial land at the national or regional level and secondly, the possibility to secure sufficient location demand. In particular, the demand of enterprises should be evaluated in a conservative manner when conducting the location demand survey for decision-making. Many enterprises do not have long-term location plans, so the location demand surveyed is highly likely to change. The decision to implement the project should be made by comprehensively considering profitability of the project, the demand of enterprises, the location condition and the ripple effect.

5.1.2. Procedure and Management of Masterplans

Procedures and management of comprehensive plans can be broadly categorized into criteria and procedures for planning industrial complexes, spatial arrangements for industrial and residential areas, and case studies on industrial and residential new towns. When the decision is made according to the function, the type of space for industrial complexes can be divided into major industrial areas: support facilities, R&D facilities, residential areas, and green areas. The main industrial area is the space where the main production and related activities take place, and the supporting facilities indicate the facilities that perform functions such as commercial, financial, medical and welfare supporting. R&D includes research facilities and information centers, and residential areas include housing, education, and amenities. Lastly, green areas refer to parks or development restricted areas.

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Table 20 Spatial Use Assessment Criteria by Items/Functions

Items Functions Arrangement Criteria

- Convenience of future expansion Main industrial Main production and - Expansion of manufacturing function area related area - Pursuit of cooperative, integrated system - Separation with the residential area

- Convenience of use/ internal and external Supportive Business, financing, accessibility facilities medical, welfare, etc. - Placement of the supporting facilities at the center of the park

-Low-density allocation in a pleasant environment Research institute, R&D - Accessibility to production, residential and information center, etc. educational functions

Residence, convenience - A pleasant environment for living Residential area facilities, educational -Accessibility to dormitory, company housing and facilities, etc. labor camp

- Inclusion and extension of green areas of the surrounding area into the park Park, green bumper, -Building of the main open space in the park and Green area etc. convenience of use - Buffering contradicting functions of production spaces and residential space

Source: Korea Industrial Complex Corporation, “Industrial Park Development in Korean Economy”, 2011 (translated)

When establishing the industrial complex development plan, allocation of space and land use plans should reflect correlation and conflicts among functions. The key contents of the development plan are divided into plans for spatial arrangement, land use, infrastructure, supporting facilities and urban hinterland development.

The spatial arrangement and land use plans of an industrial complex should reflect cooperation and conflicts among functions, and the environmental damages caused by industrial complex development should be minimized by utilizing external spaces of the complex.

Each functional space should be arranged considering the production processes, partnerships between R&D and production, and partnerships between main businesses and related businesses. If possible, any conflicting sectors in terms of land use should be separated. But if unavoidable, negative impacts caused by conflicting land use should be minimized by

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installing a green buffer (green are used as buffer space) separating conflicting functions. In addition, in order to create production supporting functions and a pleasant environment for residential spaces, some areas should be separated or a buffer zone should be installed. Green areas can improve complex environment, and provide a buffer between production areas or roads and residential spaces.

6. Future Policy Recommendation foEnhancing Sri Lanka Urbanization

6.1. Management of the National Regional Plan

Korea 's economic growth and its direct and indirect impacts on the country's land related policies have attracted huge attention from many different entities such as development banks like ADB, international organizations, and developing countries like Sri Lanka, who is the direct beneficiary of this analysis report. Many research institutes in Korea, besides the ones involved in this research, have shared implications through modularization studies on Korea's economic development.

Previous studies have devoted to Korea's national and regional planning in terms of economical and industrial aspects. However, there are only a few cases that analyzed and investigated Korea's national policy on land and urban planning. In this section, we sought to provide an outline, history, methodologies, and policies of Korea's national land plan and industrial complex for the establishment of Economic Corridor Development (ECD) in Sri Lanka.

Since it was established, the first CNTP has been driving force for Korea’s economic growth for the last 50 years. The CNTP was the plan that established and expanded the nation’s key industries. At the same time, it directly and indirectly affected domestic cities, regions, environment, politics, economy, society and culture by responding to the changes in population, social structure and domestic and international affairs.

Indeed, the implementation of the local self-governmental system reduced the level of impact the CNTP had on the whole country. However, Korea's CNTP that built industrial and economic infrastructures under government-led projects is still considered as one of the best practices for the developing countries.

Over the years CNTP has responded to various domestic and international events and changes such as oil shocks, transformations in industrial structure, eco-friendliness, sustainability,

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and the fourth industrial revolution. This implies that the policy will continue to play a central role in reinforcing the sustainability in Korean territory.

However, political controversy in Korea's national land plan still persists today. It is often challenged by a number of problems. These include balancing development between rural areas and metropolitan areas, meeting the social consensus regarding the changes in the mega-regional economic zones, and selecting locations for the distribution of important governmental and national functions. This remains as a long-term problem that needs to be solved through participation of experts and the public.

This implies that successful realization of the ECD linking Colombo and Trincomalee in Sri Lanka requires active policy formulation and implementation as well as consensus among countries and regions. In particular, the problems of hidden urbanization, messy urbanization, and air pollution, which have a direct impact and almost always negative consequences on the citizen’s health, have been influenced by the economic growth as well as the dispersion of metropolitan functions. Through the improvement of the environment in which the citizens live, along with establishing the legal basis for the formation and implementation of the organization at the government-wide level, it is possible to realize that sustainable national territory and urban space could be created and developed.

From this perspective, the factors that contributed to stable and successful settlement of Korea's CNTP and the implications for the policies regarding the national territorial planning and the city planning are as follows.

6.1.1. Establishment and the status of the national territory management policy

The CNTP is a top-level plan that forms the basis of the laws and regulations on the planning and use of the Korean land. This means it takes priority regarding decisions that are made about the use of the national territory. The plan also serves as a basis for each city-county comprehensive plan including the capital city of Seoul. In brief, the CNTP proposes guidelines for the development, use, and conservation of land resources; it also forms the foundation of all national territorial related policies. Therefore, this plan will include the management and maintenance of the land to deal with the future economic and social changes of the country, and the following long-term policy directions.

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Figure 24 The System and Hierarchy of the National Territory Plan

Source: National Environment Information Network System (neins.go.kr)

This basic guideline encompasses the overall content for the establishment and implementation of each regional plan and sectoral plan, enabling the management of the country to suit to the national development paradigm. Additionally, the plan is enforced through the consultation and management of the governmental organizations and public enterprises such as the central government, the Land and Housing Corporation, the Korea Housing Corporation, the Water Resource Corporation, the Energy Management Corporation, and other resource related corporations. Thus, its main advantage is enhanced feasibility of businesses and increased transparency in the management processes.

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In the long term policy management, Korea’s CNTP should follow the directions shown in Table 21. Sri Lanka should also refer to the following guideline to effectively respond to the economic and cultural changes in the future.

Table 21 The Basic Guideline

Contents

- Status and the change in the situations in the country - Basic ideology of land development and establishment of a positive future - Improvement of the spatial structure and the sharing of function for different regions - Measures balanced development of the country and fosters growth of local industries - Expansion of national infrastructural facilities to enhance national competitiveness - Efficient use and management of land resources such as land, water, forest and marine resources - Improving the quality of life and living conditions such as housing, water and sewage - Prevention of floods, and other natural hazards and/or disasters - Reasonable use and management of underground space - Conservation and improvement of land and environment for sustainable national territorial development

6.1.2. Provision of economic growth base through infrastructural expansion

Detailed status or conditions vary depending on the country, but one of the major tasks of developing countries in the emerging economies is the expansion of SOC at times of adverse economic and social conditions.

From a similar point of view, the planning and establishment of Korea's first and second CNTP were aimed at the expansion of SOC, the development of resources for efficient economic growth, and the development of large industrial complexes. To be specific, the 1st CNTP adopted the method of region-based development. It has the characteristics of improving transportation and communication network to connect the center of the heavy chemical industrial belt in the east to the south coast region. Most importantly, the communication network helped solve the city-rural information gap. For instance, by creating a large-scale industrial complex in Ulsan and Pohang, we achieved balanced development based on the

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promotion of industrial dispersal in large cities and the industrialization in small and medium cities. This is a technique that Trincomalee region of Sri Lanka can refer to.

In addition, the infrastructure that directly affected the growth of the development method mentioned above is the Gyeongbu Expressway. The Gyeongbu Expressway was a nation-wide project that accounted for 23.6% of the national budget at the time. This had a direct impact on people’s daily lives and their living environment as well as the location of various industrial complexes.

Even if the industrial belt of the southeast region and the Gyeongbu Expressway have had a positive impact on the general economic growth and the daily living environment, there is also a concern that the regional development and growth centered on the areas adjacent to the southeast and Gyeongbu expressways have increased regional disparities. Hence, since the 2nd, 3rd and 4th CNTP, the plan has consistently emphasized four key ideas; the balance between regions, the distribution of the industrial functions, the expansion of the infrastructure, and the population dispersion of the metropolitan area. A more efficient plan should be suggested.

6.1.3. Improvement in the flexibility of the system that reflects internal and external conditions

If the 1st CNTP is a policy that can be introduced to current developing countries, the 2nd CNTP is a plan that must be considered for industrialization and long-term comprehensive development of a country. Korea has established a plan for balanced development and rapid industrialization that induced environmental pollution, damage to the natural environment, transfer of factories beyond the limits of pollution sources that degraded the living environment. In particular, the 2nd CNTP, which established the basis for attracting industrial complexes to cities and rural areas, can achieve balanced development when applied in the initial development stage of industrial complexes. This comprehensive plan incorporates the improvement of the living environment and the expansion of traffic-related and communication facilities.

High population density in large cities and related problems that many developing countries are experiencing are the same problems that the developed countries, including Korea, experienced in the past. To prevent such problems, the national territorial planning should be a multi nuclei structure, not a single nucleus structure. That is, factors such as growth inhibition and management, expansion of SOC in each provincial city, promotion of backward regional development, and prevention of overdevelopment should be dealt with.

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The rapidly changing domestic and foreign situations and circumstances are variables that affect the management of the territory for the countries including Korea. Especially, the climate change, environmental problems, demand for economic growth, and industrial structure are one of the many variables that can impact national territory and industrial performance. Many countries must cope with these problems. Korea’s case, which is known as a relatively successful case, can provide useful implications.

In particular, if the past international circumstances and the paradigm of national planning have developed with the goal of quantitative growth, they now face the challenges of qualitative growth and environmental problems. Therefore, the management of conflicts in society and the introduction of social consensus and technology in solving environmental problems are becoming important factors for the national territorial management.

6.2. Masterplan for Industrial New Town

Industrial complexes play a pivotal role in the national economy. Korea has developed industrial geographic location strategies and policies regarding industrial complexes that facilitated many industries through the first CNTP and the economic development plan. There is a need to evaluate and recognize the significance of not only the industrial complexes but also its surrounding cities as the surrounding cities develop along with the industrial complexes for the population dispersion of the metropolitan area/city. From this point of view, the implications and characteristics of the plans of the Korea’s Industrial Complex and New Town that emerging economies and developing countries should refer to are as follows.

First is the establishment of policies that are based on the function of the industrial complex. Currently, types of industrial complexes in Korea are divided into national industrial complexes, general (local industrial complexes), urban high-tech industrial complexes, and agricultural complexes. Many specialist groups agree to the necessity of classifying the industrial complexes in accordance to their functions rather than the designation center. Korea's territorial and industrial policies were flexible and have changed according to the external and internal situations. Industrial complexes of various types and sizes have been designated according to the labor population decrease, the aging society and the 4th industrial revolution. The functions of the complexes are also becoming more diversified, such as IT, high-tech, bio-industry, and entrepreneurial valley. The complexes are also transforming into a new economic, cultural, and social growth engine; they are no longer limited to an industrial complex of the past that only functioned to maximize output and production.

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Second is the consideration of the surrounding facilities of the industrial complex. According to the study conducted by the Ministry of Land, Transport and Maritime Affairs (2015), there are six purposes of the development of the Korean industrial complexes: first, improvement of labor environment and increase in income; second, leading industrialization; third, supply of key elements for industrial activities; fourth, reduction of problems due to efficiency-oriented industrial activities; fifth, balanced regional development and efficient management of the country; and finally, need for the key base of the national strategic industry.

Among these, balancing regional development and reducing problems for industrial activities suggest the challenges for Korea's territory development that have not yet been solved by industrial complexes and urbanization.

Industrial activities tend to move into large cities for the purpose of maximizing profits and enhancing the efficiency, and this tendency can increase the demand for its surrounding areas, causing shortage of housing supplies and traffic congestion. Ultimately, this can obstruct the balanced national development. Therefore, recent industrial complexes including those of Korea are planning supply of residential housing, public facilities and supporting facilities in advance to accommodate the industrial complex residents.

According to the land use status of the industrial complex below, Korea’s industrial complex has a large area for supporting facilities and residential facilities, and a relatively low proportion of industrial facilities. In general, for the industrial complexes, there is a difference in the area depending on the type of industry, location, and industrial activity per area. However, many recently proposed industrial complexes have dealt with such problems through the introduction of residential facilities in urban areas and industrial complexes. Therefore, in order to solve various urban problems among local industrialized areas, predictable or anticipated urban problems should be solved through analyzing the type and location of industrial complexes and the provision of infrastructure through expected number of attracted population.

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Figure 25 Land Use Pattern for Different Types of Industrial Complexes

Source: Korean Industrial Complex `location of industry’ (2015)

Third, the consideration of the surrounding cities and the satellite cities must take place. As aforementioned, it is necessary to consider the surrounding facilities among the industrial complex plans in order to simultaneously challenge the development of the industry and the

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balanced development of the land. However, the state-led middle-large industrial complex plans, the balanced development of the land and dispersal of population, and urban problems that rise from the development of industrial complexes indicate the necessity for the provision of a comfortable living environment through the isolation of the industrial facilities and its surrounding facilities. In the case of Korea, the urban planning of Ansan and Changwon separates industrial and residential facilities. Through the satellite cities like Bundang, Ilsan, Pangyo, and Dongtan, the population of the metropolitan area is efficiently relocated, and at the same time, the industrial employees are able to find housing nearby.

However, in the case of satellite cities, there are still problems. For instance, the problems of land and sale speculation, the threat of the primary industry due to the destruction of agricultural land, and the social conflicts caused by the resistance of existing landowners and residents are some of the many problems that arise. There is also a need to find a solution for lack of social mix and community activity in urban and residential complexes. Furthermore, the increase in land prices due to development can lead to a new environmental problems and ineffective use of land due to the increase of the low income population in the city. Therefore, the related plans need to consider the industrial, housing and social problems from the long-term perspective. It is also necessary to aim for maximized land use and efficiency in the planning of limited national territorial area.

Figure 26 An Example of Division between Industrial Area and the Urban

(The color purple refers to industrial complexes) Source: Changwon-si, Ansan-si

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6.3. Smart City as an anchor project

The industries that are directly connected to economic growth are challenged by international demand as well as domestic demand, which affects the land and urban planning. From a global perspective, India, which is adjacent to Sri Lanka, announced plans to build 500 smart cities while Sri Lanka plants to build 100. In the private sector, global companies such as IBM and CISCO are expanding into Asia and are becoming the starters of smart city demands. India has been investing Rupees 10 billion each in 100 cities for the purpose of mitigating adverse impacts caused by urbanization led by the Ministry of Urban Development (MoUD). Smart City encompasses six distinguishable areas like waste management, energy, transportation, e-governance and many more as well as 21 indicators of the plan are being selected and announced.

The Sri Lankan government has also invested about $40 billion over the 15-year period in Colombo, an important hub for ECD projects with Siemens. These investments are to monitor climate change and natural disasters, respond to energy problems and improve the urban environment. According to the plan, city planning should be made in accordance with the international standards and requirements by setting the foundation of smart city and the potential economic corridor. It is necessary to actively review smart city planning techniques as well as various factors. These factors include environmental pollution including air pollution, vulnerability to natural disasters due to urban development, and current situation of Sri Lanka that shows increasing trend in IT industry. The smart city plan is needed for disaster management, energy and power management and traffic system improvement. In the long-term perspective, social costs incurred from the development of urban and industrial complexes should be reduced through the computerization of land (intellectual) information and land registration system.

However, given the fact that specific planning indicators are different for the smart cities internationally, the initial input costs for urbanization may be subject to increase. At the same time, as there is no national consensus on the smart cities, it is expected that localization of technology and planning techniques should be prepared from a long-term perspective by examining the efficiency of technologies and technologies that can be introduced later in the regional unit through a test bed (experiment project) and through anchor points between regional economic corridor development.

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Figure 27 Diagram for Achieving Smart City Principles

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Ⅲ. Improving Trade Facilitation: Implementation of Single Window System

1. Customs Procedure in Sri Lanka

1.1. Sri Lanka Port Logistics Industry

Sri Lanka, a country that connects Europe, Asia, and Africa, holds numerous geographical advantages as logistics hub in South Asia. Sri Lanka’s container port traffic expanded at an annual rate of 8.6% between the years of 2003 to 20142). According to the 2013 statistics from World Shipping Council, Sri Lanka’s largest port, Port of Colombo, handles approximately 4.31 million TEUs, exceeding India’s largest port, Jawaharlal Nehru port (which handles 4.12 million) by 0.09 million TEUs.

Currently, Sri Lanka actively invests in enhancing the nation’s port logistics capacity in order to better utilize its locational advantage. The Colombo Port Expansion Project (CPEP) plans to add three additional terminals to the three terminals that Colombo Port already holds. The construction for the South Container Terminal and East Container Terminal are already finished. If the West Container Terminal’s construction finishes, Colombo Port’s yearly port traffic is expected to expand from approximately 4 million TEU to 12 million TEU.

As transshipment cargo passing Sri Lanka has continued to increase, foreign investments into the Port Logistics industry has expanded considerably. Already, Hong Kong’s Kerry Logistics and Orient Overseas Container Line (OOCL) have entered Sri Lanka’s Port Logistics business and other logistics companies have shown interest in Sri Lanka’s expanding Logistics service.

2) HKTDC Research. ‘Sri Lanka: An Emerging Logistics Hub in South Asia’ 2 June 2015

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1.2. Inefficiency of the Customs Procedure

Although Sri Lanka has heavily invested in their logistic hub’s infrastructure for several years, they still lack heavily in the industry’s intangible factors. The existence of a port acts as a necessary tangible factor in a logistics industry. However, Sri Lanka’s ports lack system and experience (professionals) to effectively utilize and expand their logistics industry.

According to the World Bank’s 2014 Logistic Performance Indicator (LPI), out of 160 countries, Sri Lanka is ranked 89th. This is low compared to countries like , Vietnam, Indonesia, and other Southeast Asian countries who partake in the competition to secure a place in the logistics industry with Sri Lanka. Also, compared to countries within the same region such as India, Pakistan, and Malibu, Sri Lanka shows low scores in the logistics category.

Table 22 LPI Country Comparison

Sri ㅤ Thailand Vietnam Indonesia India Pakistan Malibu Lanka

Score 3.43 3.15 3.08 3.08 2.83 2.75 2.7 Total LPI Rank 35 48 53 54 72 82 89

Score 3.21 2.81 2.87 2.72 2.84 2.95 2.56 Customs Rank 36 61 55 65 58 49 84

Score 3.4 3.11 2.92 2.88 2.67 2.56 2.23 Infra-structure Rank 30 44 56 58 69 82 126

Score 3.3 3.22 2.87 3.2 3.08 2.92 2.56 International Transportation Rank 39 42 74 44 56 72 115 Cate- gory Score 3.29 3.09 3.21 3.03 2.79 2.79 2.91 Logistics Competitiveness Rank 38 49 41 52 75 74 66

Score 3.45 3.19 3.11 3.11 2.73 2.7 2.76 Tracking/Tracing Rank 33 48 58 57 86 92 85

Score 3.96 3.49 3.53 3.51 2.79 2.51 3.12 Timelines Rank 29 56 50 51 123 148 85

Note: LPI Scores are distributed from 1-5, with 5 being the best quality Source: World Bank Logistic Performance Indicator, http://lpi.worldbank.org/international/scorecard/radar/254/C/LKA/ 2014#chartarea (Searched: Feb. 12, 2016)

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Customs and Infrastructure received the lowest feedback and are considered as Sri Lanka’s Logistics Industry’s weak points. In the case of infrastructure, as the above mentioned Colombo Port Expansion Project (CCEP) was not taken into account during the 2014 LPI, large improvements in infrastructure can be seen to have taken place. On the other hand, Sri Lanka’s customs holds an index score of 2.56, which is relatively low compared to its competitors.

Figure 28 Comparison of Sri Lanka’s LPI by category: 2014

Source: World Bank Logistic Performance Indicator 2014, http://lpi.worldbank.org/international/scorecard/radar/254/C/ LKA/2014#chartarea (Searched: Feb. 12, 2017)

De Mel et. Al (2011) also pointed out the excessive documents, time, and cost involved in Sri Lanka’s customs process during their research on Sri Lanka’s customs procedures. The study points out that if Sri Lanka were to export tea, one of their key export items to Japan, 24 documents and 9 separate agencies had to be visited. Similarly, if Sri Lanka were to import used cars from Japan, 18 documents and 5 separate agencies must be visited. These numbers indicate that the customs procedure’s roles are split amongst several agencies, and this disunity places an excessive burden on those related to trade.

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Documents and Agencies Needed for Imports and Table 23 Exports against Japan in Sri Lanka: Case Study

ㅤ ㅤ Numbers List

(1)Proforma Invoice, (2)Purchase Order, (3)Commercial Invoice, (4)Tea Export Permit, (5)Blend Sheet, (6) Fumigation Request Form, (7)Fumigation Certificate, (8)Phytosanitary Request Form, (9)Phytosanitary Certificate, (10)GSP form, (11)Shipping Note, Documents 24 (12)Release Order, (13)Customs Declaration, (14)Bill of Lading (15)Packing List, (16)Insurance, (17)Cargo Dispatch Note, Exports (18)Certificate of Origin, (19)Delivery Order, (20)Assessment (Tea) Note, (21)SLPA Payment Form, (22)SLPA Payment Receipt, (23)Gate Pass, (24)Panel Examination Request Form

(1)Bank, (2)Tea Board, (3)Shipping Agent, (4)Insurance Agencies Company, (5)Sri Lanka Customs, (6)Sri Lanka Ports Authority, needed to 9 (7)Fumigation Company, (8)Department of Agriculture, be visited (9)Department of Commerce or Ceylon Chamber of Commerce

(1)Profoma Invoice, (2)Application for the L?C, (3)Letter of Credit, (4)Customs Declaration, (5)Commercial Invoice, (6)Original Cancellation of Registration Certificate, (7)English Translation of the Cancellation Certificate, (8)Pre-shipment Documents 18 Inspection Certificate(JAAI Certificate), (9)Declaration of Value by Imports the Agent, (10)Declaration of Valuation of Accessories, (Used (11)Working Sheet, (12)Assessment Note, (13)Bill of Lading, Cars) (14)Insurance, (15)Delivery Order, (16)Gate Pass, (17)SLPA Payment Form, (18)SLPA Receipt

Agencies (1)Local Vehicle Agent, (2)Bank, (3)Shipping Agent, (4)Sri Lanka Needed to 5 Customs, (5)Sri Lanka Ports Authority be visited

Source: de Mel et. al (2011), cited from p.24, p.30

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1.3. Summary of Sri Lanka’s Customs Procedure

1.3.1. Export Procedure

The very first step of exporting goods is to register as an exporter in following institutions.

ⅰ. Sri Lanka Export Development Board (EDB)-EDB Registration Number ⅱ. Inland Revenue Department­Tax Identification No. (TIN Number/Value Added Tax Number) ⅲ. Sri Lanka Customs

To register with the above institutions, the exporter is required to produce the original Business Registration Certificate or Certificate of Incorporation and other related documents along with duly completed application forms. Application forms are available at the above institutions. In addition to registering in above mentioned institutions, the exporter is required to obtain following certificates as well.

Certificate of Origin (GSP Certificate)

This certificate is issued by Department of Commerce, Sri Lanka clarifying the origin of the export as it is required to obtain certain tax or duty concessions such as GSP or Free Trade Agreement (FTA) duty concessions.

Certificate of Origin

This is also required by the customs of the importing country. It is issued by chambers, i.e., Ceylon Chamber of Commerce or National Chamber Commerce.

Quality Certificate

The standards of the products exported need to be clarified by certified institution. In Sri Lanka, quality certificate is issued by Sri Lanka Standard Institution. (SLSI) while private quality certificates are issued by SGS Lanka (Pvt) Ltd.

Health Certificate

This certificate refers to (sanitary and phytosanitary or SPS measures) to test the quality of agricultural products. Often, Health certificate is required by the Health Authorities of the importing country, when meat, fish and live animal are being exported. It is issued by the Department of animal Production & Health. With regard to food items, health certificates are issued by the Food Control Administrative Division of the Ministry of Health.

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Phytosanitary Certificate

This certificate is required by the importing country, when exporting cut flowers and foliage plants, fruits and vegetables etc. It is issued by the Plant Quarantine Service of the Department of Agriculture

Fumigation Certificate

This certificate may be required by buyers/government for the import of Agricultural Products such as cut flowers foliage plants, sesame seeds, cashew nuts, tea etc. and this certificate is issued by the Ministry of Agriculture or agencies that has vested with powers by the ministry.

Once above certificates are obtained, certain applications need to be filled prior exporting. These applications ask questions about quantity of exports, destination and etc.

Customs Goods Declaration (CUSDEC)

In par with international standards relating to international trade, custom good declaration has to be made in exporting goods as well as importing goods. In Sri Lanka, the good declaration is known as the CUSDEC and the Customs Ordinance, section 47 for imports and section 57 for exports sates that declaration has to be made. The declaration is made at the boarder point. (Sea Port or Airport). This form specifies the quantity of exports, destinations and all major details.

Commercial Invoice

This invoice is prepared by the exporter stating all the particulars regarding the shipment and filled along with the Goods Declaration at the time of processing it at the Export Office.

Packing List

A document specifies the contents of each individual package in the shipment.

Other Documents (if applicable)

• Any permits/license • Tea blend sheets • Material utilization sheets

Simplified process of export procedure in Sri Lanka is summarized in the following figure.

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Figure 29 Sri Lanka’s Export Procedure

Source: Summarized by the author(s)

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1.3.2. Import Procedure

To import goods to Sri Lanka, import licenses are required. An importer has to pay an amount around 7 USD and obtain import license. Payments for import of goods can be made under Letters of Credit (LC), Documentary collections (Documents against Payment, DP) or Documents against Acceptance (DA), or Advance Payment (AP) terms. Goods can also be imported to Sri Lanka on a consignment-account basis as well.

Basic documents required by commercial banks for imports include an invoice, insurance certificate (if applicable), and transport documents. Depending on the product and the mode of payment, documents such as certificates of origin, inspection certificates, and packing lists may also be required.

All shipping documents in relation to imports made on DP or DA terms should be forwarded by the supplier's bank or by the supplier to a commercial bank in Sri Lanka for release to the importer of goods. In the event the original documents are not received on time, the importer, at the discretion of the bank, may submit copies of those documents for certification by the bank for clearance of the goods. The importer should arrange the original shipping documents to be received by the bank concerned within 30 days from the date of certification of the copies.

To clear goods through customs, the importer should submit relevant shipping documents certified by a commercial bank and customs declaration forms to the Sri Lanka's Department of Customs. In case of an import made on an AP basis, goods will be released on submission of satisfactory proof of payment, such as bank confirmations. In the case of an import made on a consignment-account basis, goods will be released by customs on the submission of clearance documents.

Sri Lanka implemented the WTO Customs Valuation Agreement in January 2003 and follows the transaction-value method to determine the cost, insurance, freight (CIF) value which has been operating successfully.

Importing process in Sri Lanka is depicted in the following figure. Even though it seems to follow only four steps to importing from abroad, each step involves additional complication depending on importing products.

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Figure 30 Sri Lanka’s Import Procedure

Source: Summarized by the author(s)

1.3.3. Automation and Single Window

In recent past, Sri Lanka Customs took number of steps to make imports and exports easy through automating the system. One major achievement was the introduction of DTI which allow to submit applications through one system. Under this,

• It was allowed to receive the Customs Declaration Message (CusDec) through Direct Trader Input • Receive confirmation of updated manifest and payment of duties and other levies of CusDec • Issuing internal passes for removal of Full Container Load (FCL) containers from the yards • Allowing clearance of Cargo FCL at container yards and Less Container Load (LCL) at ware houses

The automation of process is now fully implemented through: “ASYCUDA World” which is the online system to facilitate the importers to process the CusDec without delay. Importers

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and exporters are required to registered with the ASUCUDA World and using the system, they can import and export goods.

ASUCUDA is a Single Window concept that facilitates electronic data exchange between government agencies and all imports and exports. Sri Lanka custom commenced the electronic data exchange between the tea board and custom. Therefore, tea board approval is electronically provided to customs.

Figure 31 Tea Exporter with ASYCUDA World

Source: Sri Lanka Customs

However, Single Window system needs improvement. During interviews with custom senior officials, it was noted that the electronic data exchange system needs to be used by other institutions as well. Similar to tea, approval is required for many exports, such as coconut, rubber, and apparel.

Given that most of the products that are exported requires various licenses and certificates, full-implementation of Single Window would save time as well as money. Currently, the process is cumbersome as the same document has to be submitted to various agencies and multiple visits to agencies are required. Connecting these institutions would not only reduce time and money, but also will encourage exporters and those who are interested in it.

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Box 1 Sri Lanka Single Window-Status (August 2017)

ELECTRONIC CUSDEC LODGEMENTS •Electronic lodgment of Customs declarations covers all the areas of Customs since 2011, which include imports, exports, industries and services, air cargo and Board of Investments CARGO MANIFESTS •Acceptance electronic inward sea manifest are covered 100%. Automated manifesting however takes place on in the area of industries & Service Directorate, Motor Vehicles Clearance. Manual manifesting is currently taking place in the other areas of imports. Manifesting of BOI CUSDECs are also yet to be implemented, which is a matter of activation as all the manifest data is available. •Accepting air manifests is at testing stage RISK BASED CARGO SELECTIVITY FOR EXAMINATION •Customs ICT is technically ready for the full implementation of Automated Selectivity both for imports and exports. What is already implemented is limited in scope, and to get the maximum benefit of risk management, some changes should be done once certain administrative procedures are finalized. CONNECTIVITY & INTEGRATION •ICT is capable of providing web services integrating ASYCUDA with any computer system of any agency provided that such agency based on the widely used XML/HTTP architecture. •ASYCUDA now sends release order message to terminal handlers electronically, eliminating physical movement of Cargo Dispatch Note with passed for shipment orders to respective port operators, thus further cutting down export clearance time. •Sri Lanka Tea Board is connected with ASYCUDA for uploading tea blend sheets as e-documents. Tea Board gives their approval for the blend sheet and it linked to the export CUSDEC. •Customs ICT has already implemented and made available a Web-Service for the Import & Export Control department so that the licenses could be integrated with Customs including data for debiting on imports/exports. •Agriculture permits are capable of being integrated as a Web Service connecting the Department of Agriculture together with automatic debiting capabilities. However, they do not have required technical capabilities but ASYCUDA could be made available to them as a terminal to input permit data for the time being. •Web service is already developed and available for the integration of SLSI certification procedures. However, certain differences in policies are to be settled. •Registrar of Motor Vehicle is already given a web service so that information in relation to vehicle imports could be obtained for vehicle registrations. HARDWARE, SECURITY AND PERFORMANCE •Currently computer hardware being upgraded with Oracle ExaData database platform with 140T storage with Disaster recovery and redundancy. The upgrade also includes system security enhancements with firewalls, performance enhancements, scalability and economies of scale with virtualization. The cost of the project is around 3 million USD with ADB assistance. PAPERLESS CUSTOMS •With the recent capacity and performance augmentation, ICT is now technically capable of implementing Digital signatures for authenticating electronic documents with any Certification Authority. •Customs ICT is planning to receive scanned copies of supporting documents for Customs Declarations with a view to introduce paperless cargo clearance. This is in progress with LANKA-SIGN of Lanka Clear as the Certification Authority.

Source: Sri Lanka Customs

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1.4. Need for Improving Sri Lanka’s Customs Procedure

Sri Lanka’s customs procedure must automate and computerize their system for improvement. Within Sri Lanka’s Customs, only a part of the initial stages of Custom Declaration (CusDec) is available for computer input. Thereafter, the person must take the printed copy to the customs or the Board of Investment and must directly visit to receive essential admission or signature. Due to these discomforts, many users continue to decide to write by hand. From the perspective of the user, the lack of a computerized/automated customs procedure leads to an increase in required time and cost, and possible problems for delays in customs clearance for imports and exports. Thus, there is a high demand for improvement in this specific sector.

Furthermore, automation and computerization holds important meaning for efficient implementation of trade agreements between countries. In order for Sri Lankan exporters to export goods to India and receive the preferential tariff benefits of the South Asian Free Trade Agreement (SAFTA) concluded between the two countries, a Certificate of Origin (COO) issued by the exporting country must be submitted. However, while Sri Lankan-Indian shipments are completed within 48 hours, the COO can only be issued in Sri Lanka after the goods have been shipped (or shipment documents have been completed). Thus, because the person must personally visit the agency to be issued a COO and there is no electronic version available that will be acknowledged, the COO issuance is delayed and the exporter is faced with additional cost from the delay in customs clearance when the shipment has arrived in India. Due to these reasons, there have been cases where exporters have given up on utilizing the SAFTA. As bilateral and regional trade agreements have been the global trend, the lack of an automated and computerized customs procedure decreases the efficiency and effectiveness of the agreement.

In this study, we plan to advise a general direction for improvement in Sri Lanka’s customs procedures. We will be focusing on the Sri Lankan Trade Facilitation Improvement Project’s urgent task, to automate and computerize the Sri Lankan customs procedure, to better facilitate trade.

2. Development of Korean Customs Administration

2.1. Development of Korean Customs Administration

The Korean Customs Service was initially established to manage the order of imports and exports into the country to secure national finances and protect domestic industries from crimes

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like smuggling. However, as time passed and the environment around global trade has diversified greatly, the Korean Customs Service’s roles have likewise adapted to include a total of seven branches each with a distinct aspect: to control the rising growth of imports and exports and customs clearance of tourists, to secure national finances by imposing tariffs and internal taxes on imported goods, to protect domestic industries through increasing smuggling patrols, to protect national and societal safety through screening for drugs, firearms, and harmful foods, to protect the environment through screening for hazardous chemicals and rare animals or plants, to crackdown on false indication of origin for fair competition, and to crackdown and prevent illegal foreign exchange transactions and money laundering.

Similar to these seven roles, the development of the Korean Customs Administration also occurred through seven specific periods. While the history of the Korean Customs Administration officially began on September 28, 1878 with the establishment of the Doomojin Customs Office, South Korea’s Customs Service can be said to have begun its duties officially from August 27, 1970 when the Korean Customs Service became independent from the Ministry of Finance.

South Korea’s Customs Administration history can be largely separated into two general periods: before establishment of the Korea Customs Service, and after the establishment of the Korea Customs Service in 1970. While the former contains two specific periods between 1878-1947 and 1948-1970, the subsequent age contains five specific periods between 1970-1979, 1980-1989, 990-1994, 1995-1999, and 2000 onwards. Each period acts as a reaction to the changing trade environments of globalization and South Korea striving to adjust to the times.

2.2. Chronicle Development of Korean Customs Administration

2.2.1. Establishment of Korean Customs (~1970)

On August 15, 1948, Korea, after reconstructing its government post-Japanese control, modified the central organization of its customs administration. Furthermore, on November 23, 1949, Korea created a new Customs Act to replace the Customs laws set during Japanese control. The new Customs Act, unlike Japan’s pluralistic customs regulation, was a single tariff law that integrated customs-related laws and regulations.

However, following the Korean war that occurred on June 25, 1950, the majority of production infrastructure and industries were destroyed and Korea went through a period of extreme inflation. In order to restore the destroyed production lines, massive fiscal spending

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was required during the mid-1950s and as a part of the financial securitization necessary to operate the post-war economic system, the customs administration imposed various regulations and/or taxes.

In 1957, Korea’s economy began to stabilize from the wounds of the Korean war. However, as a result of both the corruption and incapability of the governments of the late 1950s and early 1960s, society and politics were both extremely chaotic. Between 1957 to 1961, Korea’s government decided to invest over $300,000 to enact the Customs Appraisal Office Modernization Plan. In addition, as a result of modifications in the Customs Act in December of 1961, South Korea changed its tariff and item classification method from the conventional natural science method to the BTN (Brussels Tariff Nomenclature) method.

Beginning from the mid-1960s, after South Korea successfully completed its 5-year economic development plan (which allowed its economic development to leap forward greatly), South Korea adopted various systems for transition to an open economy. For instance, in March of 1965 South Korea adopted the single floating exchange rate system, in April of 1967 South Korea joined the General Agreement on Tariffs and Trade (GATT), and in October of 1968 South Korea joined the Customs Cooperation Council (CCC) and actively participated in international economic organizations. Furthermore, beginning from the mid-1960s, South Korea began actively creating measures to support export.

However, from the end of the Korean war, due to the extreme inflation and lack of supplies, smuggling from became rampant and increased the levels of economic chaos in society. Not only was smuggling rampant from China, but also a handful of items in the market were smuggled from the American Post Exchange (PX) and Japan. In response, South Korea created a number of laws in 1961 including the Prohibition on the Sale of Certain Foreign Goods, Special Act on Punishment of Specific Crime, and Temporary Special Act on Punishment of Specific Crime in order to target smuggling. Under the order of the president, the military, police, navy, and customs administration came together to create the Collaborative Smuggling Inspection Team to strengthen screening and patrolling for smuggling. After many successful accomplishments with catching large smugglers, the team was disbanded in 1969.

2.2.2. Improving Customs Management System for Export Promotion (1970~79)

Unlike the 1960s where global trade grew by over double and global economy was booming under the US-led IMF-GATT system, in the 1970s, as the United States and several developed countries entered into recession, the situation changed rapidly. While South Korea benefitted greatly during the 1960s through its export-oriented economic policies, the decrease in exports in the 1970s brought forward changes to its economic policies and direction as a country.

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South Korea decided to, while maintaining its export-oriented policies, invest greatly into the development of the heavy chemical industry. Instances of the governmental support for heavy chemical industry include laws such as the Petrochemical Industry Promotion Act (1970), Nonferrous Metal Promotion Act (1971), and Textile Industry Modernization Promotion Act (1969, 1979).

Following the 1960s, smuggling continued to be one of the greatest problems against domestic industries. However, unlike items that were smuggled during the 1960s in which the majority was composed of living supplies, the 1970s smuggled luxury items like electronic devices, jewelry, and medical drugs. In order to strengthen measures against smuggling once again, South Korea enforced its laws and created administrative formulation guidelines for custom offences in 1973. Furthermore, the state council created comprehensive measures to eradicate illegal foreign goods in 1974, which was immediately put into action nationally.

In the 1970s, export and import volume increased by over 30% yearly. Furthermore, the return of soldiers from the Vietnam war in 1973 and the dispatch of workers to the from 1975 increased the volume of travelers entering and leaving the country by 28% each year. In order to manage the increasing levels of tourists and export and import levels, several customs measures were enacted such as special customs procedures for soldiers and dispatch workers, customs measures to separate locals and foreigners, and the ATA CARNET convention (1978).

2.2.3. Strengthening of Customs Control System in Preparation of Opening (1980~89)

The 1980s was a period of stabilization for the Korean economy, symbolized by autonomy, competition, and openness. The unbalanced growth of Korea due to its forcefully developed heavy chemical industry brought upon heavy reactions upon the Korean economy. Thus, the government decided to switch direction to focus its economic policies on autonomy, competition, and opening.

In order to facilitate competition within its economy, South Korea’s Customs Administration changed its differential tariff system to a uniform tariff system and reduced the tariff levels slowly. Furthermore, in order to adapt to the international trading environment, South Korea implemented part of the new GATT Customs Evaluation Agreement in 1884 to reduce the shock on the economy and later implemented the entirety in 1886.

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The 1980s was also the period in which South Korea brought large changes to its customs system. Originally, the South Korean customs system relied on an Object Management System for customs management, but with the increasing volumes of trade, limited human resources could not effectively deal with the increasing work. Thus, South Korea’s customs management system changed to that of a Large Enterprise Management System and selected 104 large enterprises initially to manage. The specifics were revised and modified with time to make more perfect.

The 1986 Asian games and the 1988 Seoul Olympics both brought great urgency to the Korean Customs Administration. In order to manage both events successfully, great care was put into quick and effective customs clearance while maintaining high levels of security. During the periods of preparation for the events, 359 members of the customs employees were sent to Japan to learn the customs clearance skills of developed countries. Furthermore, an additional 1,165 security agents were trained by the army’s counter-terrorist specialists in preparation for the events.

The 1980s was a time of preparation for future development of the customs administration as well. For instance, in 1980, the introduction of the headquarters customs system, establishment of the Central Analysis Center for Customs, and establishment of the customs clearance counseling room took place. Furthermore, the first computerized customs clearance systems (CCS) was created and was enacted in Gimpo and Seoul for air cargo in 1986.

2.2.4. Simplification of Customs Procedure (1990~94)

The early to mid-1990s was a time of change in the Customs process involving efficiency and reduction in cost. In order to make this a reality, the Korean Customs Administration computerized the customs process using the EDI process and reduced unnecessary steps, allowing for customs clearance to occur faster. Furthermore, many of Korea’s policies on exporting products were rid of and the amount surveyed during exporting was reduced from 10% to 5%. However, in order to prevent organizations from abusing the change, major cargo screening tests were put into order as well.

At the same time, the UR agreement of the time made changes in the industry support policies inevitable at the time. Many of Korea’s policies that dealt directly with the industries had to be disposed, and new policies were set to indirectly affect the several industries. Furthermore, there became a rise in necessity to protect domestic farmers from foreign farmers, so tariff rates were adjusted 42 items in 1994.

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More than anything, the opening of the market and large increases in imported rice and wheat from China brought rise to concerns for domestic agricultural products. As imported Chinese wheat and rice were labeled falsely as Korean in the market, in 1994, several laws and policies were made that strengthened trademark policies and origin indication violations.

2.2.5. Launching of WTO and Advancement of Customs Administration (1995~99)

With the launching of the WTO, the period between 1995 to 1999 was about raising Korea’s market competitiveness on the international level. With the development of information and communication technology, the Customs Administration was able to create a computerized system much faster than planned. Furthermore, in order to compete on the global level, several trade restrictions were alleviated and screening for smuggling and unfair trade became even stricter.

In order to compete on the global scale, Korea had to aim towards reducing the logistic costs for companies. This was made possible through switching the system of exports and imports from one of licensing to declaration in 1997 and 1998. By applying this system to several of Korea’s major ports, by 1999, a yearly sum of 60 million USD worth of logistics costs were successfully reduced.

The period between 1995 to 1999 was also a time of development for the computerized structure of the Customs process. In 1998, the EDI system was further applied to imported cargo and it continued to evolve step by step when in September 1999, Korea first began its paperless Customs import system. This system was able to supply crucial information about trade to those both inside and outside Korea, and acted as an important source of information during the IMF crisis in 1997.

2.2.6. Implementing World-Class Customs Administration (2000~Now)

After several changes in Korea’s Customs Administration system in the 1990s from outer environmental factors such as the WTO, Inter-Korean summits, opening of international markets, and changes in the demands for customs processes, Korea’s Customs Service went through an unprecedented change on January of 2000.

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A management diagnosis into Korea’s Customs Service revealed that Korea’s Customs Service lacked adaptability to changing international tides, cooperation between different agencies, and cooperation within its own sectors. Thus, seeing an urgent need to change things, the Customs Service went through a structural change in which it attempted to create a process-oriented customs service to raise cooperation, raise efficiency in work by utilizing risk management techniques, and raise worker loyalty and efficiency by issuing training sessions and bonuses dependent on a performance evaluation system. Thus, through changing the focus of the structure to process and increasing the efficiency of its sectors, the Customs administration was able to improve its deficiencies of the past.

2.3. Significance of Korean Customs Administration Development

2.3.1. Quantitative Growth

In August of 1970, Korea’s export import volume was at a mere 2.8 billion USD, but by 1999, its export import volume stood at 263.5 billion USD, 94 times larger than before. Furthermore, the number of tourists also rose from 2.45 million to over 90 million, 36-fold increase. The tax revenue increased 310 times from 58 billion KRW to 18 trillion KRW and the customs organization grew from 14 offices with 1,870 workers to 28 offices with 3,931 workers during the short lapse of time.

2.3.2. Qualitative Change

The qualitative changes in the Korean Customs Service are undeniable when looking at either its accomplishments or history. In 1988, the administration changed from a full screening process to a selected screening process and was able to build a fully paperless computerized customs procedure by 1999 by continuing to develop its EDI system step by step. In 1996, Korea’s Customs created its survey monitoring information system and it expanded its duties from that of screening for smuggling to that of societal and national protection. Later in the late 1990s and early 2000s, Customs changed its procedures to be from supplier-based to consumer-based and created its One-stop service system. Now, Korea’s Customs Administration continues to look for international cooperation and prioritizes bilateral customs cooperation with foreign countries. As of 2000, Korea has now dispatched customs officials to five countries including the United States, Japan, China, and Thailand.

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3. Implementation of Single Window System

3.1. Single Window Environment in Cross-Border Trade

The concept of Single Window is widely applicable in the structure of government, which provides services to citizens and businesses. Single Window means that citizens and businesses can use a single interface to receive government services. Transforming from traditional structure of government to Single Window environment, service users can receive simplified and transparent services, reducing time and cost involved in it.

In cross-border trade, there are many different government department and agencies which have its own responsibility in cross-border trade process. Customs, food safety agencies, border policing, transport related agencies/department and/or government agencies responsible for sanitary and phytosanitary and technical barrier to trade have been present at the border to manage their respective areas of competence. Single Window in cross-border regulatory is to provide simplified and efficient procedures to users. It allows traders to use IT-based single interface in cross-border trade activities, eliminating repetitive submission of data. The United Nation Centre for Trade Facilitation & Electronic Business (UN/CEFACT) viewed the Single Window environment in cross-border trade as the collaboration between Customs and other government agencies. In UN/CEFACT Recommendation 33, it is explained in terms of information flow between participants in trade and related government agencies. According to the Recommendation 33, Single Window is defined as following;

“Within the context of this Recommendation, a Single Window is defined as a facility that allows parties involved in trade and transport to lodge standardized information and documents with a single entry point to fulfil all import, export and transit-related regulatory requirements. If information is electronic, then individual data elements should only be submitted once”

This Recommendation 33 is generally accepted as the concept of Single Window in cross-border trade and implementation of Single Window is judged by whether the norm required by the Recommendation is satisfied.

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Figure 32 Flow of Cross-Border Trade before and after Single Window

Source: Customs UNI-PASS International Agency (CUPIA) website. (http://www.unipass.or.kr/ds4_1.html)

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Depending on the degree of integration scope, Single Window system in cross-border trade can be divided into customs Single Window, national Single Window and regional/global Single Window environment. Customs Single Window implies the implementation of Single Window system in infrastructure, logistics and clearance in cross-border activities so that declarers can process customs administration procedures through a single entry, without having to visit customs or other government agencies.

On the other hand, national Single Window widens the scope of integration to connect trade-related stakeholders with other government agencies. While customs Single Window handles customs administration procedures, connecting users with government agencies such as Customs, Food and Drug Administration, and/or other related agencies, national Single Window widens the applicant’s connection to other related agencies such as port/airport office and immigration office.

Lastly, regional/global Single Window means connection of Single Window system among countries. Based on an information sharing platform under regional/global Single Window among participating countries, they can share information and provide efficient performance in trade related regulatory policies such as risk analysis and/or trade statistics.

The higher level of integration scope in Single Window, the more efficient service provide would be possible for users. However, the construction of Single Window environment in cross-border trade should follow step-by-step approach. That is, it is not possible to jump directly to regional Single Window system without having customs or national Single Window environment. Considering that Sri Lanka is at the burgeoning period of adopting Single Window system, we focus on customs Single Window environment in this study.

3.2. Construction of Customs Single Window Environment

Customs oriented Single Window is to improve customs procedure and enhancing trade facilitation. Eliminating unnecessary tasks for customs procedure and integrating customs approval results, it can facilitate cross-border trade. Also, standardization of trade related information and efficient management of border should be key factors to successfully implement Single Window environment at the border. Connectivity and interoperability between government agencies and users are keys for customs-oriented Single Window environment. For these, it requires to have infrastructure which connect users and relevant government agencies and to set up Single Window system in logistics and clearance.

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Figure 33 Customs-Oriented Single Window

Source: Customs UNI-PASS International Agency (CUPIA) website. (http://www.unipass.or.kr/ds4_1.html)

3.2.1. Single Window Infrastructure

To connect users with government agencies in cross-border trade, it has to attract users to use customs Single Window system. Inciting users to Single Window framework can be done by providing user friendly functions, such as ePayment service to pay tariffs and other duties, simplified and reduced preparation time, and/or providing strong confidentiality and security in the information which users submitted to the system.

Single Window infrastructure is to provide user convenient functions to connect users with government agencies to operate Single Window in an integrated and secure manner. Construction of internet-based e-Authentication, ePayment system, providing secure manner of transmission of documents, and/or integrated management of information should be included in Single Window infrastructure. In addition, it should make it possible to share the information among government agencies and/or between government agencies and users.

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Figure 34 Single Window Infrastructure Model

Source: Customs UNI-PASS International Agency (CUPIA) website. (http://www.unipass.or.kr/ds4_1.html)

3.2.2. Logistics Single Window

When aircrafts and vessels arrive at and/or leave ports, transporters are required to report related information about their arrival and departure to various border agencies. Not only Customs, but also other government agencies such as immigration office, quarantine office and/or port authority are involve in this process. Without Single Window environment, transporters have to provide the required information to each agency separately.

Logistics Single Window is to provide one-stop service for transporters; when integrated eDocument is given to transporters, they fill up the information required once and it is redistributed and shared by government agencies. The integrated eDocument includes common field, manifest unique fields and arrival/departure report unique field, and this

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information will be redistributed to relevant government agencies, such as Customs, Maritime authority and quarantine office.

Logistics Single Window provides cost and time savings for transporters; they do not need to physically visit related authorities and due to information sharing, it increases transparency and eliminates redundancy.

Figure 35 Logistics Single Window Model

Source: Customs UNI-PASS International Agency (CUPIA) website. (http://www.unipass.or.kr/ds4_1.html)

3.2.3. Clearance Single Window

Clearance Single Window is another one-stop service in cross-border trade. It makes it possible for importers/exporters to receive regulatory permit and to complete the Customs

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declaration through a single entry service. As it is based on electronic transmission of information, there is no need to have physical visit of government agencies to clear import/export procedure.

Clearance Single Window system collects information and it is allocated to related government agencies. Integrated eDocument, containing common fields and unique fields, redistribute information to each government agency, sending the necessary information to the agency to determine approval. Each agency processes the approval using its own legacy system, and reports its decision to the clearance Single Window. Having the decision reported, the clearance Single Window send Customs declaration and approved permit to the Customs for clearance approval, and the Customs notify results to the declarer.

Figure 36 Logistics Single Window Model

Source: Customs UNI-PASS International Agency (CUPIA) website. (http://www.unipass.or.kr/ds4_1.html)

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3.3. UNI-PASS: Korea’s Single Window System

Now one of South Korea’s most prized developments in the customs sector, UNI-PASS has become globally renowned for its capabilities. However, the system was never created with such an intention in mind. Rather, UNI-PASS’s development was strictly limited to practicality and need. In order to match the rising yearly trade volume, the Korean Customs Service felt a need to increase its efficiency and the result of it was the UNI-PASS that is globally exported now. A deeper analysis of its history allows us to better visualize the development that rose out of need.

3.3.1. Development of UNI-PASS

The history of UNI-PASS begins from a software created in 1974 by the Korean Customs Service for simple statistical purposes. However, the twenty years following UNI-PASS’s initial development was filled with numerous complaints and inconveniences for those who utilized Korea’s custom procedures. The largest of them were the long waiting periods and costs when it came to Korea’s customs. Due to all customs procedures taking place in paper, users had to visit the Korean Custom Service and the long waiting periods led to increased costs and complaints. Furthermore, since all tasks were done on paper, Korean Customs did not have the resources to analyze and maintain a risk management system. As trade volume steadily increased by 15% yearly, the abilities of the Korean Customs Service was not able to follow the development whether it be in technical efficiency or manpower due to its lack of a computerized system. For instance, import customs clearance took over three days on average, and monthly reports took over a week to write. In addition, the several government agencies in charge of the data for import and export statistics, tax notices, tax calculations, and etc. lacked a standardized system that connected each other. Thus, each system had their own numbers and the same data had to be repeatedly inputted into the several agency’s individual systems. As a result, those involved in trade were forced to submit over 120 documents in order to receive items during the customs process and this procedure took on average 15 to 23 days, increasing costs heavily for trade3).

The development of the UNI-PASS system can largely be categorized into four phases or generations: Simple Online Statistics, EDI Clearance System, Internet Clearance System, and Smart Clearance System4) Separated between the years of 1974, 1992, 2005, and 2011 respectively, the UNI-PASS system was a constantly developed piece led by the Korean government’s National Administration Network development in 1985.

3) Yoon Samuel (2012) p. 62 4) Customs UNI-PASS International Agency (Pamphlet) p. 5

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1) EDI Clearance System

The EDI Clearance system was a phase in which from 1992, a basic plan for an Electronic Data Interchange (EDI) automation plan was created and developed. In the following years of 1994, 1996, 1997, 1998, and 1999, an export clearance system, import clearance system, cargo system, P/L clearance system, and investigation and information system were created and added respectively. This period was the first time in Korean history where government agencies had created a completely automated system in which users could apply for export customs clearance without any paper documents5).

Not only was the EDI Clearance System a development from no paper to an automated system, but also the customs procedure was reduced greatly from 360 species to 180 species and several intermediary steps such as procedures for exporting bonded transportation, returning export bonded zones, and submission of documents confirming entry and exit zones were abolished. In the case of export work, the procedure was drastically reduced from 8 steps to 4, and advanced customs clearance system was put into place that made the flow of work smoother6)

2) Internet Clearance System

From 2004, a fully web-based UNI-PASS system was created where the existing EDI system was transferred to a web format. While many additions were made during this third phase, including but not limited to, duty collection (2005), drawback (2005), Performance Management System (2005), RFID air cargo management (2007), Integrated Risk Management System (2007), and AOE management system (2008)7), the largest and most impactful was that of the Single Window system applied in 2005.

The Single Window project, recommended by the WCO and UN, was led by the presidency in 2003 as part of the “Roadmap for Logistics Hub of Northeast Asia.” An idea to facilitate trade by creating a single platform in which foreign and domestic traders could utilize to complete customs clearance at a faster and easier rate and obtain information easier, the Single Window system was developed and improved over a 4 phase period from 2004 to 20098).

5) Yoon Samuel (2012) p. 65 6) Yoon Samuel (2012) p. 66 7) Customs UNI-PASS International Agency (Pamphlet) p. 5 8) So Young Yang (2011) p.2

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With a total of 5.7 billion KRW (approx. 6 million USD) invested, the Single Window system met challenges both environmental and technical, but the results of it show a successful development. From 2006 to 2010, the yearly use rate rose from 4.3% to 91.6% and connected government agencies rose from 8 to 209). Furthermore, the time saved for users who needed customs clearance by utilizing the Single Window system decreased by a full day, since the need for an approval of import-requirement application step was completely unnecessary with the Single Window system. Furthermore, the comprehensive saving of Korea’s firms’ costs by reforming trade facilitation stood at 2,582 billion KRW (2.1 billion USD) saved10).

3) Smart Clearance System

Finally, Korea’s Smart Clearance System has been an ambition that the Korean government has hoped to fulfill from 2011. This fourth generation UNI-PASS’s goal was to allow users to utilize their mobile phones and create an Intelligent customs administration system11).

As of June of 2016, this “smart” clearance system was successfully launched for mobile access and allows users to find customs information customized for their individual company or taste. This new system also further heightens security and quickens the time needed for foreign mail or goods to be processed and enter Korea12)

Figure 37 Logistics Single Window

Source: Korea Customs e-Clearance System: UNI-PASS, Customs UNI-PASS International Agency (CUPIA) website. (http://www.unipass.or.kr)

9) So Young Yang (2011) p.5 10) Doing Business Report (2010) 11) Customs UNI-PASS International Agency (Pamphlet) p. 5 12) Korean Culture and Information Service (Web)

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3.3.2. Functions of UNI-PASS

South Korea, now placed seventh in yearly international trade volume, owes much of its success in trade to the UNI-PASS program that allows custom clearance and trade to happen without long delay and cost. However, the advantages that traders and Korea Customs service receives from UNI-PASS aren’t limited to a simply fast and efficient system.

The long history and development period of UNI-PASS enables it to have several functions included and added within it. These include a Single Window system, internet clearance portal, information management system, clearance management system, cargo management system, and administration system.

1) One-stop Service and Accessibility

As mentioned above, Korea’s implementation of a single-window system allows for UNI-PASS to act as a one-stop service for all customs procedures. The single-window system allows for data harmonization of all customs data, and the data are able to be standardized. The Single Window system analyzes the 33 documents entered for customs and picks out the final 237 common items, 118 unique items, and 187 unnecessary elements from the 542 data sets13).

One of the reasons the single-window system was able to become such a success was due to the easy accessibility from the internet portal. The customs procedure can now be approved online and this reduced the time necessary for customs approval, lowering storage costs for firms.

2) Export and Import Customs Clearance and Cargo Management

The import customs clearance system in UNI-PASS is done completely online and begins by collecting the necessary data from the importer. After the data are entered, the data are sorted for errors and links to the corresponding cargo number, allowing users to see where their items are in real-time. Whilst doing this, cargo items sometimes go through extra document review, an inspection of actual goods, or a P/L screening14).

In the case of the export customs clearance system, likewise to the import system, the task is done completely online. Furthermore, as an act to encourage exports, Korean exports policies

13) Yoon Samuel (2012) p. 69 14) Yoon Samuel (2012) p.71

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have reduced, so that most exports procedures are automatically passed by the UNI-PASS system. Only selected goods, such as those that are prohibited, are inspected during export.

Finally, cargo management is done on a much more particular level from beginning to end. The cargo management procedure begins from the airline or forwarder’s admission of the cargo. After the Master and House B/L is turned in, the MFCS (Manifest Consolidation System) acts and with the MRN, a unique cargo reference number is created15). With this number, the cargo can be tracked from beginning to end in real-time as well.

3) Tax Collection and Tax Refund

Both the tax collection and tax refund systems are supported by the UNI-PASS system. By connecting with banks and customs laws, the system automatically puts into account taxes on imports and exports through an electronic payment system. Furthermore, taxes are fully returned in particular cases when certain laws and conditions are fulfilled, and these data are saved in the system, where they are reviewed multiple times for accuracy.

4) Risk Management and Data Warehouse

The risk management system is an extremely important part of the UNI-PASS system. Since there is a limit on the number of people the customs service hires while trade volume continues to increase each year, the risk management system effectively utilizes the resources to their highest efficiency in order to select and inspect for dangerous or prohibited items. The core of this system is to raise the accuracy percentage with as low number of selections as well. The risk management system also works as part of national security to prevent tax evasion and illegal foreign exchange transactions as well16).

UNI-PASS also contains a data warehouse system called CDW that sorts out and analyzes the over 2000 inner and outer data collected from the customs process. Certain data that are needed for customs are also separated from the rest of the data sets and filed into separate data marts of the particular government agencies. The data mart data are created in 3-dimensional cube shapes, so that visual analysis can be made easier17).

15) Yoon Samuel (2012) p. 73 16) Yoon Samuel (2012) p. 76 17) Yoon Samuel (2012) p. 81

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3.3.3. Globalization of UNI-PASS

Korea’s UNI-PASS has been widely accepted as a successful case for a Single Window customs system. The World Bank’s 2010 and 2011 Doing Business report acknowledged both the UNI-PASS Single Window system and the UNI-PASS container cargo management system as the Best Practice respectively and further reported that with the completely computerized UNI-PASS system, Korea’s import and export customs procedure reduced by 3 and 2 days. In addition, Korea’s UNI-PASS system earned the Intellectual Property Rights Award (WCO, 2006), E-Asia Award (AFACT, 2007), BSC Hall of Fame (Palladium Group, 2009), and Asian MAKE Award (World Knowledge Forum, 2011), showcasing its excellence on the global stage. When looking at particular case studies, Korea’s UNI-PASS began initiating export consulting to Kazakhstan in 2005 and since then, ten countries have exported over $336.5 million in ten countries by 2015. In 2011-2012, Korea’s exported model to Ecuador, ECUPASS, received the World Customs Organization’s (WCO) Innovation Award in 2013. Furthermore, Ethiopia, Colombia, Peru, and other countries are currently negotiating for an exported model of UNI-PASS as well.

Table 24 Korea Customs Service UNI-PASS Exporting Log

Time of Country Name of Business Cost Contract

Kazakhstan Consulting for development of Customs System Oct. '05 420,000 USD

Kyrgyzstan Consulting for development of Customs System Mar. '08 470,000 USD

Dominica Electronic Customs System Development Business Apr. '08 28.5 million USD

Mongolia Electronic Customs System Development Business Mar. '09 5.54 million USD

Risk Management and Data Management System Guatemala Dec. '09 3 million USD Construction

Electronic Customs System Development Business Dec. '10 21.6 million USD Ecuador Single Window Development Business Sep. '11 15.8 million USD

Nepal Electronic Customs System Development Business Aug. '11 3.83 million USD

RM and Cargo Management Construction Aug. '11 2.66 million USD Tanzania New Customs System Development Business Aug. '12 19.6 million USD

Uzbekistan Single Window Development Business Dec. '12 4.12 million USD

Cameroon Electronic Customs System Development Business Sep. '15 23 million USD

Total 10 countries, 363.5 million USD

Source: Korea Customs press release (2015.09.07), ‘Government Opens the Export to Africa’, Korean Customs Information Planning Department

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3.4 Impact of Improving Customs Procedure: Korea’s Experience

3.4.1. Effect of Improving Customs Procedure: Korea’s Experience

The implementation of UNI-PASS was revolutionary for the Korean customs process in terms of efficiency. The time it takes for export clearance, import clearance, duty drawback, and tax payment reduced from 1 day to 1.5 minutes, 2 days to 1.5 hours, 2 days to 5.2 minutes, and 4 days to 10 minutes, respectively18). Considering that the United Nations Conference on Trade and Development recommends a time of four hours, the total time it takes for all four procedures utilizing UNI-PASS stands at only 106.7 minutes or 1 hour and 47 minutes.

Figure 38 Improvement of Customs Procedure after Implementation of UNI-PASS

Source: Korea Customs e-Clearance System: UNI-PASS, Customs UNI-PASS International Agency (CUPIA) website. (http://www.unipass.or.kr)

The second most prominent benefit from the implementation of UNI-PASS is none other than the transparency that it brought. Previously, without UNI-PASS, all inspections and plans for screening were done by people, making customs extremely vulnerable to corruption. However, these types of illegal acts have become meaningless in the face of UNI-PASS, as UNI-PASS reduces human intervention to the utter most, so that the chances for corruption can only decrease. In fact, after the implementation of UNI-PASS, the detection rate for illegal or prohibited items has risen drastically19).

The second most prominent benefit from the implementation of UNI-PASS is none other than the transparency that it brought. Previously, without UNI-PASS, all inspections and plans

18) Yoon Samuel (2012) p. 83 19) Yoon Samuel (2012) p. 84

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for screening were done by people, making customs extremely vulnerable to corruption. However, these types of illegal acts have become meaningless in the face of UNI-PASS, as UNI-PASS reduces human intervention to the utter most, so that the chances for corruption can only decrease. In fact, after the implementation of UNI-PASS, the detection rate for illegal or prohibited items has risen drastically.

Increasing the efficiency of customs administration is pointed out as an important effect of UNI-PASS adoption. Over the past 30 years, Korea's trade volume has exploded over 18 times, and the number of overseas travelers has increased significantly. However, the number of Korean customs officials has doubled from 1973 to 1990 and has remained largely unchanged over the period of 20 years from 1990 to 2009. The fact that the number of customs officials has not changed since 1990, despite the rapid increase in trade and international travelers, is due to the fact that the accuracy and efficiency of customs clearance has increased with the introduction of UNI-PASS.

Changes in Trade Volume, the Number of Overseas Figure 39 Travelers and Customs

Source: Korea Customs Service (www. customs .go.kr), Recited from Yoon (2010)

Reducing time and simplifying procedures through UNI-PASS could lead to cost savings. The government report released in 2006 estimated that the introduction of UNI-PASS resulted in a cost savings of approximately $ 3.5 billion. In addition, it is estimated that the improvement of customs clearance procedures including UNI-PASS resulted in a reduction of logistics cost of USD 4 million per year20).

20) Yoon Samuel (2012) p. 83

104 Ⅲ. Improving Trade Facilitation: Implementation of Single Window System

Table 25 Economic Impact of Implementation of UNI-PASS

Economic Benefit Amount

Reduction in work process 657 million US$

Increase in income by traders 1.1 billion US$

Reduction in logistics 750 million US$

Savings in infrastructure 281 million US$

Production increase in trade industry 750 million US$

Source: Final report on Accomplishment Measurement of Customs Modernization & Development of Accomplishment Management Model by National Computerization Agency (2006). Recited from Customs UNI-PASS International Agency (CUPIA) website. (http://www.unipass.or.kr/ds4_1.html)

In addition to the economic effect, the satisfaction of the customs clearance service system is very high. According to a recent survey, the satisfaction rate of Korean customs clearance system is very high, from 82.3% in 2009 to 85.1% in 2013, increasing by about 1% point every year. The high level of satisfaction with the customs clearance system is due to the introduction of UNI-PASS, which allows the user to carry out the customs procedure at any time and place and to provide a simplified and unified service.

Figure 40 Survey Result regarding Satisfaction of Korea’s Customs Procedure

Source: Customs UNI-PASS International Agency (CUPIA) website. (http://www.unipass.or.kr/ds4_1.html)

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4. Policy Recommendation

4.1. Improving custom procedure in Sri Lanka

Computerization of customs procedures in Sri Lanka is still in its early stages of development. Although ASYCUDA, computerization of customs procedure, has been established and has played a role of enhancing the convenience for users, the service provided by ASYCUDA is very limited and it does not provide a comprehensive service covering the procedure. Except for some major export items, such as tea, it is not linked to other governmental agencies that are related to import and export procedure, and thus the Single Window meeting international standards is not realized. The following figure shows the relevant government agencies required for Single Window construction, including banking services.

Figure 41 Connectivity through Single Window

Source: Summarized by author(s)

In 2016, the Korea Customs Service conducted a comprehensive evaluation of Sri Lankan customs administration as part of its bilateral cooperation with Sri Lanka. While reviewing the Sri Lankan customs procedure, the direction for improving the customs procedure in Sri Lanka is presented. Most of the contents focus on computerization of customs procedures and construction of a Single Window environment21).

21) The following is a summary of the results of the Sri Lanka consulting project in 2015 delivered by the Korea Customs Service

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In Sri Lanka, there is a computerized registration system in the import declaration and inspection stage. However, it is needed to prepare customs declaration form and attach the original documents and visit the customs office in order to file customs declaration. In case of import declaration, it is pointed out that the receipt of the documents is confirmed manually and individually. In addition, the declarers must stand by the customs office from the reception to the completion of the procedure, and the customs officer must visit the relevant department and receive the documents for each reporting procedure. The problem with the import declaration is that only the customs declaration form is implemented and the related documents must be accompanied by an original signed by the person in charge to proceed to the next step.

Since the importation of air cargo is not electronically received from the importation by air transportation, it is necessary to check the manifest details by hard copy of manual manifest and manual report for each customs declaration. Especially, for flight with foreign nationality, Sri Lankan cargo submits manifestation, which may include possession of legal issues in the responsibility of submission. In addition, only 15 of the 25 government agencies involved in the verification of the requirements for the import requirements are linked, and the fact that the applicant handles the receipt and proceeding of documents related to the requirement confirmation is a factor that lowers the effectiveness of the customs procedure.

In the case of export declaration, a relatively solid Single Window system has been established for export declaration related to tea, which accounts for a high share of Sri Lanka’s tax revenue. In the case of the remaining items, work efficiency through ASYCUDA is low. It has been pointed out that it is urgent to expand the range of products which is covered under the Single Window system.

To solve these problems, ASYCUDA system in Sri Lanka should be improved in order to enable paperless procedure, processing of the entire customs clearance. Government agencies involved in overall customs clearance should be included under a common umbrella called Single Window and cooperation should be made in a way to improve customs efficiency through mutual cooperation. At the same time, work should be done to change Sri Lanka 's domestic laws and systems for the introduction of paperless customs clearance system, collection of manifests, pre ­screening system, and separate operation of examination and inspection system.

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4.2. Implementation of Single Window Environment in Sri Lanka

4.2.1. Success Factors and Challenges in Implementation of UNI-PASS: Korea’s Experience

There were several prominent challenges in the implementation of UNI-PASS and the Single Window environment, ranging from environmental difficulties to technical difficulties. To mention just a few, the first was the use rate by declarants. At the end of phase 1 of the Single Window system in Korea, the use rate of the system by the declarants stood merely at 1%. There were several reasons for this phenomenon such as the lack of training and adjustment for workers to use the Single Window system, and lack of advertising to the agencies and users. Thus, there was a need to train workers about the Single Window usage22).

The second issue that the implementation faced was more difficult in its search for a solution. UNI-PASS and the Single Window system both rely upon data harmonization for them to become successful. However, before the Single Window system, the coordination among related agencies was extremely limited, and communication was minimal. In order to fix this issue, strong political support behind the project was necessary and sufficient funding a must23).

The last critical issue that the UNI-PASS and Single Window system faced was one of technicality. While some government agencies had already had their own computerized verification system, some others did not. Thus, there was a need to create another completely new verification system to encompass all of these agencies and others that were to be added in the future. This meant that, of course, extra budgeting would have to be planned out24).

The most crucial success factors allowing the implementation of UNI-PASS was none other than the avid support of the government in terms of both politics and budgeting. UNI-PASS was part of the major 6 national administration network development plans beginning from the 1990s, and this influence allowed it to build up sufficient budget for creation and improvement for UNI-PASS.

In addition, the Single Window system and UNI-PASS were in serious difficulties due to lack of coordination among relevant ministries at the initial stage, but they succeeded in demonstrating the support and leadership of the government innovation and decentralization

22) So Young Yang (2011) p. 3 23) So Young Yang (2011) p. 4 24) So Young Yang (2011) p. 4

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committee with the Korea Customs Service. Strong political will and leadership in projects involving multiple institutions such as UNI-PASS served as an important factor in the implementation of the project.

In particular, the training of computer-related specialists has become an important task in computerization of customs clearance system and introduction and operation of UNI-PASS. In the case of Korea, at the beginning of the computerization stage, 10 ~ 15 people were selected and trained every year for the computerization process. The Korea Customs Service has provided incentives of quick promotion opportunity for these specialists if they have work for more than 3 years in computer related job position. This attracted excellent manpower to be added to computer-related jobs in the situation that there was a shortage of computer manpower in the KCS. These selected staffs cultivated in this course demonstrated their ability as core manpower to promote customs administration informationization.

4.2.2. Approach to Implement Single Window Environment in Sri Lanka

The Sri Lanka Customs Service was established in 1809 and is one of the oldest customs offices in the world. Despite this long history, however, the current Sri Lankan customs clearance process has hardware and software that are insufficient to operate bilateral trade efficiently. In 1992, the Sri Lanka Customs Service established the ICT division and started to improve the customs procedures based on ICT and introduced ASYCUDA. However, ASYCUDA's fundamentals are limited in terms of the collection, management and education of trade-related statistics, and it is not enough to provide one-stop-service in export and import clearance by linking with Customs and other government departments.

However, the Government of Sri Lanka has continued its efforts to improve the efficiency of the customs clearance process and to maintain its international competitiveness. Recently, Sri Lanka Customs created online payment platform for Customs payments. Prior to this platform, only the importers/exporters who maintained their bank accounts at the two state banks, and Peoples Bank, were able to make direct Customs payments online. Implementation of LankaPay Online Payment Platform (LPOPP), the online payment platform which facilitate online Customs payments from all commercial banks, has been designed to connect Sri Lankan Custom’s ASYCUDA system with the participating Banks of LankaClear’s Common Electronic Fund Transfer Switch (CEFTS). Due to the introduction of this new platform, the customers can now directly connect to their respective bank via any channel connected to CEFTS (Internet, Mobile, ATM or Over the Counter) to make the required payment to Customs on a real time and 24/7 basis.

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In order to introduce Sri Lanka's Single Window system in the future, many possibly confronted problems must be solved. In a 2011 WCO survey of 56 countries around the world, the ICT shortage was pointed out to be the most difficult factors that hinder the establishment of an electronic linkage by other government agencies with Customs clearance system. 34% of the respondents complained about these difficulties, followed by the budget and human resource constraints (24%), inadequate legal framework (22%), and the difficulties of inter-agency cooperation (12%). In order to overcome these difficulties and successfully improve the efficiency of the customs administration, it is necessary to carry out the project considering the following points.

Progressive Business Plan Implementing a Single Window system is a project that the government should pursue strategically with mid- to long-term goals. In the case of Korea, we could build an advanced customs clearance system through the stages of EDI Clearance system in 1992, moving to construction of Internet Clearance system and Smart Clearance system. Especially, in developing the Single Window System, the work progressed in three steps. The first stage targeted to link 8 government departments and customs administration with a total budget of 2.16 million USD for eight months from May 2005. In the second and third stages, it increased the range of government agencies and services participating in the system by paying 1.16 million USD and 1.4 million USD, respectively.

Figure 42 Gradual Construct8ion of Korea’s Single Window System

Source: Korea Customs Service, ‘Single Window: Korea Customs Service & World Customs Organizations Experiences’ (Cited from PowerPoint file on May 2011)

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Building a Single Window system in Sri Lanka also requires mid- to long-term goals. In the short-term, it is necessary to make an effort to establish the stage-by-stage goals by dividing the urgent matters, the possible ones, and the parts requiring mid-term or long-term improvement. We need to reflect on the errors and improvements that occurred during each step in the next step so that the specificity of Sri Lanka can be reflected in the system.

Strong Willingness of Government Commitment and Harmonization among Government Agencies The construction of a Single Window system is the process of integrating the functions of various government agencies related to customs administration. Therefore, it is the government's willingness to do what is most important for integrating the work of various government agencies that have different systems and operating methods. In the case of Korea, UNI-PASS was part of the six national administrative network development initiatives that began in the 1990s and was able to achieve coordination among the necessary budgets and government departments based on the strong will of the government.

The problem in this process was whether or not the government will proceed with the initiative. According to the 2011 WCO Report, 63% of the countries surveyed said that their Customs Service is playing a leading role in providing services for the Single Window system. 17% of the respondents said that other government departments provide leading services, while 17% said that they are private sector or semi-government agencies. Thus, in most countries, the Customs play a key role in the construction and operation of the Single Window system, and it is desirable that the Sri Lankan Customs Service, which has a professional role in the customs clearance process, conducts its business in a leading role.

Figure 43 Single Window Service Provider

Source: WCO, ‘How to Build a Single Window Environment. Vol 2: The Professional Practice Guide, Cited from p.22.

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In the process of introduction of the Single Window system, the arbitration committee is established as a means to solve the conflicts between the ministries, and the problems of the ministries are solved. If problems arise due to differences in standardization, there is a need for a device to mitigate the conflicts between the government and the government by establishing standardization and revising laws and systems so that the ministries and agencies follow them.

User-Friendly System According to the WCO report surveyed in 57 countries around the world, 57 countries all have computer-based electronic customs clearance systems. Among them, on average, 92% of import clearance, 91% of export customs clearance, and 95% of transit declaration were electronic. However, this high utilization rate cannot be achieved from the early stage of system introduction. In order for the Single Window system to be widely used among users, it is necessary to build a system in consideration of user convenience. In particular, users are concerned about the legitimacy of electronic documents. Therefore, in addition to introducing Single Window, it is necessary to educate and promote users to provide credibility of new methods such as electronic documents and to emphasize convenience. Especially, it is necessary to continuously improve and adjust the system that reflects the opinions of the users in the step-by-step process so as to provide the maximum convenience to the users.

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Ⅳ. Strategies to Attract Foreign Investors

1. Current State of Sri Lanka

1.1. FDI of Sri Lanka

As shown in [Figure 44], FDI inflows in Sri Lanka jumped from $ 234.0 million USD in 2005 to $ 752.2 million USD in 2008, but it dropped due to the global financial crisis. After 2011, it showed a steady level of FDI inflows in Sri Lanka, implying that the Sri Lankan government needs to put more efforts in promoting FDI by establishing more business-friendly environment and improving incentive programs to foreign investors.

Figure 44 FDI Inflows in Sri Lanka

($ million USD)

Note: excluding loans. Source: Central Bank of Sri Lanka (http://www.cbsl.gov.lk/)

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In terms of investment projects approved under Section 16 and 17 of the Board of Investment (BOI) Law during 2005-2016, Malaysia was the top foreign investor, investing $ 1,452.0 million USD in Sri Lanka, followed by Hong Kong ($ 1,145.4 million USD), China ($ 1,109.7 million USD), UK ($ 1,000.6 million USD), and India ($ 991.0 million USD). Over sectors, infrastructure (52% in total), including telecommunication network (29%), real estate (11%), and port container terminal (6%), has been the top sector to receive FDI inflows during 2005-2016. In manufacturing sectors (27% in total), textile and apparel (7%) and chemicals/rubber/plastics (7%) have received more FDI inflows. In services (19% in total), hotels and restaurants (8%) have been the top sector during the period.

1.2 Incentive program of Sri Lanka

The Sri Lankan government, mainly Board of Investment (BOI), has been improving the incentive programs to attract foreign investors. As of July 2017, the tax incentives, provided through Board of Investment (BOI), were not finalized as it is expected to come through Inland Revenue Amendment Act to be presented to the parliament. The BOI provides duty free facilitation and exchange control exemptions to projects that are approved under BOI Law.

Duty Free Facilitation

According to BOI25), companies signing an agreement with the BOI of Sri Lanka are entitled to obtain duty free facilities under Sec. 17 of BOI Law No. 4 of 1978. Companies that export more than 90% of products (60% for apparel & ceramic) or services (with 70% turnover in convertible foreign currency) are entitled to be free of customs duty on capital goods and raw materials. Non-export-oriented companies are entitled to import project-related capital goods free of customs duty, during the project implementation period. Prior to signing an agreement, the company should submit the list of items that are required to set up and operate the project. These lists will be evaluated and approved by the sector groups.

Exemption from Exchange Control Regulation

Export-oriented projects will be exempt from exchange control regulations under Sec. 17 of BOI Law and Strategic Development Projects. An investment project will be considered as an export-oriented project only if it exports 90% of goods produced (60% for apparel & ceramic) or services (with 70% turnover in convertible foreign currency). These companies

25) BOI, Setting up: What incentives do I get? (http://www.investsrilanka.com/setting_up_in/what_introduction; Accessed on July 3, 2017).

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will be exempted from Parts I, IA, II, III, IV, V, & VI of the Exchange Control Act, and also entitled to open and operate Foreign Currency Banking Unit (FCBU) account in any commercial bank in Sri Lanka. In recent years, the Sri Lankan government has taken several initiatives to promote investments. For example, the government removed the 15% tax on land leasing for foreigner investors and reduced the approval period for FDI requests to 50 days,26) even though it enacted ban on foreigners buying land in August 2015.

Budget 2017 proposals: Incentives proposed

Ministry of Finance (2016) proposed various incentive programs in its budget proposal in 2017, the so-called the Budget Speech 2017, by proposing trade-and-investment-based reforms. These reforms cover various measures such as improvement of productivity, trade facilitation, bilateral economic integration agreements, restructuring of the BOI, creation of much needed institutions, and elimination of exchange controls [Ministry of Finance (2016, 4)]. More specifically, after identifying the long process of registering business in Sri Lanka, the government aims to shorten this process from at least 8 steps now to 5 steps by 2020 [Ministry of Finance (2016, 30)]. The Budget Speech 2017 also proposed to introduce laws that give Public Limited Companies the freehold right of land, and private companies with majority foreign holdings will be allowed to lease land on a long-term basis. However, such companies should have invested at least Rs. 250 million excluding the value of land providing employment to at least 150 people, and have maintained this status quo for at least 3 years [Ministry of Finance (2016, 31)].

The Budget Speech 2017 proposed to establish four more Free Trade Zones (FTZs), targeting industries such as rubber-based products, pharmaceuticals, fabric manufacturing, mineral, chemical engineering, and automotive industry, and so on, locating them in Kalutara (Bandaragama), Rathnapura (), Puttlam and . In order to harness the benefits of specialization, the government will establish 15 export villages, on a PPP basis, focusing mainly on the thrust industries, such as IT, robotics, fashion, high-end apparel, and boat manufacturing [Ministry of Finance (2016, 40)].

1.3. Recent Development in Trade Agreements of Sri Lanka

Sri Lanka has two longstanding regional and two longstanding bilateral free trade agreements, such as Asia-Pacific Trade Agreement (APTA), South Asian Free Trade Area (SAFTA), Indo-Sri Lanka Free Trade Agreement, (ISFTA), and Pakistan-Sri Lanka Free Trade

26) Reuter, Sri Lanka removes land lease tax for foreigners, November 20, 2015 (http://www.reuters.com/ article/sri-lanka-budget-idUSD8N0ZV00420151120; Accessed on July 3, 2017).

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Agreement (PSFTA). In addition, Sri Lanka started the negotiation of a bilateral FTA with China since June 2016, in a more comprehensive way, including market access, services, investment, customs cooperation, technical barriers to trade, sanitary and phytosanitary measures, and safeguards. Moreover, Sri Lanka started to negotiate with India to deepen and widen economic ties between two countries, aiming at a new Indo-Sri Lanka Economic and Technology Cooperation Agreement.

As discussed before, the APTA, however, is notified to the WTO as Enabling Clause, with a relatively low level of economic integration and trade liberalization. Under the SAFTA, member countries have a right to have a list of sensitive products where no reduction of tariffs will occur per an agreed schedule for LDCs and non-LDCs. Even though Sri Lanka reduced the number of products on the sensitive lists by 20% in recent years, it still has a pretty wide coverage of sensitive products, 1,765 tariff lines on the revised sensitive list for LDCs and 1,948 tariff lines on the revised sensitive list for non-LDCs [WTO (2016)]. Two bilateral FTAs with India and Pakistan also have a pretty low level of economic integration and trade liberalization.

Sri Lanka has bilateral investment treaties (BITs) with: 29 countries, including Australia (2007), Belgium-Luxembourg (1984), China (1987), Czech Republic (2016), (1985), Egypt (1998), Finland (1987), (1982), Germany (1966), India (1998), Indonesia (1997), Iran (signed but not enforced yet), Italy (1990), Japan (1982), Korea (1980), Kuwait (signed but not enforced yet), Malaysia (1995), Netherlands (1985), Norway (1985), Pakistan (2000), Romania (1982), (1982), Sweden (1982), Switzerland (1982), Thailand (1996), United Kingdom (1980), USA (1993), and Vietnam (signed but not enforced yet). These BITs include articles on scope and definition of investment, establishment, national treatment, most-favored-nation treatment, fair and equitable treatment, expropriation and compensation, transfers, and dispute settlement mechanism.

2. Korea’s FDI Policy

2.1. Recent Development of FDI Performance in Korea

2.1.1. Overall Trend of FDI Performance

According to the World Bank Group’s Doing Business 2017 Report, Korea has highly ranked 5th in 2017 and 4th in 2016 in overall terms of the ease of doing business. It ranked 11th in terms of the ease of starting a business, up from 23rd in the 2016 report. Particularly, Korea

116 Ⅳ. Strategies to Attract Foreign Investors

ranked top in both getting electricity and enforcing contracts. Given this performance of Korea in enhancing its environment of doing business, its FDI performance had two consecutive years to have more than US$ 20 billion in 2015-16, even though there is a wide fluctuation of investment projects over time, as shown in [Figure 45].

However, FDI inflows are lower than FDI outflows (ODI), showing roughly 40% of FDI outflows, even though FDI inflows were greater than outflows right after the Asian financial crisis of 1997-98. It implies that Korean multinational corporations (MNCs), such as Samsung, LG, and Hyundai Motor, have been more actively investing in foreign countries in order to establish their own global value chains.

FDI stocks as a percentage of the total GDP are quite low among OECD countries, showing 15-20% in Korea, but roughly 50% in the UK and around 80% in Ireland. According to OECD (2016), the stock of FDI inflows as a share of GDP in Korea was the third-lowest in the OECD countries, at 13% in 2014.

The so-called Korea Discount would be a reason for a relatively poor performance of FDI inflows, including geopolitical risks with North Korea’s nuclear weapons in the Korean peninsula, Korea’s reputation for labor militancy, and so on.27) Another reason would be Korea’s manufacturing-based industrial structure because multinational corporations from developed countries have been interested in services markets, including financial markets.

Figure 45 Korea’s FDI Performance

(Notification basis, thousand USD)

Source: Ministry of Trade, Industry and Energy (http://www.motie.go.kr/)

27) The Economist, “Minority report­The Korea discount­Corporate governance explains South Korea's low stock market ratings,” February 11, 2012 (http://www.economist.com/node/21547255; Accessed on June 10, 2017).

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2.1.2. Key Characteristics of FDI Performance

Major foreign investors in Korea are mainly developed countries in the world, showing that EU and the US have been top investors over time, having 34.7% and 18.2% of the share to the total inflows respectively in 2016, followed by Singapore (11.0%), Hong Kong (9.9%), and China (9.6%). FDI from China has been increased significantly in recent years. The main reasons are including changes in the Chinese government’s policy to promote overseas investment; and more favorable expectations on economic cooperation between Korea and China, including Korea-China FTA.

Table 26 Share of the Total FDI Inflows over Sectors (%) 2011 2012 2013 2014 2015 2016

Agriculture & Fishing 0.8 0.0 0.0 0.0 0.0 0.3 Manufacturing 39.3 37.4 31.9 40.2 21.8 24.1 Chemicals 17.2 7.9 6.0 16.7 8.2 6.8 Metal 7.1 3.6 0.4 0.8 0.4 1.0 Electrical & Electronic 7.48.03.63.25.75.0 Industry Services 56.9 59.0 67.7 58.9 70.4 72.8 Wholesale/Retail 13.5 7.6 4.5 5.2 5.6 7.0 Hotels & Restaurants1.75.66.43.93.13.8 Transport & Storage 1.0 0.4 0.7 2.3 3.5 1.9 Finance & Insurance 13.9 13.4 20.1 9.4 29.0 29.2 Real Estate & Renting 10.1 10.8 17.5 14.4 13.3 11.2 Business Services 10.0 19.1 17.3 21.9 9.7 17.4

Source: Ministry of Trade, Industry and Energy (http://www.motie.go.kr/)

In terms of sectorial division of FDI inflows in Korea, the share of manufacturing sectors reduced significantly in recent years, whereas the share of services sectors has rapidly increased to 72.8% in 2016, as shown in [Table 26]. In services sectors, foreign investors concentrated their investment in the financial sector, business services, real estate and renting services, and wholesale/retail trade. Among manufacturing sectors, the chemical industry, followed by electrical and electronic industry, has been dominant over time. Interestingly, China as a foreign investor, showed a new trend by diversifying its sectorial destinations, including leisure and resorts, cultural contents, food, textiles, and so on, while in the past the real estate market was the main sector of Chinese investment projects in Korea.

118 Ⅳ. Strategies to Attract Foreign Investors

In terms of types of FDI inflows in Korea, Greenfield investment, rather than M&A-type (or brownfield) investment, has been dominant over time, even though its share dropped from 87.3% in 2011 to 70.5% in 2016, as shown in [Table 27]. It implies that in the context of the regulatory regime regulations of starting a new business would presumably be lower barrier than those of merging and purchasing local businesses in Korea.

Table 27 Share of the Total FDI Inflows over Teypse

(million USD) 2011 2012 2013 2014 2015 2016

771.6 3,748.7 4,978.7 7,980.9 6,804.1 6,273.9 M&A (12.7%) (23.0%) (34.2%) (42.0%) (32.5%) (29.5%)

5,317.3 12,537.2 9,569.6 11,019.2 14,106.1 15,025.4 Greenfield (87.3%) (77.0%) (65.8%) (58.0%) (67.5%) (70.5%)

Total 6,088.9 16,285.9 14,548.3 19,000.1 20,910.3 21,299.3

Source: Ministry of Trade, Industry and Energy (http://www.motie.go.kr/)

2.2. FDI Policy in Korea

2.2.1. Institutional Framework of FDI Promotion

Invest Korea (IK), Korea’s national investment promotion agency, was established in 2003, after being re-launched from the Korea Investment Service Centre (KISC) established in 1998, as part of the Korea Trade-Investment Promotion Agency (KOTRA) to support the entry and establishment of foreign business in Korea. IK provides all-round services for foreign investors, including consultations, administrative assistance with investment notification and corporate establishment, support for business activities in Korea and grievance resolution. It also provides various investment promotion activities abroad using its own overseas network.

While multiple agencies have been involved with FDI promotion, at the cabinet level, the Ministry of Trade, Industry and Energy (MOTIE) is responsible for FDI-related policies, with Foreign Investment Committee, which consists of representatives of various agencies and ministries in the cabinet, for policy coordination. Invest Korea, under KOTRA, is mainly responsible for policy implementations, and it is cooperating with local governments and free economic zones. In addition, KOTRA has 126 overseas offices in the world, of which 36 of them are overseas FDI offices devoted to attract foreign investment.

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Invest Korea also plays a role of the one-stop service in supporting foreign investors for FDI-related matters. This one-stop service covers all services related to mainly three areas: (1) pre-investment consultation, (2) investment execution; and (3) post-investment processes. In the stage of pre-investment consultation, Invest Korea conducts preliminary information study by searching and providing information required for investment feasibility study. And it also tries to find potential investors and arrange consultations by finding investment partners. Invest Korea also provides consultations on specific sectors, including incentives, legal affairs, accounting taxation, industrial sites, and etc.

Figure 46 Korea’s FDI Promotion Regime

Source: Invest Korea (http://www.investkorea.org/)

In the second stage of investment execution, Invest Korea receives notifications of foreign investment and issues certificates of foreign investment. After investment is received, Invest Korea also issues registration certificates of foreign-invested company. It looks for optimal factory sites for investors and provides relevant administrative services.

In the third stage of post-investment services, the Korean government, closely working with KOTRA and Invest Korea, has established a one-stop solution system for resolving problems that foreign-invested companies are facing at by operating regular roundtable discussions chaired by the Minister of Trade, Investment and Energy. Foreign Investment Ombudsman

120 Ⅳ. Strategies to Attract Foreign Investors

resolves the grievances of foreign-invested companies. In addition, Invest Korea assists administrative works related to alien registrations and extensions of visa. It also provides various services to support livings of workers of foreign-invested companies and their families settled in Korea, by searching for houses, foreign schools and surrounding living facilities.

Figure 47 Korea’s One-Stop Solution System

Source: Invest Korea (http://www.investkorea.org/)

2.2.2. Incentive Programs to Attract FDI

The Korean government has been providing various incentive programs to attract FDI. According to KOTRA (2015), the incentive programs in general include: (1) tax support, (2) cash grants, and (3) industrial site support.

Tax Support

The Korean government provides various incentive programs for FDI, shown in [Table 28]. These incentive programs mainly focus on reductions of national taxes, including corporate tax and income tax, as well as local taxes, such as acquisition tax and property tax. They are provided for limited periods and on a non-discrimination basis over countries. Depending on the local government regulations, the period of local tax reduction may be extended up to 15 years, or the reduction ratio may be increased. As shown in [Table 28], minimum investment requirements apply in some cases.

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Table 28 FDI Tax Support: Reductions of National and Local Taxes

Business Category Investment Amount Reduction Period and Details Industry support services and high-degree tech businesses Business in individual-type foreign investment zones (FIZ) Seven years in total according to the Over $ 30 million USD following ration (amount multiplied Manufacturing Over $ 20 million USD by the foreign investment ratio) Tourism Over $ 10 million USD - 100% for five years after income Logistics Over $ 2 million USD, with more than 10 creation R&D employees with Master’s degree or - 50% for next two years above

Businesses in free economic zones (FEZ), including Saemangeum Area Five years in total according to the Manufacturing Over $ 10 million USD following ration (amount multiplied Tourism Over $ 10 million USD by the foreign investment ratio) Logistics Over $ 5 million USD - 100% for three years after income Medical institutions Over $ 5 million USD creation R&D Over $ 1 million USD - 50% for next two years Developers in Free economic zones (FEZ), including Saemangeum Area

Over $ 30 million USD; over 50% of foreign shares and $ 500 million USD on business costs Developers in Jeju investment promotion district

Over $ 10 million USD; over 50% of foreign shares and $ 100 million USD on business costs Businesses in complex-type foreign investment zones (FIZ) Manufacturing Over $ 10 million USD Logistics Over $ 5 million USD Businesses in business city development zones Manufacturing Over $ 10 million USD Engineering; Additional communication; Information processing & other computer operation-related businesses; Science & technology services; Tourism; Culture industry; Various facilities; Renewable energy generation R&D Over $ 2 million USD Logistics Over $ 5 million USD Developers of business city

Over $ 30 million USD; over 50% of foreign shares and US$ 500 million on business costs Businesses in free trade zones (FTZs)

Source: KOTRA (2015) and WTO (2016)

122 Ⅳ. Strategies to Attract Foreign Investors

As tax incentive programs may contribute to inefficient allocation of resources due to the distorting effects of tax supports, the Korean government has paid attention to ensure that the financial and efficiency costs of these incentive programs do not exceed their stated benefits, by setting the maximum amount of cumulative tax incentives to prevent excessive tax exemptions and reductions and also publishing annual reports on tax expenditures to improve transparency in the tax support programs.

Cash Grants

According to KOTRA (2015), the central and local governments in Korea provide cash grants when foreign investment projects meet certain conditions. These conditions include whether these projects incorporate advanced technology, the effects of technology dissemination, the extent of job creation, and so on. To be eligible for cash grants, a foreign investor needs to have at least 30% of the equity. The exact amount of the cash grant will be determined through negotiations with the investor, and it will not exceed the actual amount of the investment.

Figure 48 Application for Cash Grants

Source: KOTRA (2015)

Industrial Site Support

In accordance with the Foreign Investment Promotion Act, the Special Act on Designation and Management of Free Trade Zones, and the Special Act on Designation and Management of Free Economic Zones, the Korean government may designate foreign investment zones (FIZs), free trade zones (FTZs), and free economic zones (FEZs) to attract FDI. As of 2017, the Korean government designated 97 foreign investment zones, including 21 complex-types, 75 individual-types, and 1 service-type. In addition, it designated 13 free trade zones, including

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7 industrial-complex-types and 6 ports-and-airports-types. Also it operates 8 free economic zones, including Busan-Jinhae, Gwangyang Bay Area, Incheon, Yellow Sea, Daegu-Gyeongbuk, Saemangeum-Gunsan, East Coast, and Chungbuk.

Table 29 Free Economic Zones in Korea

Area Airport/ Implementa Zone Targeted Business (km2) Port tion Period

Incheon IT, BT, R&D, aircraft, logistics, tourism, Incheon 132.9 Airport, 2003-2022 finance, leisure, high-tech business Incheon Port

Gimhae Busan New Port-based logistics, Airport, Busan-Jinhae 52.9 2003-2022 high-tech parts & materials business, Busan New R&D, resort & leisure business Port

Logistics, manufacturing, steel, Gwangyang Gwangyang 77.7 2003-2022 machinery, assembly, metal, new & Bay Area Port renewable energy, tourism, leisure

High-tech transportation components, Daegu-Gyeo 22.0 Daegu Airport 2008-2020 high-tech medical business, IT ngbuk convergent business

High-Tech parts, chemicals, auto Gunsan parts, energy, MRO, industrial logistics, Saemangeum 28.6 Gunjang New 2008-2020 high-tech knowledge-based business, -Gunsan Port R&D, international cooperation, culture & tourism

Pyeongtaek Auto, electronics, parts and materials, Yellow Sea 4.4 2008-2020 Dangjin Port chemicals, logistics

Advanced materials, logistics, medical Yangyang or marine tourism, non-ferrous metal, East Coast 8.3 Airport, 2013-2020 super light-weight advanced parts and Donghae Port materials, housing, education, medical and cultural facilities

BT, IT, medical research, clinical trial drugs and medical equipment, Chengju Chungbuk 9.1 2013-2020 aviation, logistics, aircraft Airport maintenance, electric auto parts, new and renewable energy

Source: KOTRA (2015)

124 Ⅳ. Strategies to Attract Foreign Investors

The foreign investment zones are designated by mayors or provincial governors. Under the Foreign Investment Promotion Act, the foreign investment zones are designed to promote foreign investment projects and to attract mainly large-scale foreign investment. They are classified into three different categories: complex-type, individual-type and service-type. A complex-type FIZ is designed to provide factory sites at a lower cost to promote foreign investment of foreign companies that have advanced technology. An individual-type FIZ can be customized for its foreign investor and the investor can choose and designate the investment zone. And a service-type FIZ refers to areas designated for a lease or a transfer to foreign-invested companies providing a service business, including R&D activities, finance, knowledge-based services, cultural and tourism-related services [KOTRA, (2015)].

To attract manufacturing companies and logistics businesses, the Korean government designates free trade zones in industrial complexes, airports, ports, distribution complexes, freight terminals, and so on. As shown in [Table 29], national and local taxes will be reduced or exempted in free trade zones, depending on the category of industries and the size of investment projects.

Free economic zones are designed to promote systems and conditions that differ from other areas, so that foreign investors in the zones actively do their own business and economic activities. In addition to providing incentive programs, the Korean government has tried to enhance living standards of foreign investors in the zones by providing international schools and hospitals.

3. Determinants of FDI Location from Perspectives of Korean MNCs

3.1. Case Study: Determinants of Samsung Electronics’ Decision to Invest in Vietnam from Business Perspectives

ASEAN has become an important destination for Korea’s FDI outflows, particularly for manufacturing, extractive and infrastructure-related activities, even though the share of ASEAN to total amount of Korean investment abroad (14.6% in 2016) has been relatively small over time. According to ASEAN and UNCTAD (2016), the share of Korea’s investment in ASEAN during 2010-2015 was over 15% and three member states, Vietnam, Singapore, and Indonesia (in that order), accounted for 63% out of the total amount in ASEAN, which has been up to 78.7% in 2016.

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Table 30 Korea’s Investment in Vietnam

Number of Number of New Investment Amount Notified Number of Year Cases Korean Amount (US$ million) Transfers Notified Subsidiaries (US$ million) 199131010 1992 26 9 101 17 17 1993 71 19 153 41 38 1994 79 48 180 111 91 1995 83 44 234 151 201 1996 96 43 220 180 125 1997 75 29 198 171 164 1998 46 6 105 87 82 1999 48 22 82 88 63 2000 79 29 99 141 72 2001 132 60 105 266 62 2002 215 109 392 484 162 2003 228 101 723 573 170 2004 293 118 362 652 187 2005 445 205 407 1,030 344 2006 635 302 1,816 1,674 601 2007 944 454 2,814 2,376 1,315 2008 897 312 1,934 2,459 1,395 2009 703 174 970 1,715 621 2010 847 232 2,226 1,950 879 2011 793 196 1,523 1,815 1,055 2012 814 214 1,000 1,754 979 2013 1,109 333 1,476 2,084 1,153 2014 1,366 460 2,150 2,790 1,617 2015 1,702 543 2,920 3,367 1,599 2016 2,137 672 2,993 3,623 2,273 Total 13,866 4,735 25,182 29,600 15,266

Source: The Export-Import Bank of Korea

126 Ⅳ. Strategies to Attract Foreign Investors

Vietnam has been the top destination of Korea’s investment among ASEAN member countries. As shown in [Table 30], 4,735 Korean subsidiaries have operated in Vietnam since 1991, in a wide range of industries. The top 20 most globalized Korean multinational corporations (MNCs) such as Samsung, LG, and Hyundai Motors all have a presence in Vietnam. Large Korean companies and small- and medium-sized enterprises (SMEs) are expanding their presence in Vietnam, with a rapidly rising number of micro, small- and medium-sized enterprises (MSMEs). Since 2006, Korean investment in Vietnam has risen sharply, particularly in manufacturing sectors, which become the largest source of investment in Vietnam, mainly due to large-scale investment projects in recent years by Korean MNCs such as Samsung, LG, and Kumho Tire.

Particularly, Samsung and LG continued to expand their presence with additional manufacturing facilities and new plants, by transforming Vietnam into their major global hub for production and export of mobile phones and some other consumer electronics. Samsung has announced its plans for an investment expansion of $3 billion to establish facilities for the production of display modules. LG Electronics, through its subsidiary LG Display Group, is expanding its presence in Vietnam by building another plant of $1.5 billion to produce digital displays. The plant is expected to start operation in 2017, while LG opened a plant of $1.5 billion to produce digital devices and electronics in Hai Phong in 2015.

Table 31 Stages and Characteristics of Korean Investment in ASEAN

(Units: $ million, %) Cumulative FDI Share of Large or Stage Characteristics Motives Flows in ASEAN Small Firms

Stage 1: Initial Stage (Government-Led Large: 64% 109 Resource-Seeking 1982-87 Industrialization) SMEs: 35% Resource-Seeking, Stage 2: Growing Stage (Pre-Crisis Large: 26% 3,225 Market-Seeking (Export 1988-97 Liberalization) SMEs: 66% Promotion) Resource-Seeking, Stage 3: Market-Seeking (Export Restructuring Stage Large: 12% 1998- 4,387 Promotion, Local Market (Post-Crisis Liberalization) SMEs: 56% 2005 Penetration), Cost Reduction Stage 4: Proactive Stage (Acceleration Large: 13% 36,422 GVC Integration 2006- of Globalization) SMEs: 54%

Source: Box Table 2.1.1. of ASEAN and UNCTAD (2016)

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The pattern of Korean investment in Vietnam has been evolved. Resource-seeking activities were dominant during early 1990s, focusing more on extractive industries, including mining. However, the share of the manufacturing industries in Korean investment in Vietnam during 1991-2016 was 60.6%, followed by mining (14.4%), real estate (7.2%), finance and insurance (4.4%), wholesale and retail sales (3.8%), and construction (3.1%).

Korean investment projects have been increasingly driven by a mixture of multiple factors, which include global value chains (GVC)-related strategies of Korean MNCs. In particular, for MSMEs, market-seeking factors include the need to follow customers or to operate close to customers in Vietnam, as Vietnamese income levels are getting higher than before. Also Korean MNCs have considered Vietnam as their export platforms, especially in electronics industries. Large Korean MNCs dominate the list of foreign investors in Vietnam, including Samsung and LG in electronics, POSCO in metals and infrastructure, and the Lotte Group in retails and chemicals.

3.1.1 Samsung Electronics’ FDI Performance in Vietnam

Samsung has been the top foreign investor in Vietnam. To reduce the costs of parts or inputs used in its mobile phones, Samsung has encouraged its Korean subsidiaries and subcontractors in component manufacturing to invest in Vietnam, operating close to its assembly plants. Samsung also procured parts and components by non-Korean FDI enterprises from Japan, the United Kingdom, Germany, or other countries if they can meet the standards for quality and price. In recent years, Samsung has increased its outsourcing to local Vietnamese suppliers for lower input and logistics costs. Satellite firms affiliated with Samsung are supplying components to Samsung’s operations in Vietnam. As shown in [Table 32], Samsung is producing 50% of its mobile phones in Vietnam, while only 8% in Korea28).

Table 32 Samsung’s Capacity to Produce Mobile Phones over Plants in Countries

Country Vietnam China India Brazil Indonesia Korea Total

Production 240 million 150 million 50 million 12 million 8 million 40 million 500 million Capacity

Source: Business Korea, “Samsung made in Vietnam: 50% of Samsung mobile phones made in Vietnam,” January 28, 2015.

28) Business Korea, “Samsung made in Vietnam: 50% of Samsung mobile phones made in Vietnam,” January 28, 2015 (http://www.businesskorea.co.kr/english/news/industry/8785-samsung-made-vietnam-50-samsung- mobile-phones-made-vietnam; Accessed on June 6, 2017).

128 Ⅳ. Strategies to Attract Foreign Investors

Table 33 Samsung Electronics’ Subsidiaries in Vietnam

Year of Ownership Asset (2015, Name Major Business Establishment Share (%) Won billions) Samsung Electronics Production of Electronic 2009 100 6,553.6 Vietnam Devices Samsung Electronics Communication System 2014 100 3,957.7 Vietnam Thai Nguyen Services Samsung Vina Production and Sale of 1996 100 219.4 Electronics Co., Ltd Electronic Devices

Source: ASEAN and UNCTAD (2016)

3.1.2 Determinants from Business Perspectives

Dunning’s OLI Framework

Why do companies go multinational? This question is compatible with questions about the motivation behind FDI because companies need to invest abroad to go multinational. If an MNC is exactly identical to a local company in the host country, it will not find advantages to enter the market of the host country, even facing the risk of doing business abroad. After all, there are added costs of doing business abroad, including communications and transport costs, higher costs of stationing personnel abroad, barriers due to language, customs, and being excluded from the local business and government networks. Therefore, the MNC must possess some special advantages such as superior technology or lower costs due to economies of scale, whereas the foreign country, which is hosting the MNC, needs to provide certain benefits to the MNC in order to attract its activities.

A traditional work to explain motivations of FDI was developed by Dunning (1977), and has been named as the so-called OLI Framework. The OLI Framework stands for Ownership, Location, and Internalization advantages. A firm’s Ownership Advantage could be a product or a production process to which other firms do not have the access, such as a patent, blueprint, or trade secret. Whatever its form, the ownership advantage confers some valuable market power or cost advantage on the firm sufficiently to outweigh the disadvantages of doing business abroad.

The foreign market must offer a Location Advantage so that MNCs make profitable to produce the product in the foreign country rather than simply to produce the product at home and export it to the foreign market. Although tariffs, quotas, transport costs, and cheap factor prices are the most obvious sources of location advantages (tariff-jumping FDI,

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efficiency-seeking FDI), factors such as access to customers (market-seeking FDI) are also important. Many MNCs are in the service industries, and hotels, for example, in which on-site provision of the services is an inherent part of the companies’ business.

The MNE must have an Internalization Advantage. Even though an MNC takes advantages of ownerships and locations, it still needs the advantage to set up a foreign subsidiary directly and to produce its own parts instead of offering local companies to produce the parts and to pay royalties for the technology. Reasons for wishing to do business abroad are referred to as internalization advantages: the product of process is exploited internally within the firm than at arm’s length through markets. Internalization occurs because it is more profitable to conduct transactions and production within a single organization than in separate organizations.

OLI framework can explain why Samsung decided to invest in Vietnam. Samsung, a leading company in sectors of mobile phones, home appliances, and IT products, has a substantial specific ownership advantage that it exploits abroad with its advanced technologies, patents, networks and other assets. However, in order to meet the objective of this paper, we focus more on its Internalization Advantage because we need to understand what corporate strategies determine their decision of FDI. Also the next subsection discusses Vietnam’s Location Advantage to understand what incentive programs have been successful in attracting Samsung’s FDI.

Efficiency-Seeking FDI

As identified in ASEAN and UNCTAD (2016), Lee and Jung (2015), and Lee and Slater (2007), most Korean FDIs in the electronics industry in ASEAN have been driven by efficiency-seeking motivations. The recent investment projects, done by Samsung in the electronics industry in Vietnam are good examples. Samsung opened a US$2 billion facility in Thai Nguyen Province in northern Vietnam in 2014 to produce smartphones, considering low labor costs as main benefits. Samsung also expanded its operations in Vietnam with additional production capacity and factories. As a consequence of subsequent investment and expansion projects, in 2013 the export revenue of mobile phones and accessories, which is about 20% of total exports, overtook the export revenue of garments in Vietnam for the first time. Samsung’s exports of electronics accounted for 23% of all Vietnamese exports in 2014 (Vietrade 2015).

In 2014, Samsung also invested US$1.4 billion in a complex of home appliance for R&D and production of high-end televisions in Ho Chi Minh City. In addition, Samsung announced its plans to invest in some other large-scale projects of energy, shipbuilding and airports, which would be estimated as $20 billion USD (KITA 2015).

130 Ⅳ. Strategies to Attract Foreign Investors

Other Motivations for FDI

Other Korean MNCs, besides Samsung, have other motivations for FDI, shown in Lee and Slater (2007). In terms of market-seeking FDI, we divide Korean MNCs into two different groups. The first group involves traditional market-seeking investments in consumer goods. For example, Lotte Group has made Greenfield investment and acquisitions in food retailing. Lotte Mart first entered Vietnam in 2006 through a joint venture with a local partner, with initial investment of $65 million USD. In 2012, Lotte Mart was approved from the Vietnamese government to turn its joint venture into a 100% foreign-invested company, and now Lotte Mart is also planning to boost its investment in Vietnam in order to expand its chains of 60 supermarkets nation widely by 2020 (ASEAN and UNCTAD, 2016).

The second group involves industrial MNCs such as POSCO, which has engaged in steel production and metal processing, as well as infrastructure-related projects in the energy sector, focusing more on business customers or the public sector in Vietnam. POSCO completed the construction of a cold-rolled stainless steel factory near Ho Chi Minh City in 2012, substantially expanding its production in Vietnam. POSCO holds about a 40% share of Vietnam’s stainless steel market (ASEAN and UNCTAD, 2016).

In terms of Resource-Seeking FDI, Korean MNCs have been investing in other ASEAN countries, such Indonesia and , rather than Vietnam. A majority of Korean MNCs, as resource-seeking FDI, operated in the forestry sector because Korea’s wood sufficiency rate was very low recording only about 5% (ASEAN and UNCTAD, 2016).

In terms of Strategic-Asset-Seeking FDI in searching for resources such as technology, skilled workers and assets, Korean MNCs have been investing in other ASEAN countries, such Singapore, rather than Vietnam. For example, LG Chem established its subsidiary in Singapore to access to the host country’s distinctive technology hub environment, including R&D infrastructure and its technology ecosystem (ASEAN and UNCTAD, 2016).

Samsung’s Investment in Vietnam from a GVC Perspective

In the electronics sector, Samsung needs to have access to parts and components in order to manufacture final commodities. However, due to the underdeveloped supply industry in Vietnam, Samsung has sourced parts and components from non-Vietnamese firms. In addition, Samsung has encouraged its Korean subsidiaries and subcontractors in part/component manufacturing to invest in Vietnam, by operating close to its assembly plants. However, in recent years, Samsung has increased its outsourcing to local Vietnamese suppliers to lower input and logistics costs, including the cost of complying with local government requirements.

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As of September 2016, there were 12 Vietnamese firms that are Samsung’s tier-1 vendors, along with 178 local tier-2 vendors, and hence 190 Vietnamese firms in total were a part of Samsung’s supply chain, implying that this number has tripled, compared to 2015.29)

From Samsung’s business perspective, assembly in Vietnam plays an important role in its mobile phone GVC, and Samsung is planning to expand production in Vietnam for its major global manufacturing hub. The linkages that Samsung established with its suppliers from Korean and Vietnamese local firms improved its supply chain networks. These intra- and inter-firm linkages, including with local vendors in Vietnam, are critical strategies of Samsung’s GVC operations (ASEAN and UNCTAD, 2016).

Summing Up

Corporate strategy, host country’s measures (will be discussed in Section 2) and cost considerations, as well as complementary locational advantages in Vietnam have all influenced Samsung’s decision to invest its FDI in Vietnam. Samsung’s efficiency-seeking FDI in electronics created an electronics hub in Vietnam, where became a major global production role. Moreover, many other ASEAN countries take a close look at the case of Samsung’s efficiency-seeking FDI in Vietnam and Samsung’s model is now spread like a case study to all other ASEAN countries.

As more Korean MNCs strengthen their foothold in Vietnam, they are also encouraging many Korean MSMEs and their suppliers to invest in Vietnam. The prospects for a further rise in Korean investment and Korean companies in Vietnam are promising. Greater linkages between Korean MNCs and MSMEs of Vietnamese companies in the value chain activities are expected.

3.1.3. Impacts of Samsung Electronics’ FDI in Vietnam

Export Performance

Samsung Electronics Viet Nam (SEVN), Samsung’s subsidiary in Vietnam, recorded $46.3 billion USD in 2016 for its turnover, while its exports reached $39.9 billion USD. It implies that Samsung accounted for 22.7% of the Vietnamese total export in 2016, while it was 20% in 2015.30) As a consequence of this and subsequent investment projects, in 2013 mobile

29) Viet Nam News, “Samsung seek VN firms for supply chain,” September 10, 2016 (http://vietnamnews.vn/ economy/ 342546/samsung-seek-vn-firms-for-supply-chain.html#p73mhtr2fUzoziwu.97; Accessed on June 8, 2017). 30) Viet Nam News, “Samsung contributes 22.7% to country’s exports,” January 11, 2017 (http://vietnamnews. vn/economy/349485/samsung-contributes-227-to-countrys-exports.html# TSdPdiFseRg5V O3r.97; Accessed on June 8, 2017).

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phones and accessories overtook garments in terms of export revenue in Vietnam for the first time, earning about 20% of total exports in 2013, implying that Vietnam has been successful in diversifying major exporting products and moving up its economic development ladder by utilizing positive benefits from FDI.

Figure 49 Vietnam’sExports over Ownership

($ million)

Note: The value of 2015 is an estimation. Source: General Statistics Office of Vietnam (http://www.gso.gov.vn/; Accessed on June 8, 2017)

As shown in [Figure 49], the share of exports by foreign investors in Vietnam to the total exports increased a lot from 27.0% in 1995 to 70.5% in 2015. This share was just over 50% in 2003 and stayed at around 55% until 2011. However, since 2012, after Samsung expanded its production facilities in Vietnam, the share of exports done by foreign investors has been over 60%, recording 70.5% in 2015.

According to Lam (2013), FDI, including Samsung’s investment, contributed to develop Vietnamese export structure from primary sectors, including mineral products, to manufacturing sectors. In addition, FDI positively resulted in diversifying export destinations, and the United States became the largest market of Vietnamese exports.

Job Creation

Samsung Electronics in Vietnam hires roughly 137,000 workers, and has a plan to expand its jobs up to 150,000 by the end of 2017.31) More Korean MNCs, such as LG, POSCO, Hyosung,

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Lotte, and Orion, also hire a number of blue-collar workers, expected to be more than 700,000 workers in total.32) There are more than 6,000 Korean companies, which notified their investment projects in Vietnam, and those have invested more than $ 50 billion USD so far and hired more than 700,000 workers in Vietnam, as interviewed by Director of Vietnam Invest Network, a Vietnamese government agency for FDI promotion.33)

The impact of FDI on the labor market in Vietnam can be explained in three ways. The first way is the job creation, as explained above that foreign investors have created over 2 million jobs directly and roughly 3 to 4 million indirect workers, according to Lam (2013). Secondly, foreign investors provided a well-organized and more efficient system to train workers than local companies in Vietnam, enhancing human resources of workers, technicians, and managers. Lastly, FDI also positively influenced the system of organizing industrial relations with workers and labor unions in a more modernized and efficient way.

Participation of Local Firms in Supply Chains

As pointed out previously, there were 12 Vietnamese firms which are Samsung’s tier-1 vendors, along with 178 local tier-2 vendors, and hence 190 Vietnamese firms in total were a part of Samsung’s supply chain in September 2016, implying that this number has tripled, compared to 2015. Samsung, with the efforts of the Vietnamese government, has aimed to continue seeking component vendors for Samsung and solutions to improve the competitiveness of Vietnamese hi-tech component manufacturing firms. Vietnamese firms try to seize this opportunity to join the global supply chain by connecting with FDI enterprises, just like Samsung, operating in Vietnam. Samsung has proposed that any Vietnamese firm to meet its criteria, including quality, due delivery, and price, has the opportunity to become its vendor.34) In process of seizing this opportunity, Vietnamese firms have been asked to develop technical human resources and product quality management to meet the criteria of a global supplier.

31) Newsis, “Samsung Electronics accelerates its jobs and sales in Vietnam” (in Korean), May 10, 2017 (http://www.newsis.com/view/?id=NISX20170510_0014884663&cID=10402&pID=13000; Accessed on July 2, 2017). 32) Hankyung, “Over 6,000 Korean companies in Vietnam” (in Korean), November 14, 2016 (http://news. hankyung.com/article/2016111465941?nv=o; Accessed on July 2, 2017). 33) Ibid. 34) Viet Nam News, “Samsung suppliers triple,” June 22, 2016 (http://vietnamnews.vn/economy/298462/ samsung-suppliers-triple.html#U5y2QEQvHQAZkGdf.97; Accessed on June 8, 2017).

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3.2. Case Study: Vietnam’s FDI Promotion from Host Countries’ Perspectives

3.2.1. Incentive Programs of Vietnam for Samsung Electronics

The Vietnamese government established National One-Stop Services and Investments Organization (NSO), a one-stop agency, where investors are able to take care of matters related to their investment in the host country. Basically, the Vietnamese government applies a non-discrimination principle to investors, domestic and foreign.

However, the Vietnamese government sets certain regulations on the fields. The Investment Law (no. 59/2005/QH-11) prohibits investment projects considered detrimental to national defense and security, historical and cultural ethics, Vietnamese traditions and fine customs, and the environment. Given this regulation, investment projects are conditional in (1) sectors having an impact on national defense and security, social order and safety, and public health; (2) banking and finance; (3) recreational services; (4) education and training; (5) real estate; (6) culture, information, press, and publication; and (7) surveying, prospecting, exploration and mining of natural resources [WTO (2013)].

Tax Incentives

Investors having projects within the categories stipulated in the legal documents shall be entitled to preferential tax rates, the duration of entitlement to such rates and the duration of exemption from and reduction of tax in accordance with the law on tax. Investors shall be entitled to tax incentives on that portion of income from their capital contribution or purchase of shareholding in an economic organization in accordance with the law on tax after such organization has paid in full corporate income tax.

Investors shall be exempt from payments of import duty on equipment, materials, means of transportation and other goods for implementation of investment projects in Vietnam in accordance with the Law on Export and Import taxation. Incomes from activities of technology transfer applicable to projects entitled to investment incentives shall be exempt from income tax in accordance with the law on tax.

Carrying Forward Losses

If an investor suffers losses after completion of tax finalization with the tax office, it shall be permitted to carry its losses forward to the following year, and the amount of such losses

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shall be set off against taxable income for the purposes of corporate income tax in accordance with the law on corporate income tax. The period for carrying forward losses shall not exceed five years.

Depreciation of Fixed Assets

Investment projects in investment incentive sectors and geographical areas and business projects with high economic efficiency shall be subject to the accelerated depreciation of fixed assets; the maximum rate of depreciation shall not be more than twice the level of depreciation as stipulated by regulations on depreciation of fixed assets.

Incentives of Land Use

The term of land use of an investment project shall not exceed five years; however, if projects are with a large amount of invested capital and a slow rate of capital recovery in areas with difficult socio-economic conditions and in areas with difficult socio-economic conditions which require a longer term, the term of allocation or lease of land shall not exceed seven years. The competent state body would approve the extension of terms if law-abiding investors need to extend their terms of land use at the expiry. Investors, who invest in investment incentive sectors and geographical areas and followed the law on land and tax, shall be entitled to an exemption from payment of or a reduction of land rent and land use fees.

3.2.2. Provision of Infrastructure in Vietnam

After its implementation of Doi Moi, the policy initiative of creating a socialist-oriented market economy, in 1986, the Vietnamese government has tried to attract more foreign direct investment by creating a more favorable infrastructure and legal environment to foreign investors with Foreign Investment Law, enacted in 1988. The first export processing zone (EPZ) in Vietnam was established in 1991, and then the Vietnamese government has been quite successful in establishing a series of industrial, export processing, hi-tech and economic zones, showing a great increase in FDI.35)

As stipulated in Investment Law 2005, an industrial zone is designed to specialize in producing industrial goods and providing various services to companies in the zone. An export processing zone is an area of an industrial zone which is specialized more in producing goods to be exported and providing various services to companies in the zone. A hi-tech zone is designed to focus more on R&D, application of hi-tech, bringing up hi-tech firms, training

35) Investment Gateway to Vietnam (http://investinvietnam.vn/; Accessed on June 4, 2017).

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hi-tech skilled workers, production and trade in hi-tech products. An economic zone is an area designated by the Vietnamese government to provide more favorable investment and trade environments for investors. Its area owns geographical boundaries of more than 10,000 hectares and can potentially become a hub of industrial production, services, trade and residential area. An economic zone is convenient in terms of public infrastructure, including ports, airports, and local and cross-border roads, so that companies in the zone can easily do their business. The Vietnamese government has set a national program to provide more efficient infrastructure to the zones in order to attract more foreign investors.

Companies in the zones, mentioned above, can enjoy preferential corporate income tax from 10% to 20%, compared to the normal 28%, for 10 to 15 years after starting their business. These companies are also exempted from corporate income tax from 2 to 4 years since having taxable income, and then the corporate income tax will be reduced by 50% in the next 3 to 9 years depending on characteristics and fields of their investment projects. In addition, value-added tax will be exempted in case of exports of goods and services by companies in export processing zones (EPZs); goods and services traded among companies in export processing zones; and goods and services provided by foreign organizations and individuals to these enterprises. Furthermore, companies in export processing zones do not have to pay tariffs for goods imported from abroad for production and for export goods. As of July 2015, there are 299 industrial zones in Vietnam with 212 zones in their operation.36) These zones have a total area of almost 84,000 hectares, locating mainly in key economic zones in the Northern, Central, and Southern regions.

Interestingly, UNIDO (2011) found that foreign-invested enterprises in industrial zones might not be performing differently from those outside zones. According to its survey in UNIDO (2011), the industrial zones in Vietnam have represented an efficient and productive way of absorbing surplus labor and attracting FDI, but their ability to stimulate long-term economic growth seems to be uncertain, mainly because they have relatively low contribution to technology transfer and spillover effects. In this sense, policymakers are asked to consider how to link incentive programs with technology transfer and spillover effects from FDI.

36) Vietnam Briefing (http://www.vietnam-briefing.com/news/the-guide-to-understanding-vietnams-industrial- zones.html/; Accessed on June 4, 2017). However, JICA (2015) identified 347 industrial parks in Vietnam. See Appendix 3 of JICA (2015) for the list of industrial parks in Vietnam.

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4. Korea’s Policies to Utilize Trade Agreements to Make Korea Investor-Friendly

4.1. Recent Developments in Korea’s FTA Network

4.1.1. Korea’s FTAs in Force

As shown in [Table 34], Korea has 15 FTAs in force with 52 countries, as of July 2017, including big countries, such as the United States, European Union, and China. These all FTA partners have 72.7% of the world GDP in 2016,37) showing that Korea has been quite successful in having an FTA with major countries in the world. When the FTA with central American countries enters into force after having an approval from the National Assembly and FTAs under negotiation successfully ends, this share will move up to 80.1% of the world GDP. Furthermore, if three more FTAs in consideration will end up successfully, it will move further up to 85.8%.38)

Table 34 FTAs in Korea

Status Countries

Chile (April. 2004); Singapore (March. 2006); EFTA (Sep. 2006); ASEAN (Goods: June. 2007, Services: May 2009, Investment: Sep. 2009); and India 15 FTAs in Force (Jan. 2010); EU (July. 2011); Peru (Aug. 2011); USA (March. 2012); Turkey with 52 Countries* (Goods: May 2013); Australia (Dec. 2014); China (Dec. 2015); (Dec. 2015); Vietnam (Dec. 2015); Colombia (July. 2016) Talks Completed Central America (Panama, Costa Rica, Guatemala, Honduras, El Salvador, (one case with 6 Nicaragua; Signed in March. 2017) countries) Talks Ongoing China-Japan-Korea (since Nov. 2011); Regional Comprehensive Economic (four cases with 17 Partnership (ASEAN+6, since May. 2013); Ecuador (since Jan. 2016); Israel countries)* (since June. 2016) Consideration MERCOSUR (Brazil, Argentina, Uruguay, Paraguay, Venezuela); Malaysia; (3 cases with 11 Eurasian Economic Union (Russia, Belarus, Kazakhstan, Armenia, Kyrgyz countries) Republic)

Note: * This report counts the number of countries, except countries overlapped. Source: Official website of FTAs in Korea (http://fta.go.kr/main/)

37) Current value of US$. We used the value of GDP in 2014 for Liechtenstein, a member of the European Free Trade Association (EFTA), because of the unavailability of the relevant data from the World Bank (http://data.worldbank.org/; Accessed on July 3, 2017). 38) Current value of US$. We used the value of GDP in 2013 for Venezuela, a member of MERCOSUR, because of the unavailability of the relevant data from the World Bank (http://data.worldbank.org/; Accessed on July 3, 2017).

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4.1.2. Korea’s FTAs under Negotiations and Consideration

As shown in [Table 34], Korea has four more FTAs under negotiation: one is China- Japan-Korea Trilateral FTA, another is Regional Comprehensive Economic Partnership with 16 ASEAN countries including China, Japan, Australia, New Zealand, and India, and two bilateral FTAs with Ecuador and Israel. Among these FTAs under negotiation, CJK Trilateral FTA and RCEP would be important from Korea’s commercial and political perspectives.

The CJK Trilateral FTA started its negotiation in March 2013 after almost ten years of Joint Study on the feasibility of the Trilateral FTA. As of April 2017, it has had 12 rounds of negotiations, but the process has not been successfully so far due to the rival relationship between China and Japan, conflicts created by differences in the perception of history among these three countries, and so on.39) However, the Korean government set the goal of this FTA negotiation to achieve a comprehensive and high quality of the integration level. 40)

The RCEP member countries announced their readiness of the FTA negotiation during the summit meeting of the ASEAN+3 at Phnom Penh, Cambodia, in November 2012, but the first round of the negotiation was held at Brunei in May 2013. As of May 2017, they had 18 rounds of the negotiation and aim at successfully finishing their negotiation by the end of 2017.41) However, since certain countries, including Japan, have been focusing more on other trade talks, such as Trans-Pacific Partnership (TPP), it is quite uncertain to meet their goals in 2017.

The Korean government considers three more FTAs, which would be expected to start their negotiations in the near future: one with MERCOSUR, another with Malaysia, and the other with Eurasian Economic Union. MERCOSUR, composed by five members from Brazil, Argentina, Paraguay, Uruguay, and Venezuela, is a potential partner of Korea’s FTAs because it has the greatest economic integration in Latin America.

The Eurasian Economic Union, mainly led by Russia with countries like Belarus, Kazakhstan, Armenia, and Kyrgyz Republic, was proposed to discuss a feasibility of a bilateral FTA with Korea during a summit meeting between Korea and Russia in September 2015. It could be a strategic partner in the field of energy cooperation from Korea’s perspective.

39) Newspim, “Getting no better in the negotiation of the CJK Trilateral FTA” (in Korean), April 9, 2017 (http://www.newspim.com/news/view/20170409000006; Accessed on July 3, 2017). 40) Official website of FTAs in Korea (http://fta.go.kr/). 41) Ibid.

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4.2. Vision and Strategies of Korea’s FTA Policy

4.2.1. Vision of Korea’s FTA Policy

In the late 1990s and early 2000s, most countries in the world tried to actively engage in regional and bilateral trade talks by eliminating trade barriers and cooperating economic activities in various fields among member countries. At that time, Korea had a fear of being left out because Korea did not have any single FTA, except the so-called Bangkok Agreement.42) Thus, the Korean government decided to change its policy focus to regionalism and then picked up Chile as the first FTA partner. The Korean government, with a lack of experiences in negotiations and with relatively passive minded, chose Chile for the first FTA partner with two main reasons: how to minimize a potentially negative impact from FTAs and how to accumulate experiences of negotiators. In those senses, Chile was picked up as a sparring partner to Korea because Chile is geographically far from Korea so that the FTA would have relatively little negative impacts, and Korea would learn more from Chile, which already had experienced multiple FTAs

FTA with Chile, however, entered into force in April 2004 even though the negotiation started in 1999 and ended in 2002, implying that it took a relatively long time to receive an approval from the National Assembly. Since it was the first FTA for the Korean government, there had been intense discussions about potential impacts of FTAs, focusing more on their negative impacts on sensitive sectors, including agriculture. Therefore, the Korean government made a ‘Roadmap in FTA negotiations’ in 2003, in process of its domestic approval from the National Assembly, in order to systemize its process of starting and pursuing FTA negotiations more efficiently.

The Korean government set major objectives of the Roadmap, as follows: (1) Securing foreign markets by negotiating FTAs with its major trading countries; (2) playing a leading role in discussing East Asian economic integration; and (3) Pursuing FTAs as a major pillar of trade policy to open and reform the Korean economy. The first priority of FTA visions is how to secure Korea’s commercial interests in foreign markets at a bilateral or regional level, rather than multilateral level, so that Korean companies keep their competitiveness in the global market. In addition, the Korean government wanted to play an important role when countries in the East Asia, like other regions such as Europe and North America, started to discuss regional economic integration. Given the rival relationship between China and Japan, the

42) The Bangkok Agreement was signed in 1975 and then renamed to the Asia-Pacific Trade Agreement (APTA) in November 2005. It has 6 members such as Bangladesh, China, India, Lao PDR, Republic of Korea, and Sri Lanka. However, it was notified to the WTO as Enabling Clause, and its scope of trade liberalization is quite narrow, having more than 4,000 tariff lines for its tariff concessions.

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Korean government believed that it could play a bridging role between these two countries when they discussed various ways of cooperating in the East Asia. Lastly, the Korean government officially announced its policy shifted from the multilateral approach, focusing more on the multilateral trade talks in the World Trade Organization (WTO), to regionalism, also including bilateral FTAs.

4.2.2. Strategies of Korea’s FTA Policy

To achieve these visions, discussed above, the Korean government set four main strategies in the Roadmap: (1) Setting a multi-track approach by initiating multiple FTA negotiations with multiple FTA partners; (2) Aiming at comprehensive FTAs; (3) Improving transparency in the procedure of FTA policy; and (4) Building consensus on trade liberalization. As discussed before, Korea had a fear of being left out and was in needs to quickly catch up the global trend of regionalism since most countries would be likely to announce no more FTAs in the near future after having FTAs with major countries. Thus, the Korean government started to pursue multiple FTA negotiations simultaneously in order to quickly catch up the global trend.

To maximize economic benefits of FTAs and to strengthen economic cooperation with FTA partners, the Korean government tried to pursue FTAs in a comprehensive manner, covering issues beyond borders, such as trade in services, investment, intellectual property rights, competition policy, government procurement, and so on. Even though Korea keeps excluding sensitive agricultural goods, such as rice, in its FTA negotiations, it tried to enhance liberalization of trade and investment with its FTA partner countries for high-quality and comprehensive FTAs.

Utilizing lessons from its first FTA with Chile, Korea needed to have more systemic process to pursue FTA policy. Therefore, the Korean government was asked to have public hearings when they started any new FTA negotiations, by cooperating with the National Assembly. However, it is still uncertain how to balance between needs of transparency in negotiations and needs not to disclose negotiation strategies. In order to persuade people in sensitive industries, the Korean government needs to enhance transparency in negotiations. However, it could disclose negotiation strategies, and hence the FTA partner would set contingency plans, weakening Korea’s negotiation strategies.

Lastly, the Korean government needs to build consensus on trade liberalization, by listening to various interest groups, establishing social safety nets, and providing information on FTA negotiations to the public. For social safety nets, Korea has Trade Adjustment Assistance (TAA), a compensatory and assistance program that aims to help reimburse domestic firms and workers for their material loss or expected loss as the result of policies implemented toward a freer trade regime, as explained in Heo (2007).

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Criteria to Select FTA Partners: Basis

Korea decided to select countries with large economies, such as the United States, EU, and China, as candidates for FTA in the mid or long-term in 2003. This is because FTAs with countries having larger markets may negatively impact the Korean economy.

Given this presumption, the Korean government set the criteria of selecting FTA partners in the short run: (1) economic benefits; (2) geopolitics; (3) readiness; and (4) advantages to launch FTAs with other countries with large economies. First of all, countries, which would provide more economic benefits to Korea, would be the top candidates for its FTA partners. Thus, the Korean government is required to conduct a statistical estimation study before starting a new FTA negotiation and practically the Korea Institute for International Economic Policy (KIEP), a government-funded research institution, does the empirical work by cooperating with Ministry of Trade, Industry and Energy (MOTIE).

Non-economic factors are also in needs of consideration when the Korean government proposes a potential country. To enhance Korea’s position in the diplomatic relations with countries in the world, Korea can consider any potential country that can be helpful in meeting this non-economic goal. In addition, Korea needs to consider partner countries’ interests, which can be described as ‘mutual readiness’ so that both parties need to be ready to start FTA negotiations, having mutual interests.

Lastly, any countries, which can be helpful in starting FTA negotiations with countries with large economies, can be another potential one for Korea’s FTA partners. As discussed before, Korea considered economically big countries as potential FTA partners in the mid- or long-run because it was premature to start it. Thus Korea considered any countries, which are geographically and economically close to those big countries and also would be helpful in understanding economic and trade systems of those big countries. Later, Korea picked up Singapore before ASEAN; EFTA before EU; and and Mexico before the United States, by using this criterion of selecting FTA partners.

4.3. Role of Korea’s FTA Network in Attracting Foreign Investors

4.3.1. Export Platform

As shown in [Table 34], Korea has a well-developed network of FTAs with major countries in the world. It turns out that companies from FTA partners and non-partners of Korea try to utilize this network of FTAs in Korea in order to enjoy preferential tariff concessions from

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the FTAs when they export their goods to Korea’s FTA partners.

A good example is Korea-China FTA. Due to the rise of China in recent years, companies from Japan and European Union try to utilize Korea-China FTA by investing in Korea to establish their production bases in Korea.43) Some local firms that produce consumer products continuously popular in China have been also receiving investments from Chinese investors, strengthening business relationship with those firms in Korea. This is the reason that FDI inflows in Korea from China have been increased a lot from $ 1.2 billion USD in 2014 to $ 1.98 billion USD in 2015 and $ 2.05 billion USD in 2016 when Korea-China FTA entered into force in December 2015. Interestingly, most manufacturing facilities of foreign investors are located in the west coast of Korea, which would be a strategic and geographical move because the west coast is seen the best route for exports to China, implying that more foreign investors review investing in Korea as an export platform to China.

Even though the European Union has a bilateral FTA with Korea, which entered in force in July 2011, companies from the EU member countries are also interested in utilizing Korea-China FTA by establishing their export platform in Korea to export their goods to the Chinese market. FDI inflows from the EU to Korea rapidly increased from $ 2.5 billion USD in 2015 to $ 7.4 billion USD in 2016 by roughly three times.

Toray Industries Inc., a leading textile producer, whose brand is Uniqlo, in Japan, announced its plan to establish its new facility in the Saemangeum Industrial Complex and then to utilize the facility in Korea as an export platform to enter the Chinese market by investing $ 262.1 million USD to expand its production site by 2018. It implies that companies from Korea’s non-FTA partners, such as Japan, consider their business opportunity in Korea in order to fully utilize Korea’s network of FTAs with major countries in the world.

4.3.2. Regional Value Chains in East Asia

Regional value chains in East Asia have been developed over time even though there has been no institution-driven economic integration, such as a regional trade agreement, in East Asia.44) Even though ADB (2016) pointed out that Asian multinationals tend to engage more in GVC-FDI than those outside the region, those multinationals outside the East Asia have also been strongly interested in their participation into this market-driven economic integration in East Asia. Some of these countries, such as Canada, recognize Korea as a gateway to the

43) Maeil Business News Korea, “Foreign firms up investments in Korea to benefit from Korea-China FTA,” April 12, 2016 (http://pulsenews.co.kr/view.php?year=2016&no=267504; Accessed on , 2017). 44) In this context, global or regional value chains can be called as ‘market-driven’ economic integration without any institutional framework to strengthen value chains in East Asia. For more details, see Urata (2006).

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wider Asia-Pacific region, including East Asia. The Canadian government expects that Korea-Canada FTA will provide greater business opportunities to Canadian companies and investors because Korea offers strategic access to regional and global value chains in East Asia.45)

As shown in WTO (2017), it turns out that deep economic integration of a trade agreement boosts GVC-related trade among member countries of the agreement.46) In that sense, North-North and North-South regional trade agreements tend to have deeper economic integration rather than South-South trade agreements. As discussed before, Korea has been actively participating into FTAs with developed countries, such as the United States, EU, EFTA, Canada, Australia, New Zealand, and so on. According to WTO (2017), FTAs of Korea have a pretty higher level of depth in terms of economic integration than South-South trade agreements, implying that Korea’s FTAs are very likely to boost the GVC-related trade among member cuntries.

4.4. Key Contents of Investment Chapters in Selected FTAs

4.4.1. Korea-US FTA

Nowadays, it is a common practice for FTAs to have an independent investment chapter to set rules on investment-related practices of member countries. For investment chapters, it turns out that Korea-US FTA is more specific than Korea-EU FTA, because Korea-US FTA has an independent chapter for investment, but Korea-EU FTA does not.47)

As shown in [Table 35], Korea-US FTA provides national treatment (Article 11.3) and most-favored-nation treatment (Article 11.4) to investors of the other party and also regulates that (e)ach party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security (Article 11.5, Para. 1). In addition, it regulates expropriation and compensation by stating that (n)either party may expropriate or nationalize a covered investment either directly or indirectly through measures equivalent to expropriation or nationalization (expropriation), except: (a) for a public

45) Government of Canada, “Canada-Korea Free Trade Agreement (CKFTA),” (http://international.gc.ca/ trade-agreements -accords-commerciaux/agr-acc/korea-coree/overview-apercu.aspx?lang=eng; Accessed on July 7, 2017). 46) This argument was theoretically shown by Antras and Staiger (2012) and empirically proved by Osnago, Rocha and Ruta (2015). 47) This is because Korea-EU FTA was signed in October 2009, which was before the Treaty of Lisbon entered into force in December 2009. The Treaty explicitly mentions ‘foreign direct investment’ as forming part of the EU common commercial policy, including investment protection, implies that EU did not have a negotiating authority from its member countries on investment before the Treaty of Lisbon.

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purpose; (b) in a non-discriminatory manner; (c) on payment of prompt, adequate, and effective compensation; and (d) in accordance with due process of law (Article 11.6, Para. 1).

Korea-US FTA has a system of Investor-Dispute Settlement (ISD) to solve disputes between an investor from a party and the government of the other party. After consultation and negotiation cannot solve the dispute, the claimant may submit a claim to either one from: International Centre for the Settlement of Investment Disputes (ICSID), United Nations Commission on International Trade Law (UNCITRAL), or any other arbitration institution where the claimant and respondent agree (Article 11.16, Para. 3).

Table 35 Investment Chapters in Selected FTAs in Korea

Korea-US Korea-EU Korea-Chin

FTA FTA a FTA Cooperation Promotion of Investments ○ Definitions on Investment and ○○○ Investors National Treatment ○ ○ ○ Protection Most-Favored Nation ○ ○ ○ Fair and Equitable Treatment ○ ○ Expropriation and Compensation ○ ○ Investor-State Dispute ○ ○ Transfers ○ ○ Liberalization Performance Requirements ○ ○

Source: Author’s compilation from legal texts of these FTAs.

4.4.2. Korea-EU FTA

When Korea-EU FTA was negotiated and signed in October 2009, the EU commissioner did not have a right to negotiate investment-related issues with other countries and rather each member of the EU had autonomy to negotiate because it was before the Treaty of Lisbon, which entered into force in December 2009. Instead, Korea has bilateral investment treaties (BITs) with 23 individual EU member countries:48) Austria (1991), Belgium (1976), Bulgaria (2006), Croatia (2006), Czech Republic (1995), Denmark (1988), Finland (1996), France (1979), Germany (1967), Greece (1995), Hungary (1989), Italy (1992), Latvia (1997), Lithuania (1993), Luxembourg (1976), Netherlands (1975), Poland (1990), Portugal (1996), Romania (1994), Slovakia (2006), Spain (1994), Sweden (1997), and United Kingdom (1976).

48) Except Cyprus, Estonia, Ireland, Malta, and Slovenia from 28 member countries of the EU.

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In Korea-EU FTA, investment-related issues are partly regulated with Trade in Services, Establishment and Electronic Commerce in Chapter Seven of the FTA. Even though national treatment (Article 7.12) and most-favored-nation treatment (Article 7.14) for investors are stated in the FTA, it does not include articles about protections on investors, such as expropriation and compensation, and investor-state dispute (ISD) settlement. However, since Korea has BITs with 23 individual member countries of the EU as mentioned above, investors can be protected by these BITs.

4.4.3. Korea-China FTA

As shown in [Table 35], Korea-China FTA is quite similar to disciplines in Korea-US FTA, providing national treatment (Article 12.3) and most-favored-nation treatment (Article 12.4) to investors of the other party. It also adopted concepts of fair and equitable treatment and full protection and security for investors (Article 12.5, Paras. 1-2). For expropriation and compensation, and ISD, Korea-China FTA has identical rules with Korea-US FTA (Article 12.9 and Article 12.12).

However, Korea-China FTA, unlike Korea-US FTA, has more concerns about the future cooperation and hence it designated contact points for improving investment environment, Korea Trade-Investment Promotion Agency (KOTRA) for Korea and the Investment Promotion Agency for China (Article 12.19). In addition, Korea-China FTA has an article for promotion of investments by stating that (e)ach party shall encourage and create favorable conditions for investors of the other Party to make investments in its territory (Article 12.2).

5. Policy Recommendation

5.1. FDI Policy

5.1.1. Policy Recommendation: Basic Direction

Taking a Strategic Approach by Linking with Industrial Development Plan

The reform and opening policies undertaken by the Sri Lankan government since 1990s have substantially improved Sri Lanka’s investment climate, leading to a continuous increase in FDI inflows into the country. The Sri Lankan government is also sincere to pursue rigorous FDI promotion policies because FDI has a role as a key vehicle for transferring technologies

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and management knowhow that are desperately needed for Sri Lanka to expand the international competitiveness of the industrial sector. In fact, Sri Lanka owns a number of favorable economic and geopolitical advantages that can be utilized for attracting MNCs from developed countries.

Having understood the situation in Sri Lanka, it is quite important for the Sri Lankan government to understand what industries are needed to be developed further for the Sri Lankan economic prosperity and development, and how benefits of FDI can be spread out into every area of the country and inclusive of all sectors and people in the country. A strategic approach to promote FDI must be taken to target and attract foreign investors in those industries, which would help achieving the government’s national economic development goals. When the government designs and implements FDI promotion policies, all kinds of FDI promotion policies, such as targeting investment, setting up and strengthening an investment promotion agency, designing incentive programs, developing investment zones and enhancing investment environment, should be in line with the government’s economic objectives, especially the industrial development goals.

5.1.2. Policy Recommendation: Institutional Perspectives

Build the BOI’s Overseas Network

Invest Korea (IK), an investment promotion agency under KOTRA, has its own overseas network, with KOTRA’s 126 overseas offices, of which 36 of them are overseas FDI offices devoted to attract FDI inflows into Korea. IK works in close consultation with its network of overseas FDI offices to identify potential foreign investors who may be interested in doing business in Korea. These offices have been active to advertise Korea as a destination of investment, by having road shows, being an inquiry point of Korea, and providing information on recent trends of global value chains, markets, and industries.

Definitely we do understand that it is not easy for the BOI to build its own overseas network due to the budget constraints. However, the BOI can have an effective overseas network if the Sri Lankan government tries to utilize its embassies. As a starting point, the BOI can send personnel to Malaysia, Hong Kong, China, and India in order to build its own overseas network using the Sri Lankan embassies because these four countries have been top four investors to Sri Lanka. In addition, the BOI needs to establish its own criteria to select countries in the network, by analyzing potential strategic industries and major investor countries. For example, the Sri Lankan government can assign an FDI promotion task to Commercial Attaché in embassies located in selected countries, which have great potentials to invest in Sri Lanka.

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Establish the Office of the Foreign Investment Ombudsman

From a longer-term perspective, Sri Lanka has been well advised to consider the introduction of an Investment Ombudsman system, as an increasing number of investment disputes can be expected concomitant with increasing FDI. The Investment Ombudsman will function as a bridge between foreign investors in Sri Lanka and government agencies, such as BOI and Ministry of Finance.

In the case of Korea, which introduced the FDI Ombudsman System in 1999, the office has proactively dealt with grievances articulated by foreign investors, and effectively played a bridging role. The Ombudsman handled (i) grievances of FDI firms due to potential regime changes in Korea; (ii) conflicts of interest with Korean counterparts in the case of joint venture companies; and (iii) issues arising during labor disputes, and so on.

Foreign investors in Sri Lanka could be also faced with various problems in different areas when they actually invest and do business in Sri Lanka. It is necessary for the Sri Lankan government to establish a special office to help foreign investors who faced with problems in doing business, to solve their concerns in a more efficient way and to provide recommendations to policy makers in Sri Lanka from actual cases and experiences of foreign investors in Sri Lanka.

5.1.2. Policy Recommendation: Institutional Perspectives

Build the BOI’s Overseas Network

Invest Korea (IK), an investment promotion agency under KOTRA, has its own overseas network, with KOTRA’s 126 overseas offices, of which 36 of them are overseas FDI offices devoted to attract FDI inflows into Korea. IK works in close consultation with its network of overseas FDI offices to identify potential foreign investors who may be interested in doing business in Korea. These offices have been active to advertise Korea as a destination of investment, by having road shows, being an inquiry point of Korea, and providing information on recent trends of global value chains, markets, and industries.

Definitely we do understand that it is not easy for the BOI to build its own overseas network due to the budget constraints. However, the BOI can have an effective overseas network if the Sri Lankan government tries to utilize its embassies. As a starting point, the BOI can send personnel to Malaysia, Hong Kong, China, and India in order to build its own overseas network using the Sri Lankan embassies because these four countries have been top four investors to Sri Lanka. In addition, the BOI needs to establish its own criteria to select countries in the

148 Ⅳ. Strategies to Attract Foreign Investors

network, by analyzing potential strategic industries and major investor countries. For example, the Sri Lankan government can assign an FDI promotion task to Commercial Attaché in embassies located in selected countries, which have great potentials to invest in Sri Lanka.

Establish the Office of the Foreign Investment Ombudsman

From a longer-term perspective, Sri Lanka has been well advised to consider the introduction of an Investment Ombudsman system, as an increasing number of investment disputes can be expected concomitant with increasing FDI. The Investment Ombudsman will function as a bridge between foreign investors in Sri Lanka and government agencies, such as BOI and Ministry of Finance.

In the case of Korea, which introduced the FDI Ombudsman System in 1999, the office has proactively dealt with grievances articulated by foreign investors, and effectively played a bridging role. The Ombudsman handled (i) grievances of FDI firms due to potential regime changes in Korea; (ii) conflicts of interest with Korean counterparts in the case of joint venture companies; and (iii) issues arising during labor disputes, and so on.

Foreign investors in Sri Lanka could be also faced with various problems in different areas when they actually invest and do business in Sri Lanka. It is necessary for the Sri Lankan government to establish a special office to help foreign investors who faced with problems in doing business, to solve their concerns in a more efficient way and to provide recommendations to policy makers in Sri Lanka from actual cases and experiences of foreign investors in Sri Lanka.

5.1.3. Policy Recommendation: Incentive Programs

Introduce More Customized Incentive Programs to Foreign Investors

It is evaluated that Sri Lanka’s incentive programs to attract FDI has been relatively well developed so far. However, as we discussed previously, most developing countries have been eager to promote and attract more FDIs in recent years, by providing various incentive programs. As a result, most developing countries are in a race to attract more FDIs. Sri Lanka’s current incentive programs focus mainly on tax incentive programs, of which most developing countries are actively operating in recent years. Therefore, the Sri Lankan government needs to focus on how to diversify and differentiate incentive programs from rival countries in this region. It could be useless to provide similar incentive programs to what rival countries in this region are providing. The Sri Lankan government needs to take a more customized approach to attract foreign investors, by providing more various and differentiated incentive

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programs. Without putting sincere efforts of diversifying and differentiating incentive programs, no developing country will succeed to attract more FDIs.

Utilizing lessons from the Vietnamese case study, the Sri Lankan government needs to respond to demand from MNCs who want to invest in Sri Lanka, by analyzing their motivation, factors to determine their locational decision, and their industrial characteristics. In this process, the Sri Lankan government can establish a more customized incentive program to an MNC, which intends to invest in Sri Lanka.

In Korea, there are largely three kinds of incentive programs: tax incentives, cash grant, and investment location support. Overall, Korea’s incentive programs have become more aggressive simply due to China. As well known, China has become a super-massive black hole of FDI from all over the world. Being a neighboring country to China, Korea has to be more aggressive to provide incentive programs.

Link Incentive Programs with Positive Spillovers

As we discussed before, FDI itself should not be the ultimate goal. Rather, the Sri Lankan government needs to use FDI as a tool of raising economic prosperity and development. According various studies on FDI-related issues, it was found that host countries could have positive economic effects of FDI only when there was a positive externality or knowledge spillover from foreign investors to local economic agents. Therefore, without learning something from foreign investors, developing countries are not able to have positive impacts. In this context, the Sri Lankan government needs to link incentive programs with positive spillovers from foreign investors.

In Korea, IK provides tax supports for foreign engineers when they transfer their knowledge or technology to any Korean national. More specifically, a foreign engineer shall be entitled to the 50% reduction of income tax on earned income derived from the offer of his/her services to a Korean national within Korea. In addition, income tax shall be reduced to 50% for the income paid to a foreign engineer who provides high technology under a technology introduction contract. This is a good example of IK’s efforts to diversify and differentiate incentive programs and also to link them with knowledge spillovers from foreign investors.

In addition to link incentive programs with knowledge spillovers, the Sri Lankan government needs to consider a fact that local companies must achieve a certain technological sophistication before they can absorb these spillovers. Without having companies achieving a certain technological sophistication, this linking policy is useless.

150 Ⅳ. Strategies to Attract Foreign Investors

Establish Industrial Cluster Using EPZs and IPs

As shown in [Table 36], the BOI operates 11 Export Processing Zones (EPZs) and two Industrial Parks (IPs). These EPZs and IPs have played an important role in developing industries and attracting FDI. However, it is hard to see a strong linkage between these areas and industrial development plans set by the Sri Lankan government.

Table 36 Export Processing Zones and Industrial Parks in Sri Lanka

Exports Year Size Number of Number of Region from Zone Established (acre) Companies Employees (Rs. Mn.)

Katunayake-EPZ 1978 531.54 84 37,762 200,542 Biyagama-EPZ 1986 450.68 57 25,007 57,026 Koggala-EPZ 1991 227 22 12,906 6,528 -EPZ 1999 395.6 17 1,893 3,553 Mirigama-EPZ 1998 260.5 9 3,950 5,723 Polgahawela-EPZ 2000 65 5 4,199 8,948 Mawathagama-EPZ 2000 53.75 7 5,735 56 Wathupitiwela-EPZ 1999 123 18 9,394 13,214 Malwatta-EPZ 1998 33 6 1,800 597 Kandy-EPZ 1994 205 23 7,469 719 Seethawaka-EPZ 1999 431.3 27 21,734 39,169 Mirijjawila-IP 1999. 565 5 1,650 332 Wagawatha 2004 76.25 6 427 -

Source: Board of Investment of Sri Lanka (http://www.boi.lk/).

In this context, the Sri Lankan government needs to designate a specific zone or park to a specific industry, considering the zone’s infrastructure, environment, demographic factors, and industrial characteristics of the selected industry. In the process of doing so, the BOI is able to establish industrial clusters, based on the Sri Lankan government’s industrial development plan.

In general, an industry tends to cluster at a particular location. There are two different forces to determine industrial clusters: centripetal and centrifugal forces. Centripetal forces are encouraging firms to locate close to each other, while centrifugal ones to spread out. The centripetal forces are usually classified in three groups: (1) knowledge spillovers or other

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beneficial technological externalities; (2) various labor market-pooling effects; and (3) linkages between buyers and sellers. On the other hand, the centrifugal forces would be based on congestion, pollution, and other negative externalities that might be associated with concentrations of economic activities because they will lead to high rents and severe competition for immobile factors. Therefore, the Sri Lankan government needs to consider this fact that clustering or agglomeration typically arises from the interaction between centripetal and centrifugal forces, when they try to establish industrial clusters using EPZs and IPs.

5.2. Policy of Utilizing Trade Agreements in Sri Lanka

5.2.1. Policy Recommendation: BITs

According to ADB (2016), BITs have been important international policy tools in spurring FDI. Despite the growing heterogeneity in the scope and depth of BITs, the treaties generally help both greenfield FDI and M&As. Empirical findings, done by ADB (2016), suggest that having investor-state dispute mechanisms (ISDMs) is most effective for BITs to attract FDI -it can increase the number of FDI projects by 35.3%. Separately, nondiscrimination provisions -such as national treatment and most-favored-nation clauses in regional trade agreement investment chapters-are the most effective element in attracting FDI.

Expand the Network of BITs and Deepen the BITs with ISDM

In this context, the Sri Lankan government needs to enact more BITs with foreign countries and to deepen the existing BITs in a more investor-friendly manner. Considering major investors, it turns out that Sri Lanka does not have a BIT with Mauritius and UAE among top ten foreign investors during 2005-2016. As empirically identified by ADB (2016), BITs can strongly encourage greenfield and M&A investment projects, and the presence of an investor-state-dispute mechanism (ISDM) is the only provision that appears to be significant across various empirical models. It turns out that it has been important for developing countries to provide international arbitration rights to foreign investors in attracting FDI.

5.2.2. Policy Recommendation: FTAs

Try to Have FTAs with Developed Countries from Perspectives of Rule-Based Systems

It turns out that regional trade agreements (RTAs) help attract north-south FDI because

152 Ⅳ. Strategies to Attract Foreign Investors

RTAs increase greenfield FDI from high-income to low-income economies, perhaps by helping improve the business environment and cutting trade costs. However, its effect is negative for greenfield FDI among developing economies because the so-called South-South RTAs is particularly in manufacturing and services. It suggests that FDI among developing economies, under a South-South RTA, might be driven more by tariff jumping and market seeking, rather than the desire for an export platform for external trade. Nonetheless, the effect of longer-term trade and investment promotion is expected to outweigh a more short-term substitution effect (ADB 2016). Therefore, Sri Lanka needs to negotiate with developed countries to enact FTAs because those FTAs with developed countries can send more favorable signals to foreign investors in terms of implicitly verifying that Sri Lanka has a rule-based system to protect foreign investors. Vietnam could be a good example because it has been actively participating into the Trans-Pacific Partnership (TPP) negotiation, whose members include developed countries, such as the United States, Japan, Canada, Australia, New Zealand, and so on. If Sri Lanka thinks that it would be premature to start FTA negotiations with big developed countries, then it can pick up relatively developed countries in East Asia, such as Japan, Singapore, and Korea. This strategy comes from lessons from Korea, because Korea, in the short run, selected potential countries that can be helpful in negotiating FTAs with big countries.

Start FTA Negotiations with ASEAN or Try to Participate into RCEP

In recent years, East Asia has been one of hot areas in the world in terms of trade, investment, and global value chains.49) It implies that Sri Lanka needs to strengthen and deepen economic relationships with countries in East Asia. In process of doing so, Sri Lanka needs to strongly consider any type of economic cooperation with ASEAN. Definitely, a bilateral FTA between Sri Lanka and ASEAN as whole would be a good target. If the bilateral approach were not possible somehow; however, the SAFTA-ASEAN FTA would be another alternative to be considered.

Currently, India is the only country from South Asia to participate into the RCEP negotiation, which includes 10 ASEAN countries, China, Japan, Korea, Australia, New Zealand, and India. To strengthen virtual economic cooperation among Northeast Asia, , South Asia, and Oceania, Sri Lanka, another country from South Asia, would be a good candidate to participate into the RCEP. Since the RCEP negotiation is in almost the final stage, it would be too late for RCEP countries to consider another partner country. If it is the case, Sri Lank needs to participate into RCEP when RCEP considers its enlargement after it enters into force.

49) Europe, North America, and East Asia can be called a Triadintermsofinternationaltrade.

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Aim at Comprehensive and High-Quality FTAs

One of key lessons from Korea’s experience in FTA negotiations is that the bilateral FTA between the United States and Korea (KORUS FTA) was criticized due to less commitment to open services markets. The services sector in Korea has been seen as a new growth engine, transforming the Korean economy from a manufacturing-oriented to a knowledge-based economy. In addition, key agricultural commodities, such as rice and some fruits, had been permanently excluded from the FTA negotiations and tariff reductions were deferred on many items. Given these lessons from previous FTA negotiations, Korea was asked to take a new approach by pursuing comprehensive and high-quality FTAs.

Sri Lanka needs to pursue comprehensive and high-quality FTAs as well. This is because seeking FTAs as comprehensive as possible will ensure that benefits accrue from substantial liberalization in a WTO-Plus manner. ADB (2016) also showed that deep economic integration of trade agreements boosts common economic prosperity with GVC-related trade. In addition, Sri Lanka needs to take more active, rather than passive, approaches by focusing more on how to maximize benefits of FTAs, rather than to minimize negative effects of FTAs. Therefore, Sri Lank needs to put its efforts in improving the existing FTAs, for example, Indo-Sri Lanka FTA.

154 Ⅴ. Strengthening the competitiveness of Sri Lanka SMEs through participation in GVC

Ⅴ. Strengthening the competitiveness of Sri Lanka SMEs through participation in GVC

1. Introduction

Improving the competitiveness of SMEs can be achieved through various methods. Internal knowledge creation activities such as R&D and external knowledge creation through export are representative ways of competitiveness enhancement activities by firms. SMEs can increase their competitiveness through their own research and development (R&D) efforts. In addition, SMEs can increase their competitiveness by imitation of advanced management techniques such as foreign manufacturing process, labor management, marketing, and etc., by simply participating in the export market. However, considering the characteristics of SMEs lacking capital, it would be more useful to indirectly create competitiveness through participation in the export market rather than creating direct competitiveness through R&D.

SMEs account for about 99.8% of the economy in Sri Lanka. On the other hand, Sri Lanka's SMEs generate only about 30% of their output. Like many developing countries, Sri Lanka is also concerned about how to strengthen the competitiveness of SMEs, which are the backbone of the industry. While it is possible to increase the competitiveness of SMEs through various methods such as inflow of FDI, securing of technological power, and strengthening export competitiveness, in this study we aimed to enhance the competitiveness of SMEs by participating in the global value chain (GVC) of SMEs in Sri Lanka.

Many countries are implementing various policies to foster SMEs. In particular, there are many SMEs customized policies to increase exports of SMEs to enhance their productivity through learning-by-doing process while SMEs are perceived as a kind of competitors with domestic large corporations and global corporations. However, it is important to create a win-win relationship with SMEs, large corporations and global corporations by allowing SMEs to integrate into production networks of large corporations or global corporations.

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2. SME status and GVC participation in Sri Lanka

2.1. SME Competitiveness

Each country defines SMEs differently. Sri Lanka does not have a clear definition of a SME, but it largely distinguishes SMEs according to their size and sales scale.

Recently NEDA, which governs the policies of Sri Lankan SMEs, presents a single definition for SMEs as shown in the [Table 37] below. In the case of manufacturing, a firm that has less than five employees is classified as micro firm, a firm that has 50 or less employees are classified as small firm, and a firm that has 150 or less employees is classified as medium firm.

Table 37 Sri Lanka Small Business Classification Standard

Firm Agriculture Manufacture Service

Employee 1~4 1~4 1~4 Micro Sales ~200K Rs ~250K Rs ~200K Rs Asset ~5M Rs ~10M Rs ~5M Rs Employee 5~19 5~50 5~19 Small Sales 200K~1M Rs ~10M Rs 200K~1M Rs Asset ~10M Rs ~20M Rs ~10M Rs Employee 20~50 51~150 20~50 Medium Sales 1~5M Rs ~25M Rs 1~5M Rs Asset ~20M Rs ~50M Rs ~20M Rs

Source: NEDA

In Sri Lanka's national economy, SMEs including micro-firms account for a large portion of number of firms. However, Sri Lankan SMEs are largely underdeveloped and non-competitive. In Sri Lanka, there are about 1 million SMEs (including micro-enterprises), which represent about 99.8% of all Sri Lankan businesses and about 30% of Sri Lanka's GDP. Micro-enterprises have a large portion of the total businesses. In other words, about 92% of all enterprises are micro businesses, and their employment accounts for about 45% of the total industry.

156 Ⅴ. Strengthening the competitiveness of Sri Lanka SMEs through participation in GVC

Table 38 Sri Lanka's Business Statue

No. of Establishment Employees engaged

Number % Number %

Micro 935,736 91.8 1,338,675 44.6 Small 71,126 7.0 529,751 17.6 Medium 10,405 1.0 386,756 12.9 Large 2,414 0.2 747,937 24.9 Total 1,019,681 100.0 3,003,119 100.0

Source: Non-Agricultural Economic Activities in Sri Lanka Economic Census 2013/2014

In Sri Lanka, the industries with the highest output are food and beverages (ISIC 15), clothing (18), rubber and plastic products (25), nonferrous metal products (26) and textiles (17) (see Table 39).

Table 39 Status of Sri Lanka Production, Employment by Industry

Value of Output Value Added ISIC2 Establishment Employees (Rs.Billion) (Rs. Billion)

15 522.5 208.4 874 115,890 18 364.6 177.9 475 266,750 99 192.6 23.4 21 11,769 25 150.7 62.9 260 52,413 26 96.0 42.4 77 1,448 17 61.4 43.4 187 40,711 16 68.8 65.3 14 4,094 24 68.7 24.6 107 12,091 36 40.3 22.0 143 20,330

22 31.3 13.2 82 15,026 27 30.2 7.9 42 3,702 35 21.5 9.4 17 6,096

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In Sri Lanka, the 10 largest industries are processed food, clothing, tobacco, and rubber. However, most of the added value is generated from food and beverages and clothing.(See Figure 50)

In such an industrial structure, it is difficult to expect Sri Lanka's economic growth without raising the competitiveness of SMEs. Effective policy of government to upgrade the competitiveness of Sri Lankan SMEs is needed. In a situation where the domestic market is narrow, it is effective for the Sri Lankan government to let SMEs participate in exporting in order to increase industrial competitiveness. The Sri Lankan government has selected promising export industries as shown in [Table 40] below, and it is necessary to create a strategy to preferentially cultivate SMEs engaged in the industry.

Value Added Ratio of Foreigners Generated by Figure 50 Exports by Industry in Korea in 2011

Unit: Rs. Billion

Source: Annual survey of industries, Department of Census and Statistics

158 Ⅴ. Strengthening the competitiveness of Sri Lanka SMEs through participation in GVC

Table 40 Sri Lanka Export Promising Industry

Industry size Big Small

Export World Export World Industry Industry ratio Rank ratio Rank

Fish 2.0 32 Textile 40.0 23 Coconut 2.1 10 Tea 15.6 1 Petroleum 1.8 n/a p Rubber 6.6 30 High Electronics 1.9 71 r Jewel 5.4 45 Publishing o Food & Beverage 2.2 n/a Boat construction s Spices 1.6 n/a p Specialized Service e Ceramic etc 1.0 103 c Fruit & Vegetable 0.6 n/a Chemical & t Low 1.5 93 Toys 0.5 53 Plastics Shoe, leather 0.4 75 Pet fish 0.1 10

Source: Annual survey of industries, Department of Census and Statistics

The government of Sri Lanka has tried to strengthen the competitiveness of small and medium-sized enterprises through the improvement of information accessibility, technology development and transfer program, infrastructure development project, SME networking, consulting services, and value chain as well as financial accessibility of SMEs for the development of SMEs. The government of Sri Lanka has implemented various policies to strengthen the competitiveness of SMEs with the recognition that SMEs form the economic basis of almost all fields such as textiles, textiles and clothing, agriculture, food and beverage, tourism, construction, trade, warehousing and transportation and other service industries.

2.2. GVC participation in Sri Lanka

Several studies have shown that the incorporation of the global value chain (GVC) creates positive economic effects such as increased value-added in domestic production and employment creation [Koopman et al., (2012, 2014); Kummritz, (2015); Timmer et al., (2016)]. Countries that have joined the global value chain experienced the growth in production, and this positive effect is particularly pronounced in countries with high incomes [Kummritz, (2015)]. Asian countries such as China and Vietnam have played an important role in the global value chain. They have been importing high value-added intermediate goods from advanced countries and producing and exporting final products. Korea has also been taking

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a strategy to produce and sell its export products directly overseas, using production facilities in China and Vietnam, and other developing countries in order to take advantage of low production cost.

Sri Lanka is participating in the GVC in the garment industry. Sri Lanka produces ODM of intimate apparel, active wear, swimwear, and children's wear, and its main export destinations are EU-15 (48%) and the United States (41%). Exports of Sri Lanka apparel products to Europe have become more active as the EU has given preferential tariffs to Sri Lanka under GSP and GSP Plus. In recent years, many apparel manufacturers in Sri Lanka joined GVCs in conjunction with the textile industry in India and Bangladesh, as well as establishing factories in Africa and Jordan (Kelegama and Wijaysiri, 2004).

Sri Lanka has been involved in the GVC since the 1980s in two phases. From the 1980s to the 1990s, Sri Lanka participated in GVC with the form of GVC of Cut, Make and Trim (CMT). At that time, East Asian and European clothing companies invested in Sri Lanka, and Sri Lanka joined the global enterprise GVC by supplying simple labor at these factories. Sri Lanka apparel companies MAS Holdings and Bradix have started as global supplier companies and settled in GVC. These companies now have 45 factories in Sri Lanka and create about 70,000 jobs. These companies are supplying to a variety of global brands such as Nike, Victoria’s Secret, and M & S. These companies move beyond the CMT phase and upgrade to the more sophisticated GVC.

Since the 2000s, the Sri Lankan apparel industry has been producing more functionally upgraded products. In other words, beyond the CMT stage, the Sri Lankan apparel industry develops itself to the stage of designing and producing more elaborate clothing. This development can be found in two factors. First, the Sri Lankan apparel industry has formed a strong sense of solidarity with global companies such as Nike, Victoria’s Secret, M & S, and Gap. Through strong solidarity with global apparel companies, the Sri Lankan apparel industry has been able to move up to the higher level of GVC, and as a result, it has been able to steadily increase exports in the GVC established by global corporations. Their exports have grown to more than 50% of Sri Lanka's total apparel exports. Second, there was the Sri Lankan government's efforts to globalize the Sri Lankan clothing industry. The Sri Lankan government created the Joint Apparel Association Forum (JAAF) and supported the development of the ODM phase at the CMT level, which allowed the garment industry to provide more goods to the GVC.

Since Sri Lanka's education system is superior to other Southeast Asian countries, it is easy to utilize well-trained manpower for GVC participation. Sri Lanka is establishing a training system for human resources training in the field of textiles and apparel, so it is easy to acquire

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excellent manpower compared to other industries. The fact that Sri Lanka is able to secure relatively high skilled labor is becoming a great advantage of Sri Lanka’s GVC participation. On the other hand, the majority of skilled and unskilled workers are women (about 80%), which should be fixed for Sri Lanka to engage more GVCs in the future.

3. Competitiveness enhancement through Korean SME's participation in GVC

As Korea is also proposing various policies to support companies that enter the export market in order to overcome the limitations of the narrow domestic market, we can provide insights into the successful entry of Sri Lankan SMEs' global production network.

3.1. Korea GVC Participation Status

Korea firms’ GVC participation is increasing rapidly. Korea's exports accounted for 3.3% of total world exports in 2011, up from 2.7% in 1995, and the share of value-added exports increased from 2.4% to 2.8% in the world. The share of Korea's imports in total world revenues increased from 2.6% in 1995 to 3.0% in 2011, and the share of value-added imports also increased from 2.0% to 2.3%. In this way, the proportions of total exports, imports and value-added exports and imports are growing, which means that the share of GVC participation in Korea is increasing [Jung, (2014)]. According to Kim (2016), the proportion of total value-added exports to manufacturing has increased from 70.9% in 1995 to 79.6% in 2011.50)

In terms of the share of value-added exports in each industry, high-technology industries such as electronic components, computers, and video equipment fell slightly from 30.4% in 1995 to 24.7% in 2011. But the absolute value added exports rose from about 32.5 billion USD in 1995 to about 125.5 billion USD in 2011. On the other hand, the share of value-added exports of textile, bag and footwear industries, which can be classified as low-tech industries, dropped from 15.8% in 1995 to 2.7% in 2011, as well as from about 16.9 billion USD to about 13.3 billion USD respectively.

In Sri Lanka, GVC participation in textiles, apparel, bags and footwear is high, while South Korea's GVC participation in those industries is decreasing. It is expected that Korea will be able to provide implications for Sri Lanka through the experience of industry changes in the GVC participation.

50) Europe, North America, and East Asia can be called a Triad in terms of international trade.

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Table 41 Change of Korea's Value-Added Exports

Industry 1995 2005 2010 2011

Total Value Added Export 150,706 330,857 528,689 622,265

Total Manufacturing 106,867 255,050 416,289 495,395

Food & Beverage 2,298 3,024 4,863 6,260

Textile, Shoe, Bag 16,892 10,026 11,383 13,234

Wood products 122 61 73 94

Pulp, Paper, Printing 1,294 2,800 3,258 3,777

Coke, Petroleum 3,136 16,664 34,916 54,515

Chemicals 6,287 24,564 40,729 53,262

Rubber, Plastics 6,539 5,762 8,925 10,957

Non-metal 594 1,192 1,551 1,777

Fabricated Metal 10,381 22,429 43,835 58,458

Machinery 6,028 19,368 34,718 42,528

Electronics 32,518 87,308 125,153 122,467

Other Electronics 1,678 6,013 13,422 16,122

Transport 16,783 53,774 92,492 111,723

Other Manuf. 2,317 2,065 971 1,222

Source: OECD

The ratio of value added created by foreign companies in export by industry is shown in the figure below. Pulp and paper industries have the lowest foreign value added ratio (28.7%), while the oil refining industry accounts for 80% of revenues. In other industries, the foreign value added share of gross export is in the range of 30-40%, but the ratio of creating value added by foreigners in the chemical industry (53%) and the metal industry (54%) exceeds 50%.

162 Ⅴ. Strengthening the competitiveness of Sri Lanka SMEs through participation in GVC

Figure 51 Sri Lanka Top Ten Value Creation Industry

source: OECD TiVA database (Foreign Value Added share of gross export)

The share of value added by foreign companies in Korea's industry exports is steadily increasing. The [Table 42] shows how the percentage of value added by foreign firms has changed since 1995. It shows that the ratios have steadily increased in all industries in Korea. In 1995, almost all industries showed about 20% share of foreign added value, but in 2011 almost all industries accounted for about 40%. It implies how many Korean companies depend on foreign companies for their use of intermediates.

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The Change of Value Added Ratio of Foreigners Generated Table 42 by Exports by Industry in Korea

(%) Industry 1995 2000 2005 2008 2009 2010 2011

Food and beverage 16.5 18.9 22.1 31.6 30.3 31.3 35.6 Textile and Clothing 21.3 23.9 27.1 36.2 32.7 36.4 35.3 Wood products 19.7 21.6 25.2 33.9 29.6 32.5 35.1 Pulp, paper, and printing 16.6 21.8 23.3 30.1 26.7 32.3 28.7 Coke, and petroleum 59.6 76.8 75.8 83.8 79.8 78.1 80.8 Chemicals 27.0 36.1 41.4 53.1 47.2 50.8 53.1 Rubber, plastics 24.2 27.2 30.8 40.8 36.9 40.3 41.3 Other non-metal products 26.1 29.1 31.4 38.0 33.5 36.7 39.3 Basic metal 36.3 39.7 41.9 54.0 47.9 49.8 53.4 Fabricated metal 28.1 28.3 31.2 42.6 37.2 37.6 39.2 Machinery 31.2 31.8 33.5 42.2 38.3 39.7 40.9 Computer and optic 27.8 37.5 37.6 44.4 42.4 41.4 42.2 Electronics 28.8 26.9 33.0 39.8 36.7 37.2 38.3 Transport 24.6 28.8 31.5 39.0 35.0 36.3 37.7 Other Transport 29.8 29.333.540.336.737.238.3

Source: OECD TiVA database (Foreign Value Added share of gross export)

3.2. Korean Government Support

Kim (2016) introduces the policies of Korean government and government agencies to be designed of supporting SMEs' participation in GVC in Korea. Using the nine criteria of APEC (2014), such as product attributes, financial soundness, production capacity, standards and certification system, flexibility, geopolitical position, level of information and communication technology, talent and innovation ability, and intrinsic strength, it listed various programs supported by Korea Small and Medium Business Administration (SMBA), Small Business Corporation(SBC), Credit Guarantee Fund, Technology Guarantee Fund, Korea Export-Import Bank, Korea Chamber of Commerce, Korea Trade Association and KOTRA.

However, it was noted that SME policies listed by Kim (2016) are not designed to participate in GVC but common SME support programs. The following table summarizes the policy to encourage SMEs to participate in GVC among polices listed by Kim (2016).

164 Ⅴ. Strengthening the competitiveness of Sri Lanka SMEs through participation in GVC

The Small and Medium Business Administration (SMBA) and KOTRA are supplying various policies that promote SMEs' export capabilities and encourage their GVC participations. The SMBA supports SMEs to participate in GVC through various methods such as overseas marketing, R&D, and distribution. SMEs often develop innovative idea products, but their products sometimes disappear because they cannot find the distribution network. In order to overcome these difficulties, the SMBA is launching a 'creative innovation product discovery & linkage system project' that helps SMEs to explore creative and innovative products and link them with the existing distribution network. There is a project to carry out the ‘Technology Development Project for Linking Foreign Demand’ to SMEs who are asked to develop technology suitable for specific products, which have been recognized by overseas global companies. The ‘Partner business to strengthen competitiveness of SME technology ' is a system to establish a cooperative network between SMEs and medium-sized enterprise partners, while strengthening global technological capabilities and establishing win-win and cooperative models among them to support growth in the world market. There is also a policy for SMEs to evolve from OEM to ODM. That is, the 'SME Brand Support Program' is a system to support brand development and promotion expenses for these companies when 5 or more SMEs jointly develop the trademark, perform marketing and PR. The 'Small but Strong Global Enterprise Fostering Business' is a system to support the marketing and R&D assistance by finding innovative SMEs so that they can grow into self-sustaining SMEs in the global market. Finally, to support the difficulties of small and medium-sized enterprises, which have difficulties in exploiting overseas markets, the ‘Support SME for advancement with large firms ' is a system to support overseas markets by exploiting overseas networks owned by domestic large corporations.

The Small and Medium Industry Promotion Corporation is carrying out a 'global buyer purchase subsidy support project'. This is a business that receives inquiries from overseas buyers and matches SMEs that can supply to the companies concerned. SMEs will have the opportunity to demonstrate their skills through this project, which will enable them to form partnerships with global companies.

The Large and Small Business Cooperation (SBC) is carrying out a Cost-saving Large-SME joint business project'. This is a project that supports research and development expenses when a consortium is formed between the first supplier or the second or third supplier of a large company to carry out a cost reduction type task.

KOTRA also supports the globalization of SMEs through various programs. KOTRA has 127 foreign trade centers in 86 countries. KOTRA is actively helping SMEs to enter the overseas market by utilizing its own extensive overseas network. KOTRA mainly provides SMEs with information on overseas markets rather than financial support, or arranges meetings with

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overseas buyers. Representative businesses providing overseas market information are trade, investment, information portal operation business and foreign investment information portal business. Through these businesses, KOTRA provides SMEs with information on their customized overseas market entry by region and theme. It also provides opportunities for SMEs to meet directly with overseas buyers through export conferences and trade missions. These programs will give the competitive SMEs the opportunity to be incorporated into GVCs of global companies overseas.

Table 43 Korea Small Business GVC Participation Support Program

Organization Program Contents To find out innovative idea products of SMEs and to Creative Innovation Product support them to meet domestic and overseas distribution Discovery / Linkage System networks Supports competitive product development expenses for Technology Development Project SMEs who are requested to develop new technology for Linking Foreign Demand’ from overseas Establish a cooperative network between SMEs and Partner business to strengthen mid-large sized business partners and build a mutual competitiveness of SME growth system by strengthening global technology technology capabilities SMBA Support development and promotion expenses when 5 SME Brand Support or more SMEs work together joint brand development and promotion Small but Strong Global Enterprise Supporting overseas marketing and R & D support for Fostering Business global markets by identifying excellent SMEs Utilizing the overseas network and infrastructure of large Support SME for advancement corporations to support expansion of overseas market with large firms by SMEs Business that finds and matches SMEs that can receive SBC Global buyer subscription support supply from overseas buyers Large & Small When a consortium is formed between the first supplier Business Cost-saving Large-SME joint or the second or third supplier of a large company to Cooperation business carry out a cost reduction type task, Foundation invite buyers who want to export Korean products and Export Consultation arrange meeting with domestic companies to expand sales channels Organize an overseas delegation for overseas Trade mission advancement and arrange a meeting with local buyers from abroad KOTRA Portal of Trade, Investment Provides overseas market information by region and Information theme for Korean companies to enter overseas market A portal for overseas investment information, which is Portal of Outward Investment a one-stop comprehensive information on foreign Information investment information provided by 24 foreign investment related institutions

Source: Kim(2016). P. 118-126

166 Ⅴ. Strengthening the competitiveness of Sri Lanka SMEs through participation in GVC

3.3. Examples of GVC participation by SMEs

ADB (2003) presents various directions for SMEs to enter the global market. The most representative types are foreign direct investment through greenfileld or portfolio, joint venture with local companies, custom branded product production, manufacturer design production, and subcontracting.

In particular, Original Equipment Manufacturing (OEM) and Original Design Manufacturing (ODM) are among the best strategic options for developing countries to enter the existing GVC. SMEs in the early stage of entry into GVC will enter the global market through OEM participation and develop into ODM later. After the stabilization of GVC, SMEs finally evolve into Original Brand Manufacturing (OBM) that enables SMEs to design and manufacture their own brands. SMEs must secure their own proprietary technologies in order to enter the OBM phase; therefore, SMEs’ approach the global market by OEM method is the most suitable entry strategy in order to enter the initial GVC.

The Korean SMEs participated in the GVC through five major approaches. First, it is a GVC advancement through global conglomerates located overseas. In order to be included in the global GVC system of large conglomerates, it is necessary to secure the competitiveness and technical power of SMEs. Second, SMEs can participate in GVC through global companies located in Korea. Although it initially acts as a supplier of parts and materials in the domestic market by participating in the GVC of a global company that has entered the domestic market, it can be incorporated into the global GVC of overseas companies by gradually acquiring proprietary technologies and learning advanced management techniques. Third, it is the method of incorporating GVC in domestic large corporations such as Samsung and LG. Many SMEs have difficulties in getting global companies into GVCs. They are incorporated into the value chain of Korean large corporations, and pursues a stable profit structure, thereby enabling opportunities for technological development. It is a way for large companies to attract small businesses and provide opportunities for SMEs to enter the global market in the future. Fourth, SMEs will have an opportunity to participate in GVC based on its own technology. In addition to serving as a supplier in a global or large enterprise GVC, SMEs can also have the opportunity to incorporate other SMEs into their own GVC. The last way of GVC formation is a joint venture between large corporations and SMEs. It is an effective way for large companies to provide a platform for SMEs to enter overseas and utilize them by SMEs. The following are some representative examples of SMEs participation in GVC through these five approaches.

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3.3.1. Entering GVC through win-win partnership with global conglomerates

In order to participate in GVCs through global conglomerates located overseas, SMEs must have the technology in the field. Cosmax in Korea is a small and medium-sized cosmetics manufacturing company that manufactures cosmetics and sells various cosmetics by OEM and ODM method with global companies such as Loréal, Johnson & Johnson, Christian Dior, Amorepacific, and LG House and Health Care Ltd. Cosmax, which originally supplied only the domestic market, began to supply cosmetics to Loréal by way of OEM in 2000, and gradually expanded its scope to other foreign buyers. Since then, it has established a factory in Guangzhou in 2013 and Shanghai in 2014, and has been developing into a global company by acquiring the Jakarta plant in Indonesia and the Solon plant in the United States, both operated by Loréal. It is a representative example of development through the incorporation of GVC, which is now moving toward ODM, as an OEM-based overseas production method.

Meanwhile, there are cases in which OEM and OBM are promoted at the same time. Lihom Cuchen is manufacturing an electric rice cooker specializing in supplying its own brand products and OEM rice cookers to China 's Lobahm Electric. It is a successful example of participating in GVC of a representative small and medium-sized company, which is using the distribution network of Shenyang Han Sung Woo Trading Co., Ltd., which has a wide distribution network in China, as well as OEM and OBM.

3.3.2. Entry into GVC through global companies which have advanced to Korean market

The second is the GVC participation plan through the global companies that have entered the domestic market. The government should prioritize policies that facilitate the entry of global companies into Korea for this plan. For example, when the government's incentives for foreign direct investment and infrastructure construction are prioritized, foreign global companies will enter the country. As a result, SMEs supported by global conglomerates can be successfully created. Cuckoo Homesys and Cell Biotech are the leading examples of participating in GVC through Amway, a global distributor. Cuckoo Homesys is a representative example of the rapid growth of product sales using Amway's sales network through One for One program.51) Cell Biotech is a small and medium-sized company producing lactic acid bacteria, and has participated in export through Amway's distribution network. At present, it has grown from OEM to ODM company which exports through its own brand.

51) Whenever one of Amway's products is launched, it distributes one of Korea's best SME products.

168 Ⅴ. Strengthening the competitiveness of Sri Lanka SMEs through participation in GVC

3.3.3. Transferring to global GVCs of domestic large corporations

By selling intermediate products to large corporations in Korea, SMEs can be incorporated into GVCs of large corporations. Not only can it serve as a primary vendor for large corporations in Korea, it can also lead the internationalization of secondary and tertiary vendors who deal with SMEs. PSK is a semiconductor device manufacturer and supplier to Samsung Electronics, a global company. PSK is a successful example of a SME’s integration into Samsung Electronics' GVC, which has greatly improved efficiency in the production process by reducing the number of components in semiconductor equipment and shortening assembly time by Samsung Electronics' support. In addition, it provides management know-how to 29 partner companies and provides the opportunity for global GVCs to follow-up vendors.

3.3.4. GVC participation through own technology

It is significant that SMEs themselves build small GVCs and include other SMEs in their GVCs to increase the participation rate of other SMEs in GVC. In order to continue participating in GVC with this type, there may be a burden that companies need to acquire technology through continuous R & D. Dasan Networks is a small and medium-sized company that produces Linux-based routers for the first time in the world. It has entered to Japan and China markets, and is attempting to localize equipment in cooperation with domestic large companies (LG), and continues to globalize jointly with other KT affiliates.

3.3.5. Going overseas with large companies

Small and medium enterprises can utilize various global networks secured by large companies to advance overseas together. SMEs are less likely to succeed if they enter overseas independently because they are not well known overseas. Therefore, if the distribution network of large conglomerates with high overseas recognition is used, it is easy to incorporate SMEs into the global network when SMEs collaborate with large companies to go abroad. The case of Lotte Mart and Nokchaone is an example of accompanying overseas advance between large company and SME. Nokchaone, which has excellent products but does not have overseas sales network and Lotte Mart, which has an overseas distribution network, have successfully entered the overseas market together.

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4. Policy Suggestions

4.1. Quality improvement of GVC participation

In addition to quantitative growth such as the increase in participation rate of GVC in Sri Lanka, quality improvement of GVC participation should be promoted together. Korean companies initially joined GVC in the form of original equipment manufacturer (OEM), and they have developed into a self-branded producer (OBM: Original Brand Manufacturer) through the stages of manufacturer development and production (ODM: Original Design Manufacturer). Sri Lanka is currently in the process of producing order consignors or is attempting to incorporate into global GVCs. In order to be included in the GVC, it is necessary to attempt to enter global networks of domestic and overseas global companies and domestic large corporations. In addition, although SMEs themselves can establish a global network by securing their own technology, it is a medium- and long-term plan to pursue rather than proceeding immediately in light of the current situation in Sri Lanka, which lacks technological capabilities. Finally, there is a plan to build a global network by using the recognition of Sri Lankan conglomerates, but it is also a medium- to long-term strategy to be pursued in Sri Lanka, where large enterprises are lacking in manufacturing. Most large companies in Sri Lanka are domestic importers, so this plan can be effectively achieved when industrial policies that can develop SMEs into medium-sized enterprises and further into large corporations are accompanied.

Korea has participated in the GVC through the five routes listed above. Based on the Korea's experience, Sri Lanka should improve the quality and quantity of GVC participation in the medium to long term.

As textiles, apparel, leather, footwear, and other industries are expected to reduce production cost the most in the global value chain, the government of Sri Lanka should prioritize the development of various policies to increase the participation of companies belonging to these industries in GVC. As Korea's industrial value added export has been gradually decreasing, and industrial production movement of the industry has already started, Sri Lanka, which is easier to secure skilled labor than other developing countries, is expected to have a GVC advantage in the first place.

170 Ⅴ. Strengthening the competitiveness of Sri Lanka SMEs through participation in GVC

4.2. Improve FDI environment

It is necessary to develop policies to improve the FDI environment, focusing on the industries in which GVC participation is expected in Sri Lanka. Attracting foreign direct investment is essential for GVC participation. Therefore, it should be examined the foreign direct investment environment of Sri Lanka, and it is necessary to develop policies that provide additional incentives for foreign direct investors to enable Sri Lanka SMEs to participate in the GVC. Sri Lanka will actively attract comparative downturn industries in neighboring countries such as Korea and Japan, and new value chains should be incorporated into SMEs' competitiveness. Due to the low technological competitiveness of SMEs in Sri Lanka, it is not easy for them to enter production networks already established overseas, therefore, it should be prioritized to create a production environment in Sri Lanka through active foreign direct investment.

4.3. Entering GVC through FTA

We should try to enter global network through free trade agreement (FTA). In order for Sri Lankan SMEs to function as members of the GVC, they need to take a step closer to the global market. By eliminating unnecessary trade barriers through the FTA and improving the investment environment of foreign companies, global companies can invest in Sri Lanka, which will enable Sri Lankan SMEs to become more involved in GVCs. South Korea has so far signed 16 FTAs with 52 countries, while Sri Lanka has signed just two FTAs so far. In order to expand GVC participation, the ability to supply manufacturing-related services as well as the manufacturing capabilities of manufacturing industries is also an important factor. The participation of Sri Lankan SMEs in GVCs can be extended when the quality of service at the final stage of value added is improved through the establishment of a high-level FTA.

Activation of GVC through ‘virtual small-sized mini-cluster’ is required. SMEs are absolutely inferior to information technology. Even if SMEs want to be part of the GVC, they do not know which companies in the world want to be part of the GVC. Therefore, it is necessary for the government to provide a virtual space where foreign large corporations and Sri Lankan SMEs can meet online to provide SMEs with the opportunity to participate in overseas GVCs. SMEs can meet other domestic SMEs in similar locations as well as overseas large companies, and they can enhance their competitiveness by sharing R D activities, production and design together.

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Ⅵ. Conclusions and Suggestions

Sri Lanka is located at the intersection among countries in Europe, Asia, and Africa, which allows Sri Lanka to become the global hub for the distribution of goods. However, low Foreign Direct Investment, lack of competitiveness within small and medium sized industries, and inefficient customs clearance led to low export rate and formed economic imbalance throughout the regions. To cope with this matter, the government of Sri Lanka with the ADB have launched the Colombo-Trincomalee Economic Corridor (CTEC) project to form integrated social infrastructural network in Sri Lanka. The development of CTEC along with the formation of high value added industrial clusters and national strategy for an export based economy altogether could contribute to further growth in Sri Lanka by extending economic opportunities in the urban hinterlands and connecting small towns or village centers with the industrial clusters. KSP-ADB joint consulting project [Support for Development of the Colombo-Trincomalee Economic Corridor in Sri Lanka] deals with urbanization, Single Window system, enhancing FDI, and facilitating trade of SMEs in Sri Lanka.

The Chapter One introduced successful examples of urbanization in Korea, and suggest policy implications for urbanization in Sri Lanka along with the Colombo-Trincomalee Economic Corridor. Considering Korean industrial clusters that reflected regional balance, we have suggested ways to develop industrial complexes in Sri Lanka. Also, applicable Smart City Indexes are examined and we have suggested functions, skills, and business models related to smart city.

In the Chapter Two, we realized that one of the most urgent problems of custom system in Sri Lanka is the lack of automation and computerization. To solve the problem, we introduced the case study of Korean Single Window system in customs procedure, and explored ways to facilitate trade in Sri Lanka. To implement Single Window system effectively in Sri Lanka, the government should pursue strategically with mid- to long-term goals, and the government should mitigate the conflicts between the various ministries and agencies by establishing standardization and revising laws and systems. Also, it is necessary to continuously improve and adjust the system that reflects the opinions of the users in the step-by-step process to provide the maximum convenience to the users.

172 Ⅵ. Conclusions and Suggestions

In Chapter Three, the project shared Korean experience of attracting Foreign Direct Investment to give implications to Sri Lanka. The role of Invest Korea (IK), national investment promotion agency, has been introduced, and other various incentives programs provided by Korean government to attract FDI have been discussed. In this chapter, the case study of Vietnam, the top destination of Korea’s investment among ASEAN member countries, has been discussed to analyze the factors that attract FDI from Korea. To attract Foreign Direct Investment to Sri Lanka effectively, the Sri Lankan government should understand what industries are needed to be developed further for the Sri Lankan economic prosperity and development, and how benefits of FDI can be spread out into every area of the country and inclusive of all sectors and people in the country. Also, the Sri Lankan government needs to focus on how to diversity and differentiate incentive programs from rival countries in this region.

Chapter four investigates current status and problems of Sri Lanka’s small and medium sized enterprises (SMEs), and analysis methods to strengthen competitiveness of the MNEs in Sri Lanka and to increase Sri Lanka’s participation in the global value chain by considering Korea’s cases. Based on Korea’s experience, policy implications for Sri Lanka is that it is necessary for the government to provide a virtual space where foreign large corporations and Sri Lankan SMEs can meet online. Also, as textiles, apparel, leather, footwear, and other industries are expected to reduce production cost the most in the global value chain, the government of Sri Lanka should prioritize the development of various policies to increase the participation of companies belonging to these industries in GVC. In addition, as attracting FDI is essential for GVC participation, it is necessary to develop policies that provide additional incentives for foreign direct investors to enable Sri Lanka SMEs to participate in the GVC.

Competitions among countries and regions are getting fierce in the global market. The economy of Sri Lanka as well as Southwest Asia are expected to grow by successfully following various ways to facilitate trade, FDI, MNEs, and by benchmarking the experience of Korea as mentioned in this project. Korea can be benefited from this project as well by getting closer to Southwest Asian markets in advance. We expect this project contribute to the economic growth in Sri Lanka and expect Sri Lank to be the global logistic hub.

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